Pottery Barn 2005 Annual Report Download - page 6

Driving Profitability to a New Level
The second highlight of our 2005 operating results was the improvement in our pre-tax operating margin,
increasing from 9.9% in 2004 to a record 10.2% in 2005, excluding the 2005 impact of the Hold Everything
charge. This increase was primarily driven by cost reduction initiatives in our furniture supply chain and the
ongoing leverage of our corporate infrastructure. In 2005, our core brands overall achieved a new level of
profitability – including delivering the highest operating margin in their history. As these improvements were
driven by fundamental changes in the way we operate our business, we believe that the operating and financial
disciplines necessary to sustain these benefits are in place.
Building Infrastructure
The third highlight of our 2005 operating results was the significant progress we made in building our
infrastructure to support the growth of our core and emerging brands.
In supply chain operations, we successfully implemented our “Daily Store Replenishment” program in the retail
channel and began testing the in-sourcing of our furniture hub operations in our east coast distribution center. We
also expanded our distribution network by increasing distribution leased square footage by approximately 10%.
In the information technology area, we made great strides in our five-year strategic plan. To support the long-
term scalability of our infrastructure, we outsourced the hosting of our data center to IBM and continued the
development of our direct-to-customer order management and inventory management systems. We also
continued to invest in our new retail inventory management system, which we expect to implement over the next
two years.
Commitment to Corporate Governance
A final highlight of 2005 was the advancements we made in the area of corporate governance – including the
addition of two new independent directors to serve on our Board, and the ongoing company-wide dedication to
full compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Integrity and high ethical standards are the
principles on which we built our company and our commitment to preserving their importance in our culture has
never been stronger.
The Year Ahead
As we enter 2006, we are excited about the opportunities that lie ahead in both our core and emerging brands and
remain focused on one single vision – to “Own the Home” through multi-channel retailing. And since we target
the highly fragmented home-furnishings market, we believe we are optimally positioned to increase our market
share by capitalizing on our superior multi-channel marketing and supply chain capabilities.
In 2006, we will continue to focus on the three long-term strategic initiatives that have transformed our financial
performance over the last several years – driving profitable top-line revenue growth; improving our pre-tax
operating margin; and enhancing shareholder value.
To drive top-line revenue growth across all of our channels, we will continue to increase retail leased square
footage by opening 24 net new stores – including the initial launch of three test stores in the Pottery Barn Bed +
Bath format – and expanding 16 existing stores. We continue to believe that store expansions are a significant
opportunity for long-term leased square footage growth in our Williams-Sonoma and Pottery Barn brands. We
will also increase catalog circulation to an estimated 390 million catalogs, expand our electronic direct-marketing
programs, and enhance customer access to the brands by implementing new e-commerce functionality –
including gift card sales and redemption. Of our 10% to 12% expected growth rate in 2006, we estimate that
approximately 180 to 220 basis points will be generated by our initiatives in the emerging brands. These
emerging brand initiatives include opening 14 new stores, increasing catalog page circulation by 16%, and
launching a Williams-Sonoma Home e-commerce website in the third quarter.
To improve our pre-tax operating margin, we will continue to drive efficiencies in our supply chain operations,
leverage our emerging brand infrastructure, and contain our general overhead expenses. We remain committed to
our financial discipline and will continue to maintain tight control of expenses while investing in our future.