Why did net earnings decline so sharply in fiscal 1995?

Net earnings fell to $2.5 million from $19.6 million. The filing attributes this to higher cost of goods sold and occupancy (63.7% of sales versus 59.9%), including higher occupancy costs, a Q4 promotional program to reduce excess inventory, a year-end inventory reserve, and higher-than-planned shortage results. SG&A also rose to 35.0% of sales from 33.5%, partly due to operational problems at distribution and telemarketing facilities during the holiday peak.

How is the company funding its store and distribution expansion?

The company issued $40.0 million of 7.2% Senior Notes in August 1995 and increased net bank borrowings by $29.6 million. In April 1996, it issued $40.0 million of 5.25% convertible subordinated notes, with net proceeds of $38.7 million. The bank credit agreement was renewed on March 29, 1996, with a seasonal line ranging from $60 million to $90 million.

Does the company pay dividends?

No. The company has never declared or paid a cash dividend on its common stock. Its policy is to retain earnings to finance growth, and its bank credit agreement, Memphis sublease, and 7.2% Senior Notes restrict cash dividends.

What is the company's exposure to inventory risk?

Merchandise inventories rose to $121.6 million from $87.9 million. The company disclosed that a small portion of this inventory exceeds current requirements, recorded a reserve for expected disposition losses, and is running a program to reduce inventory to desired levels over the near term. It warned that additional accruals or write-downs may be needed if the program is unsuccessful.

How is the store base changing?

The company operated 240 retail stores at January 28, 1996, up from 214. It opened 34 new large-format stores in fiscal 1995 and plans 27 new or expanded large-format stores in fiscal 1996, 14 Williams-Sonoma and 13 Pottery Barn.

WSM 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 26, 1996. Cited figures are marked; the original filing is the authoritative source.

Williams-Sonoma, Inc. reported fiscal 1995 (ended January 28, 1996) net sales of $644.7 million^a, up $116.1 million (22%) from $528.5 million, but net earnings fell sharply to $2.5 million, or $.10 per share, from $19.6 million, or $.75 per share, in fiscal 1994.

Gross margin pressure was significant: cost of goods sold and occupancy rose to 63.7%^b of net sales from 59.9%, reflecting higher occupancy costs, a fourth-quarter promotional program to clear excess inventory, a year-end inventory reserve, and higher-than-planned shortage results. Selling, general and administrative expense rose to 35.0% of net sales from 33.5%, partly due to distribution and telemarketing problems during the holiday peak season. The company operated 240 retail stores at year-end, up from 214, and mailed 131.8 million catalogs.

Retail sales were $394.3 million^c (61% of net sales) and catalog sales were $250.4 million. Operating cash flow fell to $2.4 million from $21.7 million, and cash used in investing activities reached a record $85.8 million, mainly for new and remodeled stores and the Memphis distribution center. Inventory rose to $121.6 million from $87.9 million, and management disclosed that a portion of this inventory exceeds current requirements, with a reduction program underway.

Financing actions included a $40.0 million^d 7.2% Senior Notes issuance in August 1995 and, after year-end, a $40.0 million 5.25% convertible subordinated notes offering in April 1996 with a conversion price of $26.10 per share. The company has never paid a cash dividend, and its bank agreement and Senior Notes restrict dividends. The filing describes the company's stock as quoted on the NASDAQ National Market System under the symbol WSGC.

02—Key points

Key Highlights

Net sales rose 22% to $644.7 million in fiscal 1995, but net earnings fell to $2.5 million ($.10 per share) from $19.6 million ($.75 per share).
Cost of goods sold and occupancy rose to 63.7% of net sales from 59.9%, driven by higher occupancy costs, a Q4 promotional program, and a year-end inventory reserve.
Retail sales reached $394.3 million (61% of net sales), supported by 34 new stores and a year-end total of 240 stores, up from 214.
Catalog sales grew to $250.4 million, with 131.8 million catalogs mailed; the Memphis distribution upgrade and Las Vegas call center are expected to address prior fulfillment problems.
Merchandise inventories increased to $121.6 million from $87.9 million, and management disclosed that a portion of this inventory exceeds current requirements.
Operating cash flow dropped to $2.4 million from $21.7 million, while investing outflows reached a record $85.8 million.
Post-year-end, the company issued $40.0 million of 5.25% convertible subordinated notes (conversion price $26.10); the company has never paid a cash dividend.

03—Questions

Frequently Asked Questions

Why did net earnings decline so sharply in fiscal 1995?
Net earnings fell to $2.5 million from $19.6 million. The filing attributes this to higher cost of goods sold and occupancy (63.7% of sales versus 59.9%), including higher occupancy costs, a Q4 promotional program to reduce excess inventory, a year-end inventory reserve, and higher-than-planned shortage results. SG&A also rose to 35.0% of sales from 33.5%, partly due to operational problems at distribution and telemarketing facilities during the holiday peak.
How is the company funding its store and distribution expansion?
The company issued $40.0 million of 7.2% Senior Notes in August 1995 and increased net bank borrowings by $29.6 million. In April 1996, it issued $40.0 million of 5.25% convertible subordinated notes, with net proceeds of $38.7 million. The bank credit agreement was renewed on March 29, 1996, with a seasonal line ranging from $60 million to $90 million.
Does the company pay dividends?
No. The company has never declared or paid a cash dividend on its common stock. Its policy is to retain earnings to finance growth, and its bank credit agreement, Memphis sublease, and 7.2% Senior Notes restrict cash dividends.
What is the company's exposure to inventory risk?
Merchandise inventories rose to $121.6 million from $87.9 million. The company disclosed that a small portion of this inventory exceeds current requirements, recorded a reserve for expected disposition losses, and is running a program to reduce inventory to desired levels over the near term. It warned that additional accruals or write-downs may be needed if the program is unsuccessful.
How is the store base changing?
The company operated 240 retail stores at January 28, 1996, up from 214. It opened 34 new large-format stores in fiscal 1995 and plans 27 new or expanded large-format stores in fiscal 1996, 14 Williams-Sonoma and 13 Pottery Barn.

04—Continue

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