Pottery Barn 2006 Annual Report Download - page 5

A LETTER TO OUR SHAREHOLDERS
Fiscal 2006 was a difficult year for Williams-Sonoma, Inc. as year-over-year growth rates – on both the top and
bottom line – fell well below the expectations that we had set for ourselves at the beginning of the year. But
despite these lower growth rates and excluding an $0.11 per diluted share charge for unusual business events and
new accounting pronouncements, we delivered the highest diluted earnings per share in the history of the
company.
Our key challenges during the year were two-fold. First, like many home furnishings retailers, we were
negatively impacted in the back half of the year by the significant softening in the home-centered macro-
economic environment. As a result, we saw lower direct-to-customer response rates, weaker retail traffic, and an
unusually high level of competitive markdown pressure. This was particularly true in Pottery Barn, our largest
brand, where revenues fell substantially short of our expectations. But there were also specific operational issues
within the Pottery Barn brand – primarily in the areas of merchandising, marketing, and retail execution – that
contributed to the shortfall. As these issues were within our control, we assure you that a comprehensive recovery
plan is underway – but this will take some time. Our expectation is that we will see progressive improvement
throughout 2007 leading to significantly improved performance by 2008.
Despite these challenges, however, there were several operational advancements that we made during the year
that we are very proud of. First, we successfully insourced our east coast furniture hub operations, which allowed
us to substantially improve the furniture delivery experience for our customers and reduce our furniture return
rates. We also significantly expanded our capabilities in monogramming and personalization. In information
technology, we implemented new retail inventory management systems in our Williams-Sonoma and Pottery
Barn Kids brands. We believe that over time, these new systems will allow us to optimize the flow of inventory
from our vendors to our stores as well as improve our service levels to our customers. We also implemented new
gift card issuance and redemption functionality in our direct-to-customer channel. We believe that this
functionality is critical to driving future growth as consumers increasingly show a preference for this convenient
form of gift giving. All of these initiatives substantially enhanced our operational infrastructure and leave us well
positioned to support accelerated growth in the coming years.
Our Fiscal 2006 Financial Results
Net revenues in 2006 increased 5.3% to $3.7 billion, with positive growth across all brands. Diluted earnings per
share, however, decreased 1.1%, including a net charge of $0.11 for unusual business events and new accounting
pronouncements. Excluding this charge, diluted earnings per share increased 1.1% to a record $1.90 per share.
Although these results were below our expectations, they do demonstrate the strength of our brands and our
ability to profitably drive our business in a challenging home-centered macro-economic environment. From a
cash flow perspective, 2006 was another strong year – generating over $300 million in net cash from operating
activities, despite higher inventories and lower growth rates. In 2006, we returned nearly $220 million to our
shareholders through a combination of share repurchases and dividends. We ended the year with a cash balance
of $275 million, after internally funding all growth and infrastructure initiatives – including $191 million in
capital expenditures.
While the home-furnishings environment clearly impacted our business in the back half of the year, we believe
that the relative strength of our overall financial results reflects what is unique about our company: our superior
multi-channel business model, the competitive advantages that exist within our supply chain infrastructure, and
the benefits of operating a portfolio of brands.
Growth Driven by a Portfolio of Brands
The first driver of our 2006 operating results was our growth in revenues, which increased 5.3% to $3.7 billion.
In our core brands, net revenues increased 4.7%, including an 11.5% increase in the Pottery Barn Kids brand, a
5.6% increase in the Williams-Sonoma brand, and a 1.8% increase in the Pottery Barn brand. We were
particularly pleased with the performance of the Williams-Sonoma brand. In its 50th year of operations, the brand
Shareholders’ Letter