Earnings Call Transcript
WILLIAMS SONOMA INC (WSM)
Earnings Call Transcript - WSM Q1 2022
Operator, Operator
Welcome to the Williams-Sonoma, Inc. Q1 2022 Earnings Conference Call. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.
Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations
Good afternoon, and thank you for joining our first quarter earnings call. I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including guidance for fiscal '22 and our long-term outlook. Although we believe these statements reflect our best estimates and all available information, we cannot make any assurances that these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. A reconciliation of non-GAAP measures to the most directly comparable GAAP measure, along with an explanation of how and why we use these measures, appears in Exhibit 1 to the press release we issued earlier today. This call should also be considered in conjunction with our periodic and annual filings with the SEC. Finally, the call is being recorded, and a replay will be available on our Investor Relations website. Now I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.
Laura Alber, President and CEO
Thanks, Jeremy. Good afternoon, everyone. We've been looking forward to this release. The first quarter of fiscal '22 represented another quarter of outperformance with a 9.5% increase in revenue on the top line, with both demand and net sales aligned, and a 19.5% growth in earnings per share to $3.50. These results highlight the strength of our multibrand portfolio and our team's ability to navigate challenges successfully. The achievement is even more remarkable given that we were compared to last year's strong performance, which had over a 40% increase. We remain confident in our annual guidance and our long-term goal of reaching $10 billion in revenue by 2024, with growth across our core businesses as well as in our B2B, marketplace, and global initiatives. Understanding the industry we operate in is crucial to contextualizing our outstanding results. We function within a large and fragmented industry that generates over half of its sales from smaller, brick-and-mortar retailers lacking advanced e-commerce capabilities. We are among the leading market players and believe we can seize a larger share of the $830 billion total addressable market. Our revenues of $8.2 billion in FY '21 made up about 1% of this opportunity, and we continue to demonstrate our capacity to capture market share incrementally. The current economic environment is challenging, yet the housing market remains robust. The hybrid work model means that people will spend more time at home, and rising costs associated with gas and travel have historically encouraged individuals to stay home for cooking and entertaining. We believe these trends will lead to ongoing momentum in outfitting and improving homes. As a company, we are prepared to manage through economic uncertainty. We are a multichannel portfolio of brands led by a management team experienced in navigating economic challenges. A significant shift in our industry is the consumer's movement toward online purchases, further intensified by the millennial generation entering the household creation phase. While many companies lag in their digital capabilities, we are well-positioned as a digital-first, yet not digital-only, company. These macro trends align perfectly with our key differentiators. Our customers continue to seek us out for our exclusive, inspirational, and high-quality products, which we can create affordably due to our in-house design capabilities. The advantages of our in-house design extend beyond product design; we have also optimized supply chain efficiencies and proprietary technology that strengthens our business resilience. Our channel strategy offers a competitive advantage for scaling our business compared to both retail-only and marketplace-only competitors. Additionally, our values—rooted in sustainability, diversity, equity, and inclusion—are integral to our products and actions. These principles remain essential for our customers, who show a willingness to spend their disposable income on what they believe in. In a recent survey, over half of consumers indicated they would pay a premium for sustainable products. All of this, paired with our growth strategies, not only opens significant opportunities to expand our core business but also to drive momentum in reaching new customers, geographies, and industries. Our B2B business had its largest quarter ever, generating nearly $250 million in demand and a 53% growth compared to last year. We are succeeding in this area by leveraging our best-in-class in-house product design capabilities to create products tailored for large contract projects. The ongoing expansion of our client base allows us to focus on various client types and industry sectors. For example, in the hospitality sector, we are establishing ourselves as a reliable partner for large projects, recently completing installations at Marriott's new headquarters hotel. In terms of recognition, we won the award for Best Booth at the Hospitality Design Expo, the largest hospitality trade show in North America. As we head into Q2, this segment is experiencing strong momentum and energy. Regarding marketing, we are pleased with our investment outcomes. This quarter, we achieved robust revenue growth while effectively managing our advertising spend. Key factors for this efficiency include our proprietary in-house platform that identifies customers seeking home furnishings and optimizes our spend per customer through our loyalty program and cross-brand marketing efforts. Digitally, we concentrated on two primary areas this quarter: enhancing the conversion funnel throughout the customer journey and increasing our average unit retail with improved product recommendations and a better furniture shopping experience. In sustainability, our leadership in ESG continues to distinguish our individual brands as well as the company as a whole. We are making progress on our commitment to plant 6 million trees by 2023, in partnership with the Arbor Day Foundation. We also initiated an internal award for sustainable innovation, the Williams-Sonoma, Inc. Good By Design Changemaker, which honors associates making sustainability strides. This marks our fifth consecutive year as a REPREVE Champion of Sustainability for utilizing recycled materials. Moving to our global business, we are adhering to our franchise-first strategy, concentrating on both retail and digital execution. We are building our franchise presence in areas like the Middle East, with three new stores opening in Dubai this quarter and more global locations planned for 2022. Before discussing our brands, I want to address the supply chain, where we continue to face delays, challenges, and additional costs across our network. We are working through COVID-related pressures and shortages in raw materials and labor. Nevertheless, we are dedicated to meeting customer expectations, and we are pleased that our customer satisfaction scores remain high, with improvements in in-stock inventory across our brands. Now, let's review the performance of our brands. Pottery Barn had another strong quarter, reporting a 14.6% increase in comps, building on last year's 41.3% gain, equating to a 55.9% increase over two years. All channels and product categories contributed to the growing demand. Our high-quality proprietary furniture line continues to lead growth, with strong performance observed in core products, new offerings, and seasonal inventories. In stores, our design services show particular strength, and as we enter Q2 and the summer season, we have extended these services into outdoor spaces, with our remodeled stores exceeding expectations, thanks to a reimagined design that enhances the display of lifestyle furniture. Moving to West Elm, the brand achieved a 12.8% comp in the first quarter, following a 50.9% increase last year, or a 63.7% growth over two years. The growth this quarter was driven by excellent results in furniture, with customers responding positively to new collections, line extensions, and varied sizes and aesthetics. Moreover, new categories like kids and bath are contributing to additional growth. Looking ahead to Q2, we are excited to launch an expanded B2B assortment and customer experience at West Elm, catering specifically to the numerous small- and medium-sized U.S. businesses. This initiative is a crucial part of our long-term strategy to achieve $3 billion in brand revenues. Now, I want to provide an update on our Pottery Barn Kids and Teen segments. In our Q4 call, we discussed challenges in our children's business caused by supply chain issues from Vietnam, which persisted into Q1, leading to a negative 3.1% comp. We are seeing inventory levels recover in the business; however, we still have significant back orders, and our creation rates are higher than last year. Anticipating the year's remainder, we expect improved inventory levels in the second half. Our Williams-Sonoma brand also faced issues with out-of-stocks, reporting a negative 2.2% comp in Q4 following a 35.3% comp last year. Unfortunately, these out-of-stocks affected key programs, impacting our exclusive products. Over a three-year span, inventories have declined by nearly 40% in Williams-Sonoma while sales have grown by 30%. We are committed to increasing in-stock levels and are optimistic about recovery before Q4. Our Williams-Sonoma Home business achieved a high double-digit comp this quarter and continues to present a significant opportunity. Leveraging the strength of the Williams-Sonoma brand and our expertise in the furniture category, we believe that Williams-Sonoma Home is poised to emerge as a leader in distinctive, design-oriented, high-quality furnishings for the high-end market. Lastly, we should not overlook our emerging brands, including Rejuvenation and Mark and Graham. Collectively, these brands experienced a 31% comp growth this quarter and continue to excel. We are confident in their potential to contribute to our long-term growth. In particular, Rejuvenation is on track to generate over $200 million in revenue this year and has the potential to become our next $1 billion brand. In summary, we take pride in our continued outperformance. Looking ahead to the rest of the year, we remain confident in our mid- to high single-digit comp guidance while maintaining operating margins aligned with fiscal '21. We have a strong array of growth initiatives and operational enhancements planned for the remainder of the year, and we are on track to reach $10 billion in revenue by 2024. Before I hand the call to Julie for a more detailed financial overview, I want to express my gratitude to our customers, employees, and shareholders. We are devoted to delivering for all our stakeholders. Now, I'll turn the call over to Julie.
Julie Whalen, CFO
Thank you, Laura, and hello, everyone. We are pleased to report another quarter of outstanding financial results with strong top line growth at record profitability levels, including revenue comps of 9.5%, operating margins expanding 120 basis points to 17.1% with gross margin expanding 80 basis points and EPS growing 19.5% to $3.50. Our results are even more impressive considering we were up against our strongest year-over-year compare, and we outperformed against the backdrop of ongoing macro volatility, including continued global supply chain pressures, rising inflation, increasing interest rates and the continued evolution of consumer spending in a post-pandemic world. Our results further validate the demand for our proprietary and sustainable products, the success of our growth strategies and the efficiencies of our operating model, highlighting why we believe we are best positioned to succeed in the short and long term with strong profitable growth. Moving to our first quarter results in more detail. Net revenues grew to nearly $1.9 billion with comparable brand revenue growth at 9.5%, which was in line with our demand comp. And this growth was on top of a 40.4% comp last year for a 2-year stack of 50%. These strong top line results actualized in both channels, including retail at a 14.4% comp, which was an 82.1% 2-year stack despite retail traffic still negative 20% to pre-pandemic levels in 2019. And in e-commerce, we delivered a 7.3% comp on top of a 30.6% comp last year, maintaining our e-commerce mix as a percent of total revenues at 65%. Moving down the income statement. Gross margin came in at a record 43.8%, an 80 basis point expansion over last year, driven primarily by the strength of our merchandise margins where we're able to continue to preserve our pricing integrity without utilizing site-wide promotions. The demand for our full-priced products once again allowed us to more than offset higher product and freight costs while still delivering record margins and strong top line sales. Occupancy costs came in at 9.9% of net revenues and leveraged 20 basis points, resulting from another quarter of higher sales and lower occupancy dollar growth. Occupancy dollars increased 6.1% to approximately $186 million, which includes the incremental costs from our new East Coast distribution center to support our strong customer demand as well as higher depreciation costs primarily from our capital expenditures to support our e-commerce business. All of this was partially offset by our ongoing retail optimization actions. The occupancy benefits we are seeing from our rent renegotiations and the incremental net closure of 37 stores at the end of 2021 has enabled us to minimize occupancy dollar growth and deliver this leverage. Our SG&A rate was a first quarter low of 26.7%, leveraging 40 basis points over last year, driven primarily by employment and advertising. This leverage was a function of our strong top line performance and operational efficiencies, holding our payroll costs, advertising and general expense growth below sales growth. We are proud of the disciplined culture we have built, which demands efficiency and returns from our spend. These results led to our most profitable Q1 ever with operating income growth of 16% to $323 million and an operating margin at 17.1%, our highest non-holiday quarter ever, expanding 120 basis points over last year. This resulted in diluted earnings per share of $3.50, up 19.5% from last year's record first quarter earnings per share of $2.93. On the balance sheet, we ended the quarter with strong liquidity levels with a cash balance of $325 million and no debt outstanding. Our strong liquidity and operating cash flow of almost $185 million during the quarter allowed us to not only fund the operations of the business but to also invest in the business at higher year-over-year levels in the form of $71 million in capital expenditures to pay incremental dividends increasing to over $58 million in the quarter and to repurchase a record $500 million in shares, a 60% year-over-year first quarter increase off of a prior year high. These decisions reflect our commitment to maximizing returns for our shareholders. And with our strong and disciplined balance sheet, combined with our expected cash flow strength and our remaining over $1 billion share repurchase authorization, this allows us the flexibility to continue to opportunistically invest in our own stock and drive long-term shareholder returns. Moving down the balance sheet. Merchandise inventories, which include in-transit inventory, were $1,396,000,000, increasing 28.4% over depressed levels last year. Inventory on hand increased 17.7% over last year. And our units were only up 1% year-over-year, which primarily reflects the mix shift to higher AUR furniture inventory. And on a 3-year basis, our on-hand inventory was down nearly 7% to 2019 pre-pandemic levels as compared to sales that have grown over 50% over the same time frame. As a result, given our ongoing higher sales volumes, our continued elevated back order levels and the significant macro supply chain disruptions we are still experiencing, we are still below optimal levels, particularly in our best-selling back-ordered items. And we expect this to continue into the back half of 2022. Now let me turn to our expectations for the rest of the year and beyond. We remain optimistic in the long-term outlook of the business. As a result, we are reiterating our financial outlook of mid- to high single-digit revenue growth with operating margins relatively in line with 2021. We are confident in our ability to deliver our revenue outlook given the strength of our business year-to-date, the momentum in our growth initiatives such as B2B and our expected sequential improvement in our in-stock inventory levels, enabling us to fill our significant back orders and recognize net revenue and potentially at a higher comp than demand even if demand were to soften as we move throughout the year. From a profitability perspective, we remain confident in our ability to hold our operating margins relatively in line with 2021 despite expected ongoing cost pressures. Like everyone else, we are experiencing higher product costs and supply chain-related costs, including higher freight, and incremental distribution center costs for additional space to support our overall growth and our ongoing mix shift to furniture that is a larger cube. We are also experiencing higher costs to best serve our customers to get product to them as timely as possible by shipping product from out-of-market distribution centers. And for multiunit orders, we are shipping multiple times to the same customer, which typically would have all been done in one shipment and an incremental cost to us. However, because of the power of our operating model, we believe we are best positioned to mitigate these costs in both the short and long term, whether it is the leverage from our higher sales on our path to $10 billion; the accelerating expansion of our highly accretive growth initiatives such as B2B; the growth of our e-commerce business, which operates at a higher margin profile; our strong merchandise margins from the pricing power our proprietary and vertically integrated products provide; our retail optimization efforts, reducing rents and other efficiencies to drive margins more in line with e-commerce; various supply chain efficiencies, including automation and in-stock inventory levels over time; and our continued emphasis on strong financial discipline. We continue to believe the combination of all of these opportunities provides several levers we can utilize to drive incremental earnings to offset higher costs. And this is what gives us the confidence to hold our operating margins relatively in line with last year. In summary, we are pleased with our outperformance this quarter. These results further validate that our key differentiators, our incremental growth strategies and our proven operational execution, combined with an environment where consumers are investing more in their homes, are shifting increasingly online and are prioritizing value and sustainability in their purchases now more than ever before, leave us uniquely positioned to continue to take market share and profitably in this evolving macro environment. And this, combined with our strong operating cash flow and liquidity, our operational levers that enable us to help mitigate incremental costs, along with a proven track record of strong financial discipline and a tenured management team with a winning culture, give us the confidence to reiterate our accelerated long-term growth and profitability outlook of $10 billion in revenues by 2024 with operating margins relatively in line with last year and to drive strong financial returns for our shareholders. Finally, I would like to thank our associates for all that they do to make our company great. The commitment, creativity and integrity of our talent is the backbone for the results we continue to deliver. And now I'd like to open the call for questions. Thank you.
Operator, Operator
And our first question will come from Seth Basham with Wedbush Securities.
Seth Basham, Analyst
Congrats on a set of great results. My question is on the demand outlook. Are you seeing any slowdown in demand as you look into the second quarter here? And how are you considering the demand comp relative to sales comp for the balance of the year?
Julie Whalen, CFO
Seth, it's Julie. Regarding the first quarter, we haven't observed any slowdown. Our results reflect a 9.5% comparable store sales increase on top of last year's 40%, resulting in a 50% two-year stack, and we believe demand aligns well with that. As for the second quarter, we are just three weeks in, so it's quite early to make definitive statements. We have noticed some short-term moderation in demand across our brand portfolio, but it is not as significant as what others are reporting. Importantly, from a net perspective, we have seen and anticipate ongoing sequential improvement in our in-stock inventory levels, which will allow us to fulfill significant back orders and recognize net revenue even if demand decreases as the year progresses. This, along with our key differentiators, incremental growth strategies, and strong operational execution, positions us well to outperform, even in a changing macro environment.
Seth Basham, Analyst
Okay. And just to reframe the question, thinking about that delta between demand and sales comps, how much would demand have to slow for you to come in at the low end of your guidance?
Julie Whalen, CFO
We haven't disclosed that. But I think, obviously, we have said many times that we have significant amount of backlog that gives us the confidence to move throughout the year to be able to hit our guidance on the year.
Operator, Operator
And our next question will come from Adrienne Yih with Barclays.
Adrienne Yih-Tennant, Analyst
Julie, congratulations on your outstanding results. Laura, there seems to be a disconnect between the macroeconomic environment and your results. Recently, sales of new homes dropped by about 17% in April due to rising prices and higher mortgage rates. How do you reconcile the broader economic situation with what you're experiencing? I know you covered several points earlier, but is it primarily millennials driving home buying for you? What indicators do you look for to determine if the macroeconomic conditions might eventually affect your business?
Laura Alber, President and CEO
That's a good question. I recently received a report from Google with some current data, and there are some interesting statistics. Nearly 40% of Americans are considering a move in 2022, with most hoping to buy. The primary reason for moving is the desire for more space, and many have specific features in mind, such as outdoor areas and large kitchens that are pet-friendly. This aligns well with the casual lifestyle we promote across all our brands. While there are negative aspects to consider in the macroeconomic landscape, there are also positive realities, like more people working from home, learning to cook, and investing in their homes, which has led to increased desire to move. Conversations with people in New York and others show that most are planning renovations or relocations, which significantly boosts our sales. Despite some negative trends in the housing market, there's still ample opportunity for us to capture market share because we remain relatively small compared to the total market, even as the leader. I believe our unique differentiators, combined with our growth strategies, are proving effective. We have consistently demonstrated progress in recent quarters, and those factors are truly working in our favor right now.
Adrienne Yih-Tennant, Analyst
Okay. And then for Julie, always helping to shape the near-end quarter, the quarter that we're in, Q2. I know you gave sort of long, long-term LRP guidance and then for the year. But how should we think about kind of the trends, the momentum continuing into May? How should we think about gross margin? Should we just think of Q2 as a continuum of what we're seeing here today in Q1?
Julie Whalen, CFO
Yes. I mean obviously, we're not providing quarterly guidance. But we would say, as we've said before, you need to kind of stick within our band range on the top line that we've said for the year. I would say on the gross margin line, certainly, there could be pressure from supply chain costs that we've been experiencing, like everybody else has. But we're committed on the year to hitting our operating margin relatively in line with 2021, which, as a reminder, is more than two times where it was two years ago. So we feel really good about that. And obviously, we've proven that we can do that with this quarter's results being up 120 basis points.
Operator, Operator
And our next question will come from Chuck Grom with Gordon Haskett.
Charles Grom, Analyst
Congrats on a really tremendous quarter. I just wanted to follow up on Seth's question on the slowing demand comp. Curious when that began in the quarter. And we heard from a lot of retailers that business started to slow in the middle of March. And I know that started for you at that point in time. And I guess curious if it happened across all four banners equally or if it was with the PB and West Elm parts of the business where the tickets are greater.
Julie Whalen, CFO
I wouldn't read too much into it. It's been three weeks into the second quarter. Based on our performance in the first quarter and the current demand, we didn't really notice any issues in Q1. Now that we're three weeks into Q2, I mentioned that the situation is specific to our portfolio of brands, and it's not necessarily affecting everything equally. We have seen some improvements as well, so this moderation we've observed is quite short term. Ultimately, due to our net bill, B2B, and other growth initiatives, we feel very confident about our outlook for the year.
Charles Grom, Analyst
Okay. Great. And just a quick follow-up would be you've had great success raising prices over the past 12 to 24 months. When we look at recent trends and more particularly demand trends, is there any pushback on higher prices, any demand destruction? It doesn't sound like it, but we're hearing that from other retailers. And I didn't know if you were saying it so far.
Julie Whalen, CFO
No, we haven't seen it. I mean furniture is our biggest growth vehicle. Furniture has been very, very good for us. And so you would think that if there was a problem with big ticket or higher prices or things like that, we'd see that coming down, and we have not. That merch has been very strong for us.
Operator, Operator
And our next question will come from Cristina Fernández with the Telsey Advisory Group.
Cristina Fernandez, Analyst
Congratulations on the excellent results. I wanted to inquire about promotions. It seems that many retailers are beginning to offer more promotions or anticipate doing so as the year goes on. What is your position if the industry becomes more promotional?
Laura Alber, President and CEO
Thanks, Cristina. It's Laura. We've definitely seen more promotional environments, especially as you heard about the general softness out there. And it really hasn't changed our stance at all, as you can see by the results we just put up. We made a strategic decision not to do site-wide promotions, and that has not changed. And you can see from pre-pandemic to now, we are a much more profitable business. And this is a structural change for us and one that we continue to see opportunity in once we get out of the supply chain costly year that we're in. There's a lot of things that we expect to have the improvements to our operations, not this year, but into the future. And so we are always looking at turning our inventory, being better at inventory accuracy and getting rid of slow movers. And you're going to constantly see us package those things up and make them really appealing to our customers. So it's very different than wholesale price reductions across the board that you see many using right now.
Operator, Operator
And our next question will come from Jason Haas with Bank of America.
Jason Haas, Analyst
The first is just on a definition question. When you say that demand and net sales were in line with each other, are you referring to the dollar amount? Or is that also the growth rates were in line with each other?
Julie Whalen, CFO
Relatively one and the same. But yes, I would focus on the growth rate, but if the growth rates are the same, then the dollars have to be close as well. Yes.
Jason Haas, Analyst
Got it. That's helpful. That makes sense. That's what I thought. I wanted to delve into the advertising expense a little bit. I think there was a point of deleverage throughout last year and in the fourth quarter as well. I know you mentioned it's now a point of leverage, so I'm curious about what changes you're making to drive that leverage.
Julie Whalen, CFO
Yes. If you remember, last year we were working to restore our advertising spending to previous levels. In 2020, we had significant cost cuts that impacted our advertising budget throughout the year. As we mentioned throughout 2021, we focused on reinvesting in advertising for the long-term sustainability of the business. Last year was primarily about reducing debt, and now that we've moved past that, we have returned to more typical advertising levels. We're pleased to see that this strategy has allowed us to achieve better sales while maintaining our approach to return on advertising investment. We don't advertise just to increase customer numbers or traffic; we do it to generate a return, which we believe is the right approach. This quarter, we have successfully seen results from that effort.
Laura Alber, President and CEO
I'd just say also, as a portfolio of brands, we have a big advantage because we're bidding as one. We're not bidding separately. And also, we're looking at what works in one brand and applying it to the other. And that's a huge advantage as a multibrand company that we have.
Felix Carbullido, Marketing Executive
No, I think Julie is right. I mean everything we do is ROI-focused. And so when we see the return on investment, even if advertising costs go up, if we see AUR increases and dollars per customer increase, exceed that, we'll invest. So we have that ability to throttle given the business conditions because we manage it in-house and because we're all committed to the op margin growth.
Operator, Operator
And our next question will come from Max Rakhlenko with Cowen and Company.
Maksim Rakhlenko, Analyst
So first, just if the industry were to slow, what are some tools and strategies that you have to play offense? And then what are some of those initiatives that you alluded to in your prepared remarks?
Julie Whalen, CFO
Yes. From a leverage perspective in a downturn, we recently experienced this at the beginning of the pandemic and have navigated similar situations in 2008 and 2009. Fortunately, our current management team is well-prepared to handle these challenges. While we hope to avoid such a situation, and currently are not facing anything similar, we know how to manage expenses effectively. We can reduce inventory, cut capital spending, decrease advertising, and halt all discretionary expenditures. On the other hand, regarding taking offensive actions, we see that some competitors are not achieving the same results that we are, and with our strong performance and ongoing momentum, there are numerous opportunities available. For instance, some companies are withdrawing from advertising, which could present an interesting opportunity for us. However, the specifics of our strategy are confidential. That said, we certainly have the capacity to act if our cash flow and earnings continue to support it.
Laura Alber, President and CEO
In terms of supply chain efficiencies, there are several areas that are improving, although they are not quite where they need to be yet. Our Sutter Street upholstery operation has reduced its lead time by half compared to last year. While it remains too high, we currently have some of the best custom quote times in the market. We are seeing improvements in stock availability, fewer out-of-market scenarios, reduced duplicate shipments, and lower damage and return rates, as well as better utilization of hubs and retail stores to enhance efficiency. As mentioned, we are in the process of opening a new distribution center in Arizona, equipped with more automation, which should help us achieve greater efficiencies and ultimately lower shipping costs. Additionally, we've faced challenges recently due to the slowdown in Vietnam, which has forced us to inform customers multiple times about delivery delays stemming from COVID-related issues in some countries. These are just a few examples of the areas I consider regarding future efficiencies. I am enthusiastic about these opportunities because they signal that we can improve, which aligns with our ongoing commitment to do better.
Maksim Rakhlenko, Analyst
Great. That's helpful. And just very quickly, I don't know if I missed it, but did you call out how your cancel rates are trending? And then I imagine that you check a lot of your competitors, but how do you rate how your lead times are today versus some of your top peers?
Julie Whalen, CFO
As far as cancel rates, they're really low. I mean we haven't seen much movement from week to week, thankfully. I mean the customer is obviously voting with their wallet and they're willing to stay on and work with us to get the product that they want. And so we haven't seen that change at all. I don't know if you want to talk about the lead times.
Laura Alber, President and CEO
Lead times are significantly lower for us compared to the industry standard of around 100 days. There are many different brands and product lines, so I can only provide information on some of them. However, feedback from our customers suggests that we are operating faster. Additionally, we have new tools that help us track stock availability across our brands.
Yasir Anwar, Operational Executive
Yes. I think we've been continuously working on this opportunity of the challenges that we are seeing in inventory. And we have built our in-house, cross-brand, product finding tool that allows us to serve the customers even upfront, especially in the B2B channel. But also when there are situations whether there are gaps and delays, we can quickly find across the brand the right product the customer needs for their design, and it is turning out to be a very, very strong, powerful tool for us.
Operator, Operator
And our next question will come from Oliver Wintermantel with Evercore ISI.
Oliver Wintermantel, Analyst
I have a question about the differences between Williams-Sonoma and Pottery Barn Kids and Teens compared to Pottery Barn and West Elm. In your remarks, you mentioned that the issues were due to out-of-stocks or insufficient inventory. Were these the only factors contributing to the divergence? When do you anticipate improvements in this area? Additionally, do you expect Pottery Barn and West Elm to experience a slowdown in the second half, or could you potentially be at the higher end of your guidance if the situation with Williams-Sonoma and Pottery Barn Kids and Teens improves?
Laura Alber, President and CEO
I wish I had a clear answer. We remain confident in our guidance, as Julie mentioned. Our portfolio of brands targets various markets that often cater to different life stages and product types. Specifically, the Kids and Teen segment has faced significant challenges; many of its products came from Vietnam, particularly furniture, which is the backbone of that business. The shutdown in Vietnam has resulted in severe out-of-stocks and high back orders for this segment, unlike Pottery Barn and West Elm, which have seen better recovery in inventory. You can see this through various metrics we analyze. This recovery has provided them with an advantage. On the other hand, Williams-Sonoma operates in a different market involving kitchenware, housewares, and furniture, and they've also experienced unfortunate out-of-stocks. This situation has impacted the exclusive offerings we can present to our customers, which is a crucial part of our strategy. I remain hopeful that we can resolve these issues before the holiday season, and I believe the Kids and Teen segment may improve even sooner. However, I acknowledge that I have made predictions before that haven't materialized because fixing one issue often leads to another supply chain problem. Having a diverse array of brands helps us achieve results, and we are closely monitoring the situation. Regarding the second half of the year, this is my best estimate.
Operator, Operator
And our next question will come from Peter Benedict with Baird.
Peter Benedict, Analyst
I want to discuss the B2B business, which appears to account for more than 60% of your growth in the first quarter. That's impressive. Could you help us understand the potential opportunities you see there? I know you anticipate doubling it in the next three years, adding around $750 million in revenue. Where do you expect that growth to come from? Also, is this segment less vulnerable to current macroeconomic concerns regarding consumer spending, housing, and similar issues? Do you believe this business can remain somewhat insulated from economic cycles in the coming years?
Laura Alber, President and CEO
Yes, it's exciting. We're seeing different customers. The slowdown in building due to the pandemic has created a backlog. Remember, construction and furnishing happen sequentially. I believe there are more opportunities now than before. We're writing estimates and reviewing our bookings, and the business remains robust. We haven't experienced any slowdown, making this a significant win for us. This clearly sets us apart, even in a potentially tougher environment. Our success spans across multiple sectors, as we've mentioned. We're thrilled to design products tailored to specific customer needs, which has been beneficial even for consumers. The innovation in new product offerings is noteworthy. What started as a concept has now evolved into a substantial business, gaining recognition. This gives us confidence. Furniture is ubiquitous, not just limited to homes. We will continue to invest in this area, and we are receiving awards for our efforts. We're committed to growing this business as a source of competitive advantage.
Peter Benedict, Analyst
Absolutely. It seems like everyone is asking two questions, so I'll add one. Can you tell us how many shares you bought back in the quarter with that $500 million?
Julie Whalen, CFO
I think that will be in the Q when we release the Q. So we'll give it to you then. But certainly, it was, as I said in my prepared remarks, that it's up 60% off of last year's all-time high. So it is a considerable amount of shares that we bought. And we believe wholeheartedly, obviously, in the strength of our business and believe certainly that we're at a level of our stock price that we shouldn't be at. And so we're going to continue to opportunistically invest in our own company.
Operator, Operator
And moving on to Simeon Gutman with Morgan Stanley.
Simeon Gutman, Analyst
My question is about ticket pricing. Are there any surprises in that area? Is the gap between ticket prices and units increasing? Given that higher costs are entering the system, it seems like prices might also rise in the latter half of the year. How do you evaluate that balance, considering potential macroeconomic challenges? It appears likely that prices will increase further in the second half, and while you're maintaining your guidance, I'm interested in how all of this aligns.
Laura Alber, President and CEO
There are a few points to consider. Firstly, it's not solely about the ticket price. It's about our overall business mix. We are expanding our furniture segment, which has a higher ticket price, and that's where our growth is originating compared to the small business sector. This will create an interesting dynamic as we move forward. Thus, I believe it's not accurate to view this solely as an inflationary issue. We're intentionally focusing on building the best furniture business, which will naturally lead to an increase in ticket prices. Additionally, Pottery Barn has a higher ticket price than some of our other brands, notably, beds are more expensive than cribs. There are numerous factors affecting ticket prices, so it's overly simplistic to categorize it as merely an inflationary concern. Regarding pricing, we have significantly exceeded our operating margin targets. However, we are not projecting this level of outperformance for the remainder of the year because we anticipate additional costs coming in. It's not that we're increasing prices; it's more about managing expectations for how much our margins may be affected, which we estimate could be around 120 basis points.
Simeon Gutman, Analyst
Fair enough. If I can sneak in my first follow-up question, outdoor and seasonal, is anything deferred, whether because it's coming in late or because the weather didn't break? And how do you plan that category?
Laura Alber, President and CEO
I mean there's no specific weather pattern that I've ever seen, frankly, impact us. But versus last year, of course, coming out of COVID or because we're still in COVID, we sold it earlier. And so we're back at a more normalized curve for outdoor that's later in the season, which is actually a really good thing. We have a year-round business, so it's not a business that we just have during the summertime, and that also helps us with stability of inventory. But outdoor business is a very strong business for us. It's one where we continue to gain market share and push our assortments and have better product and better marketing. And it's a real growth vehicle for us.
Operator, Operator
Our next question comes from Jonathan Matuszewski with Jefferies.
Jonathan Matuszewski, Analyst
Laura, Julie, great results. A follow-up question about a scenario of the economy slowing. Could you remind us how much of your COGS and SG&A could flex the fixed and variable split for both, if you could share?
Julie Whalen, CFO
We've never really disclosed that. And I guess what I would say, what we've learned is nothing is fixed. If you're depending on the environment, we go after it all, and we've been very successful at that. So it's kind of irrelevant for us. We've been very successful going after it.
Laura Alber, President and CEO
Remember, if prices come down, costs come down too, from our vendors.
Jonathan Matuszewski, Analyst
Okay. And just a quick follow-up on B2B. A lot of traction there. Any sense of how much of your business on B2B has been driven by repeat engagements? Presumably, if you've done a hotel or a satellite office for one hospitality or corporate client, how often does that translate into a future project? Trying to get a sense of how much of this is relationship-driven or would be open to kind of recurring competitive bidding.
Julie Whalen, CFO
Yes. So that piece of the business is growing. But we still have a lot of small projects, too. We love both. So teasing it out that way. I don't think there's anything really to that yet other than to say that we're building this more consistent annuity business, and that will get more and more stable as we grow.
Operator, Operator
And moving on to Steven Zaccone with Citi.
Steven Zaccone, Analyst
Great. I wanted to follow up on Simeon's question. So you referenced inventory on hand was up 17%, and then I think units on hand are up about 1%. Is that spread a good proxy to think about how much AUR is up?
Julie Whalen, CFO
Not necessarily. It's mix shift. It's pricing. It's all sorts of things that are a combination that make up that delta. But I think the point there is to really think about that we don't have excess inventory like the other companies that have been reporting. We have been very thoughtful about that, and we only have 1% up in units to make the point that the 28% is overstated relative to what we've heard from others.
Steven Zaccone, Analyst
Understood. To clarify, I want to ensure I grasp the messaging accurately. It appears there will be additional costs impacting the remainder of the year. Should I take this to mean that gross margin expansion may become more difficult as we progress through the year? I'm trying to determine if this is a new consideration or if it reflects some ongoing caution in your gross margin outlook.
Julie Whalen, CFO
It's possible. We are definitely facing higher costs as the year progresses, including increased product and freight costs. We're also incurring expenses for additional distribution space to manage the shift toward furniture, which takes up more room. Furthermore, we are committed to providing excellent customer service, which means shipping items from out-of-market distribution centers to ensure faster delivery. We may even send multiple shipments to the same customer if they have a multi-unit order, as we want to prioritize their needs. There could be pressures ahead, but we are dedicated to doing everything possible to mitigate these challenges as we have in the past. We are also focused on maintaining our operating margin for the year at a level that is more than double our historical performance.
Operator, Operator
Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.
Laura Alber, President and CEO
Yes. I just want to thank all of you for your support and interest in our company, and we look forward to talking to you next quarter.
Operator, Operator
Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.