Pottery Barn 2006 Annual Report Download - page 7

consumption to FSC certified paper. Utilizing this paper, which carries the gold standard in forest products
certification, ensures that our paper comes from forests that are managed under the strictest environmental and
socioeconomic standards. This change in our catalog production process was a major achievement in our ongoing
effort to deliver on our commitment to our employees, customers, and shareholders to operate in a socially and
environmentally sound manner.
The Year Ahead
As we enter 2007, we continue to be encouraged by the opportunities that we see ahead in both our core and
emerging brands and remain focused on our mission – to “Own the Home” through multi-channel retailing. And
since we target a highly fragmented home-furnishings market, we believe we are well positioned to increase our
market share by capitalizing on our superior multi-channel marketing and supply chain capabilities.
In 2007, we will focus on the strategic initiatives that we believe will enhance the financial and operational
performance of the company over the next several years – driving sustainable revenue growth with a key focus
on the revitalization of the Pottery Barn brand; increasing our pre-tax operating margin by continuing to drive
operational advancements and cost containment initiatives across the company; and enhancing shareholder value
by delivering on the commitments that we have made with respect to improving the overall performance of our
business.
To drive top-line revenue growth across all of our channels, we expect to increase retail leased square footage by
approximately 5% to 6%, including adding 13 net new stores and expanding or remodeling an additional 20
stores. We will also increase catalog circulation by approximately 4% to 5% and intensify the marketing support
behind our fastest growing shopping channel – e-commerce. Of our 5.7% to 8.0% expected growth rate in 2007 –
including a 53rd week – we estimate that approximately 150 to 170 basis points will be generated by our
initiatives in the emerging brands. These emerging brand initiatives include opening five new stores in the West
Elm brand, opening two new stores in the Williams-Sonoma Home brand, and increasing catalog circulation by
8%.
To improve our overall cost structure, we will continue to drive efficiencies within our supply chain, leverage our
emerging brand infrastructure, and maintain tight controls around overhead expenses while investing in our
future. We expect, however, that we will see further short-term compression in our operating margin in 2007 as a
result of continued softness in the home-furnishings macro-economic environment, increased costs associated
with the Pottery Barn recovery plan, and higher incentive compensation.
To enhance shareholder value, we will continue to adhere to the principles that have successfully guided us in the
past – building the authority of our existing brands in the market segments that we serve; continuing to leverage
the potential of our multi-channel strategy; and delivering on the commitments we have made to our
shareholders.
Increase in Quarterly Cash Dividend
Although our 2006 operating results were below our expectations, excluding an $0.11 per diluted share charge
for unusual business events and new accounting pronouncements, we still delivered the highest diluted earnings
per share in our history. For this reason, we are approaching our future with great confidence, not only from a
growth and profit-enhancement point of view, but also from a free cash flow standpoint. Based on this
confidence – combined with our strong cash position and future projected cash flows – we are increasing our
cash dividend by 15%, from $0.10 per quarter to $0.115 per quarter – in addition to continuing our ongoing share
repurchase program. As we enter 2007, we are authorized to repurchase up to 6.2 million shares of our common
stock. In 2006, we repurchased approximately 5.8 million shares of our common stock at an aggregate cost of
$185.5 million.
Shareholders’ Letter