Williams-Sonoma Aktie

Welcome to the Williams-Sonoma, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our first quarter earnings call.

Before we get started, 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 our annual guidance for fiscal '26 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances 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. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of the call 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.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. We are off to a strong start in fiscal 2026. In Q1, our comp came in at 4.8%, reflecting strong execution across our portfolio of brands, our channels and our teams. Thank you to everyone at the company for your hard work and dedication. We are pleased that our growth initiatives are working, and every brand delivered a positive comp in Q1. We also saw strength in both our retail and DTC channels with improvements across the customer journey. Furniture and non-furniture trends were strong and collaborations, newness and innovation all performed well.

From a profitability standpoint, we delivered an operating margin of 16.2% ahead of expectations. We delivered this operating margin even while absorbing tariffs and higher fuel costs. Earnings per share was $1.93, up from $1.85 last year.

We continue to outperform on both top and bottom lines in this uncertain environment which includes, but is certainly not limited to war, trade policy, including tariffs and interest rates. We are delivering compounding results year after year despite the cyclical swings of the housing market and other macroeconomic events. We believe our strong brands, our proven ability to execute our vision and our relentless focus on customer service will allow us to accomplish our goals in 2026 and beyond.

First, on growth. In Q1, our 4.8% comp reflected our company-wide focus on growing our top line. Our quarter was driven by strong performance at all of our brands, growth from our B2B division and continued outperformance of our smaller but quickly growing and profitable emerging brands. Also, the product pipeline that we laid out this year is working. We are committed to delivering great customer service, and we continue to put the customer at the center of everything we do. We extended AI further into the customer journey. We scaled personalization across our portfolio of brands and we continue to optimize the shopping and checkout experience.

We also made progress using automation to improve customer care and strengthen product discovery, while continuing to advance our design tools. And across the operations, we delivered enhancements to support supply chain efficiency and enable important brand initiatives this quarter. And we continue to make progress in supply chain performance with our focus on time and delivery and low returns and replacements. These improvements helped us offset higher year-on-year tariff and higher fuel costs. We stayed lean and efficient throughout the organization and managed variable costs. And you can see those results in the P&L we share with you today.

Additionally, in the quarter, we returned $373 million to our investors through share buybacks and dividends. Our results demonstrate our discipline and commitment to delivering quality earnings and returning free cash flow to our stockholders.

Now let's talk about guidance. We are reiterating the annual guidance we provided on our Q4 call. We are confident about our business, both because of our Q1 results and our strategies for the balance of 2026. However, despite [indiscernible] in the first quarter, we are not raising guidance as it is early in the year, and there's a lot of uncertainty in the external environment. We are not building in on meaningful housing recovery, and we are assuming continued volatility across geopolitics, war, fuel prices, trade policy and tariffs and interest rates.

Of course, we can never plan for extreme outlier events, but what we can do is give you our best estimate for 2026 which at this point reflects comp brand revenue growth of 2% to 6% with a midpoint of 4% and an operating margin in the range of $17.5 to 18.1% with a midpoint of 17.8%.

Now let's review our brands. Pottery Barn delivered a positive 1% comp in Q1, and we were pleased to see the brand's results improve. We saw progress in key categories for Pottery Barn across furniture, lighting and textiles. Customers responded to both our spring and summer assortments. The quarter also reflected the actions we have been taking in marketing. We are focused on Pottery Barn's heritage aesthetic, both in marketing and product design, and we are improving value across key categories. At the Pottery Barn channel level, DTC improved as we focused on the digital experience. Retail remained strong as customers continue to respond positively to our stores, design services and the in-person shopping experience, including Take It Home Today. We remain focused on executing the Pottery Barn strategy quarter-by-quarter and are confident about the brand's trajectory in 2026 and beyond.

Before I move on, I also want to share an update on leadership at Pottery Barn. This morning, we announced the promotion of Jennifer Kello to the role of President of Pottery Barn. Over the course of her 29-year tenure, Jen has demonstrated an exceptional track record of driving growth and incubating brands. She brings deep expertise across merchandising, design, e-commerce and marketing and has helped drive significant growth for our company. We also have a strong bench of talent in our Pottery Barn Children's businesses, and that team will continue to lead the brands and will report to me.

And finally, today, we announced former Pottery Barn President Monica Bhargava's departure from the company. I want to thank Monica for her significant accomplishments throughout her 26 years with our company. Monica's visionary leadership and creative talent have made a lasting impact across our brands, and we are grateful for her many contributions.

Now let's turn to our Pottery Barn Children's business which delivered yet another strong quarter, running a positive 4.5% comp in Q1. Growth was driven by product innovation with strength in both furniture and non-furniture. Collaborations and licensing remain key drivers led by LoveShackFancy, Chris Loves Julia and partners to keep the assortment fresh and bring in new customers. We also saw a strong momentum in Baby supported by high-quality furniture and expanded gifting assortment and improvements to the registry experience, both in stores and online. And in Dorm, we are entering the season well positioned with complete solutions that meet customers' needs and preferences. In the quarter, we also launched Dormify as our tenth brand which expands our reach in dorm in small space living with functional style-driven solutions to the next generation of customers.

As we think about the future, we see meaningful growth ahead in our Children's business. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited about the momentum as we move through the year.

Now let's review West Elm. West Elm had a positive, 8.5% in Q1 and I'm proud to say again that West Elm is on a roll. The drivers at West Elm are consistent and the results are compounding. West Elm continued to make improvements across products, brand heat and channel excellence, new introductions in both furniture and non-furniture drove growth and both Springs and Summer Newness performed particularly well. Retail West Elm was a highlight in Q1. Customers came into our stores and saw more newness and better in-stock availability. And the strength of the brand gives us confidence to return store count growth with 5 West Elm openings planned in 2026. Collaborations also remain a key pillar of the growth strategy at West Elm. The Emma Chamberlain collection was a great example that brought new energy to the brand and connected with the younger customer. It is another proof point tath West Elm can create brand heat and drive growth through distinctive products and storytelling. Overall, we are thrilled with [indiscernible] at West Elm. The brand is executing well, and we feel good about the opportunity to build on this progress as we move through '26 and beyond.

Now let's review the Williams-Sonoma brand. Williams-Sonoma continues its streak of strong performance with a positive 5% comp in Q1 on top of a 7.3% comp last year. As we spoke about on the last earnings call, 2026 marks Williams-Sonoma's 70th anniversary. At 70 years old, this brand is not slowing down. In fact, it's gaining momentum. The Kitchen business continues to accelerate and our pipeline of proprietary in-house design products and market exclusive separate us from the competition.

We also continue to strengthen the brand through collaborations and marketing partnerships. In Q1, we welcomed well renowned interior designer, Kelly Wearstler as a spokesperson for our exclusive [indiscernible] offering. We also launched the Stanley Tucci pizza oven from GreenPan and a food collaboration with Oakfield Grocery on Napa Valley culinary institution and the oldest continuously operating grocery store in California.

In our Williams-Sonoma stores, we continue to bring the brand to life through experiences that deepen engagement. In Q1, skill series classes remains an important driver, and we also built momentum in registry through events and concierge appointments. We also saw notable momentum in Williams-Sonoma Home in the quarter. Customers responded to newness and innovation in color, print and pattern. And while the business is small, we see opportunity to expand in the underserved high-end furniture and home furnishings market. Looking ahead, we are excited for the summer entertaining season. We have [indiscernible] this weekend which is another great example of how we bring the brand to life, to food, community and experiences that are uniquely Williams-Sonoma and if you're going to be in Napa this weekend, please give me a call.

Now I'd like to update you on B2B. B2B started the year strong with another record-breaking quarter, delivering growth of 13.7%. We saw the strength across B2B with continued momentum in both trade, which were 9% and contract, which grew 22%. Our B2B team continues to strengthen our position as a preferred partner. We're winning because of our deep relationships with designers, developers, procurement groups and brands and because our design to deliver capabilities are difficult to replicate.

We also delivered several marquee projects in the quarter, including hospitality work for Delano Miami, [indiscernible] Resort and Spa, multiple locations with national developers like AMAR and Greystar and continued momentum in sports and entertainment with Capital One Arena, Live Nation Philadelphia and upcoming work with the U.S. Open. And to start Q2, the team was recognized that the Hospitality Design Expo, winning the Best in Show award. Overall, we are pleased with the start to the year in B2B and we remain excited about the pipeline and the opportunity ahead.

Now I'd like to update you on our emerging brands. With our proven ability to incubate and scale rooms in-house, these concepts represent sizable growth opportunities for us. Starting with Rejuvenation, which had another strong quarter with double-digit comp growth. Performance was driven by continued momentum in project light categories, including cabinet hardware, bath, lighting and mirrors. Rejuvenation also continued to see strong engagement from the trade which reinforces the brand's position with design and renovation customers. And in DTC, growth is supported by continued engagement in our core categories. Product innovation continued to be a focus on the brand with high-quality, design-driven products, distinctive details and customizable options that matter in home project categories. With only 13 stores and great online growth, we are thrilled with the progress in Rejuvenation, and we continue to believe in the opportunity for Rejuvenation to be our next billion-dollar brand.

Mark & Graham also had strong Q1 with a double-digit positive comp. The brand continued to build momentum across key categories, and it remains a distinctive destination for personalized gifts for less meaningful moments. As we look ahead, we are leaning into major seasonal milestones like Graduation, Father's day, Wedding Season and [ Summer Entertaining ] and we are doing that with compelling new products and elevated coastal point of view.

And last, but certainly not least, GreenRow. GreenRow continued to deliver growth in Q1. We opened our first store in March and is a great manifestation of the brand. And since we've last talked, I hope you have had an opportunity to stop by and see the store yourself in SoHo. GreenRow focuses on sustainable, responsibly crafted vintage inspired design. The brand combines colorful eclectic styling with airline quality materials and low-impact manufacturing practices.

Finally, I'd like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico and the U.K. driven by differentiated products, ongoing omnichannel improvements, and continued growth in our design and trade businesses.

So in closing, as you can see, we are off to a strong start in fiscal 2026. I would summarize Q1, the 3 accomplishments. First, we delivered strong top line growth with every brand positive. Second, we drove operating margin that exceeded expectations. And third, we delivered earnings growth and we did all of this in a dynamic and uncertain external environment. This quarter reflected what we set out to do in 2026. We are accelerating growth through strong execution across channels, strength in both furniture and non-furniture and continued momentum in collaborations, product newness and product innovation. We are continuing to invest in the customer experience and making progress in service and supply chain. And finally, we are staying disciplined on cost and productivity, which supports strong profitability and returns to our shareholders. We feel good about the start of the year, and we remain confident in our priorities and our strategies for 2036. And while the external environment can shift quickly, our model and our team are built to navigate volatility and keep delivery.

And with that, I want to thank our team again for their work and their commitment. And I also want to thank our vendors and our shareholders for their partnership and support. Now I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. We delivered another quarter of growth and strong earnings in Q1. Our results reflect the power of Williams-Sonoma Inc.'s operating model. And our team's strong execution on the priorities we laid out for fiscal year '26, accelerating growth, delivering world-class customer service and driving earnings. As I walk through the numbers, you'll see how we delivered on all 3 priorities this quarter. I'll start with our Q1 results and then review our guidance for fiscal year '26.

Q1 net revenues finished at $1.81 billion, with comp growth of 4.8%. Both our 1-year and 2-year comps accelerated from Q4 to Q1, reflecting the continued strength and momentum of our business. Both Furniture and non-furniture categories posted positive comps in the quarter, and the trend in both categories accelerated significantly from Q4. From a channel perspective, both e-commerce and retail delivered strong comps with e-commerce up 4.8% and retail up 4.7%. We accelerated our market share gains as the home furnishings market declined in the low single digits in Q1. We accomplished this even as we maintained our level of full price selling. Our strong results demonstrate the power of our portfolio of brands, which span different aesthetics, life stages and price points. Combined with our growth strategies, our portfolio sets Williams-Sonoma Inc. apart in the home furnishings industry.

Moving down the income statement. Q1 gross margin was 44%, down approximately 30 basis points versus last year. Our focus on growth, customer service and supply chain efficiency partially offset the headwinds from tariffs and higher fuel costs. Merchandise margins declined 100 basis points versus last year. Higher tariffs flowing through to our weighted average cost of goods sold drove this decline. Full price selling was essentially flat year-over-year.

Ocean freight costs were also pressured by higher oil prices. However, our size and scale and our talented supply chain team helped mitigate the impact. Supply chain efficiencies, including a lower shrink accrual delivered approximately 50 basis points of gross margin benefit in the quarter. Our focus and execution on customer service continued to drive efficiency across our supply chain enabling us to offset the impact of higher fuel prices to domestic shipping costs. I'd like to acknowledge and thank our supply chain team for their relentless focus on service and efficiency that is helping us offset higher fuel prices.

Occupancy costs leveraged approximately 20 basis points versus last year with our strong top line growth more than offsetting the 3% increase in occupancy dollars. Overall, our gross margin came in ahead of our expectations. We are pleased with our ability to partially offset tariff-related merchandise margin pressure and higher fuel prices through supply chain efficiencies and occupancy leverage.

Turning now to SG&A. Q1 SG&A ran at 27.8% of revenues, approximately 30 basis points higher than last year. Employment expense deleveraged 30 basis points. We continue to manage variable employment costs in line with top line trends while staying focused on investing in talent. Advertising expense as a percent of revenues leveraged 10 basis points. Our in-house marketing team continued to test, scale and optimize across our portfolio of brands, driving strong customer engagement while remaining disciplined on spend. We also invested in social media, using compelling content, collaborations and influencer partnerships to increase relevance, expand reach and drive brand heat. Lastly, general expense deleveraged approximately 10 basis points, primarily from timing. On the bottom line, we delivered operating income of $292 million with operating margin at 16.2%. Diluted earnings per share were $1.93, up 4% versus last year. On the balance sheet, merchandise inventories were $1.46 billion, up 9% to last year. Included in our inventory is approximately $60 million of embedded incremental tariff costs. Excluding these tariff costs, inventories would have been in line with our top line growth. Our inventory levels and composition continue to be well positioned to support our sales growth and customer service goals. During the quarter, we invested $58 million in capital expenditures to support our long-term growth. We also returned $373 million to shareholders through share repurchases and dividends. We repurchased $288 million of stock or approximately 1.4% of shares outstanding. We also paid $85 million in dividends, a 15% increase year-over-year.

Summing up our Q1 results, we are proud of the strong execution across the business. We accelerated our top line growth, continued to improve customer service and supply chain efficiency and grew earnings per share. These results speak to the power of our operating model, but none of it would be possible without the incredible team we have here at Williams-Sonoma, Inc. I'd like to thank our team for their outstanding execution this quarter.

Now let's turn to our fiscal year '26 outlook. As Laura mentioned, we remain confident in our strategy and momentum. We are reiterating our guidance as it's still early in the year and the environment is uncertain. We expect fiscal year '26 net revenue comps to be in the range of 2% to 6%. And with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. Our guidance continues to assume no material changes in the macroeconomic environment [ or ] housing turnover or interest rates. We remain focused on accelerating growth delivering world-class customer service and driving earnings.

As we discuss guidance, I'd like to address 3 topics top of mind for investors: higher oil prices, tariff refunds and tariffs. First, higher oil prices. Higher oil prices are pressuring transportation costs. With ocean freight, we believe our size and scale combined with the outstanding work of our experienced transportation team will allow us to continue to mitigate the impact. For domestic shipping expense, deal prices near today's levels are embedded in our guidance. While the direction of oil prices is difficult to predict, our guidance reflects our best estimate of the impact of higher oil prices on our business.

Second, tariff refunds. Our guidance does not contemplate recognizing any benefit from tariff refunds due to the uncertainty surrounding the timing and potential of recovery.

Finally, tariffs. Our assumptions on tariffs remains unchanged as well. As discussed last quarter, we continue to expect the impact of tariffs to be front half weighted and then moderate over the balance of the year. Our guidance continues to assume all tariffs currently in place remain in effect for the balance of the year, including the Section 232 tariffs, the current Section 301 tariffs and the Section 122 tariffs. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. With the ongoing uncertainty around tariffs, it is impossible to say where they will ultimately land and it is difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance.

Also today, we are providing some further inputs for modeling purposes. We expect our full year interest income to be approximately $25 million and our full year effective tax rate to be approximately 25.5%.

Turning now to capital allocation. We will continue to prioritize funding our business operations and investing in long-term growth. Our capital expenditure guidance is unchanged. We expect to spend approximately $275 million in capital expenditures for the year. About 95% of that investment will be focused on e-commerce, retail and supply chain. With regards to our investment in retail, we continue to expect our year-end store count to be essentially flat to last year, after which we anticipate 1% to 3% growth in store count each year starting in fiscal year '27. Embedded in our fiscal year '26 guidance continues to be approximately 70 basis points of non-comp growth from our investment in retail.

We remain committed to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases. On dividends, we will continue to pay our quarterly dividend of $0.76 per share which is a 15% increase year-over-year. We are proud to say that fiscal year '26 is the 17th consecutive year of increased dividend payouts. On share repurchases, we have approximately $1.1 billion remaining under our current authorization, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns. Looking beyond fiscal year '26, we are reiterating our long-term outlook for mid- to high single-digit revenue growth and operating margins in the mid- to high teens.

Wrapping up our comments, we are proud to have delivered yet another strong quarter for our shareholders. We're confident we'll continue to outperform our peers and deliver shareholder returns for these 5 reasons that remain consistent. Our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy. The ongoing strength of our growth initiatives and the resiliency of our fortress balance sheet.

With that, I'll open the call for questions.

[Operator Instructions] Your first comes from the line of Kate McShane of Goldman Sachs.

We wanted to first ask about the health of the consumer. If you saw any change in behavior during the quarter, any differences between income cohorts? And if you've seen any change in made to date?

Sure. I can't really speak for others and what they're saying, but our consumer is responding to our products, our strategies across channels and across our brands, as you can see by this morning's set of numbers. And it's from furniture to smaller items and collaborations, across the board really. I think the truth is that we have put together a pipeline of products that is very appealing and distinctive in the market and people trust us for our great prices and quality and they're coming into our stores because of our engaging store experiences and service and it seems like they are very interested in spending with us, and we believe that, that's going to continue as we look through the year because the strategies that we built through the year that are going to come, it looks like the ones we've been implementing. And so I think you're going to continue to see the momentum that we've seen in the first quarter.

And it does appear that you were able to offset a lot of the higher fuel costs with the efficiencies in the supply chain that you laid out on the call. But I was wondering if this inflationary environment were to persist, do you think you'll have to look to increasing prices at all?

I think it's too early to comment on that and remember, we don't just compete on price. We're competing on the whole, which is the product itself and [ with similar ] market versus other similar products. And we have incredible finishes and product design, exclusives, exciting stuff in the works. And that's where we see the customer being less price sensitive. That said, we're careful to make sure that they feel really good about buying from us, and we want to continue to invest in our customer and give them the best value in the market.

And I'll just add, Kate, that as I said in our opening remarks, oil prices at today's levels are embedded in our guidance. We are seeing ocean freight prices pressured. But given our size and scale, we're able to mitigate them. And then with domestic transportation, we are seeing higher costs, but our supply chain efficiencies are really offsetting them. And I want to take a moment just to acknowledge and recognize and thank our entire supply chain organization for their ongoing focus on just efficiency and driving customer service, which as everyone has seen, is really producing phenomenal results for the company.

Your next question comes from the line of Seth Sigman of Barclays.

So with comps accelerating this quarter relative to prior quarters, at a time when it seems like you've raised prices, but it seems like those pricing increases are maybe starting to stabilize. So it would imply that the composition of the business is maybe shifting, meaning more volume is improving. Is that right directionally? And if so, what do you think is changing that is driving that? And how do you think about the sustainability as you move through this year?

You are right. And so we're seeing broad-based comp lever improvement and we're very excited to see it across channels. It's based on our strategy and the execution of our strategy, which are very competitive but we could lay out a bunch of them in the last conference call and in this one and so we're thrilled to see furniture recovering, we had a good Easter, we're going to back to school. We've invested in the dorm experience, the total customer experience, in stock at retail. All these things are good for the comp levers. I always think of comp levers as the output of the strategy and not the thing to focus on, but just to tell you, it's not just for [ price ].

Okay. That's helpful. And then maybe for Jeff, on the merchandise margins, they were down this quarter, but a little bit better than, I think, expected you're going to start to lap very healthy merchandise margins, particularly in the second and third quarter. Can you just remind us how you're thinking about that? How you would expect the cadence to play out throughout the year?

Yes. So margin was down about 100 basis points in the MMU in Q1. A little better than Q4 and a little better than we expected. But we still are guiding that the impact of tariffs will be heavily front weighted and then moderate across the back half of the year simply because of the way the tariffs are flowing through on our weighted average cost accounting. Now Q1 had an easier compare because we were again, up against some timing items in last year. Q2 won't have that benefit. So Q2 will probably be peak impact to the tariffs. But after that, we expect it to moderate for the balance of the year.

Your next question comes from the line of Chuck Grom of Gordon Haskett.

Can you help us think about the underlying demand curve in the business? I mean skeptics are going to say that this is tax-refund-driven, but I don't think that's the case. And I was hoping maybe you could opine on strength in West Elm and the recovery in PB specifically. But more importantly, just getting a better sense for the demand curve, the underlying demand curve in the business.

Yes. We're thrilled with the results in West Elm. We're not entirely surprised though we've been building this foundation for growth and if you remember many [ quarters ] ago I mentioned we're starting to see newness really working [indiscernible] inventory. Now we have had that in stock, and we have confidence in building more newness both the core and also the collaborations and it is [indiscernible] we also have new categories that are really performing well for us and focusing on not just furniture, but [indiscernible] and then the combination of two things is great. I also will just say that this is not emotionally-led. We had a very, very strong [indiscernible] in West Elm[indiscernible] not emotionally-driven at all. And we believe that this is a sustainable, the brand is very well positioned versus the competition and [indiscernible] extremely exciting. As it relates to Pottery Barn, we continue to improvements based on the strategy that I laid out we're working [indiscernible] mobile key strategies and [indiscernible] results and have a lot changes especially [indiscernible] positioning and getting back to what is the traditional Pottery Barn aesthetic, which is really resonating with the customer and we've only begun to implement that strategy and so I think you're going to see continuing improvements in Pottery Barn comps as we go [indiscernible] we're confident.

Okay. Great. And then just, Jeff, on the supply chain, another 50 basis -- 50 bps of improvement there to help offset some of the merchandise margin pressure. Can you -- can you walk through some of the KPIs across the metrics that you follow to give us a sense of kind of where you are on that journey and the visibility you have to continue to gain on the supply chain side?

Absolutely, Chuck. So supply chain efficiencies continue to be a big benefit for us. And our goal remains the same. It's having a perfect order on time, damage-free every time. And those are really the key KPIs that we track is the order on time? Is it damage free? Are there no issues with it? And is the customer satisfied? And at the end of the day, it's really about making sure that customer is satisfied, and we have an incredible supply chain team that really makes a difference in terms of our customer service. And as many of you have heard me say, we don't just compete on price. We also compete on service. We compete on service in our stores with our free interior design services, which has [ helped you ] propel the strength of our retail division. And also, we compete on our in-home delivery. We made 2.4 million in-home deliveries a year. That's about 7,000 a day. And we do it better than just about anybody else out there. And we do it by focusing on making sure the customer is happy and that the order comes perfect every time. Is it on time? Did we hit the delivery? Did we have all the pieces together? Did we put it where the customer wanted it? Are they happy with it? At the end of every order, they actually have to sign and acknowledge that they're happy with it. We take pictures of the order, and we make sure that it's what they want. And that customer service is really what differentiates us. And the more we service our customer, the better our results are.

Your next question comes from the line of Jonathan Matuszewski of Jefferies.

My question was on the trade channel. It's promotional in the industry for consumers but it's also increasingly promotional in the industry for the trade channel. It seems like many retailers are increasingly trying to court the interior design community. It looks like your trade channel business was strong this quarter, up around 9%, I believe. So my question is what's on the horizon in terms of initiatives to maintain that momentum and neutralize maybe some of the higher promotions some competitors are doing to court those designers.

Yes. We continue to believe in our B2B business. It had another strong quarter of 14%. That was our largest quarter ever to date in B2B. Now today is an important part of it. To your point, it was up 9% in quarter and that's not really being driven in price. We're not changing anything regarding the pricing we do with the trade consumers or promotional activity [indiscernible] service and it comes down to our local stores, our own [indiscernible] community, building those relationships and really executing on all the different strategies we have around product and service and delivery. And then the place we're focused in B2B is on the contracts side which had a 22% increase in the quarter. We continue to have an incredibly robust pipeline and are making really big inroads here. I'll share that as many of [indiscernible] I manage B2B. Earlier this month, I joined our B2B team down in Las Vegas to the Hospitality Design Expo, where we won best booth which was a sign of how much attention we get in the industry. And I'll just share with you [indiscernible] I've never seen a team were motivated to drive results and so much activity in our booth with customers coming in. It left me incredibly excited about our ability to achieve our goal, which is to drive it [indiscernible].

Your next question comes from the line of Christopher Horvers of JPM.

I feel like I'm at a Pink Floyd concert right now. Can -- Laura, can you maybe talk about the West Elm acceleration a bit more. There's a lot going on at the brand you're running that PB playbook of category expansion, rooms, outdoor, kids, you have the B2B side, which I think is a big driver of the West Elm business and then you have the Emma collaboration. So as we think about that sequential improvement, could you maybe qualitatively bucket, how the drivers -- which one of these drivers have been more significant?

I'm assuming you're commenting about the echo, which we're very -- we're very sorry for. Is it any better now?

It's a little better.

I mean it's our partner, Q4, and they're working on it as we speak. But I apologize, it's distracting for us too. But I'm not so distracted. I won't tell you about the amazing business, which is driven by multiple things. We laid out the strategies, and we have been executing against them. And -- it's not one thing. Emma Chamberlain is amazing. She has got such a wonderful following and she continues to gain momentum in the world and people knowing her and -- the team started working with her a while back, and they put together a beautiful line of product that is really bringing in new customers, younger customers to the brand and bringing back that hip feeling and a surprise, I think in great retailers execute. It's not what you always expect. It's this new layer that makes you smile and that's what Emma did. All her great products from [ Pigeons to Beautiful Beds ]. I mean it's across the categories. And that's just one thing. There's a bunch of really exciting other collaborators coming. And you can imagine when you have one hit like that, and people see it. A lot of people want to work with you. So we have a wonderful opportunity to continue to feed the collaboration pipeline with really interesting names.

And then at the same time, we've been working on filling white space in the market with West Elm's unique designs, modern aesthetic and price point, and we're making progress against the categories of furniture. We've -- I would say, we've added more looks. We've seen [indiscernible] continue to do well. And then we have our core categories, textiles, and rugs and [ deca ] and tabletop and we have wins across the board. So it really isn't pointing to just one thing. But there's a lot of room to go. I mean there's still areas where we are underdeveloped versus Pottery Barn and areas where we haven't hit it, and that's what we're focused on. We're just going to keep driving it. And we're going to keep pushing for even higher comps. I think this brand has a lot of growth in it and its positioning, and we're going to go get it.

Excellent. And then, Jeff, as a follow-up, can you help us with the price cost lap? You mentioned gross margin troughs year-over-year in the second quarter. How much did 2Q '25 have the price/cost benefit? And does that $60 million of tariff costs that hung up in inventory right now essentially flow through in the second quarter?

Chris, so not all of the $60 million [ inflows ] through the second quarter but some of it does and like I said earlier, Q2 will be the [indiscernible] the front half will be heavily impacted as the tariffs [indiscernible] but as I've said this quarter and last quarter, the tariff [indiscernible] as we travel throughout the year, Q2 the tariffs are essentially still [indiscernible] we did take [indiscernible] against that. And then Q3 they were [indiscernible] the quarter and then in Q4, there no comp. So when you think about that across the year, it goes back to Q2 [indiscernible] back half. In terms of pricing overall, I think [indiscernible] we don't give out the specifics [indiscernible]

Your next question comes from the line of Peter Benedict of Baird.

I guess Jeff, so the full year guide still embeds about a 70 basis point gap between your comp brand revenue growth and your total revenue growth. The first quarter, it was a 40 basis point negative, I guess. So just help us understand the cadence and what's going to drive that as we think about over the balance of the year.

Yes. It really comes down due to our store opening schedule. As we talked about last call, we did say that Q1 would have benefited -- the 70 basis points [indiscernible] full year because [indiscernible] activities that we discussed, which includes opening 20 new stores and [indiscernible] stores while [indiscernible] so we still anticipate a full year benefit of 70 basis points to revenues from all this retail activity, and it will accelerate as we go throughout the year.

Okay. Makes sense. And then my other question is just on the shrink accrual. I kind of recall if you framed the size of that in the quarter, if that was just part of maybe one of the other buckets. But can you talk about the shrink accrual in the first quarter and if we should expect that to continue to be a good guy, I guess, over the balance of the next couple of quarters before we cycle the positive in the fourth quarter of last year.

Yes. Happy to, Peter. As you may recall [indiscernible] accrual in fiscal year '25. And for fiscal year '26, we [indiscernible] as a result, we will see benefit in Q1, Q2, Q3 and then come up against incentives we saw last year in Q4. In terms of [indiscernible] in Q1 [indiscernible] supply chain benefits and [indiscernible] you'll never know what's going to happen until you take [indiscernible] and all of this is embedded in our guidance.

Your next question comes from the line of Cristina Fernandez of Telsey Advisory Group.

I wanted to ask about the accelerating trends in D2C. Can you talk perhaps what you're doing on the advertising that's different in driving traffic to the website in that environment that has seen more promotional to us, [ not from you, from the competition ]?

Well, I'd say that we're always looking at where we can make a tweak to our mix that drives incremental traffic and conversion. And we are using our brand heat to fuel social, organic and paid and influencers are doing a great job for us. With our partners, we are continuing to invest in the high ROIC ad cost terms and programs, and we're doing a lot of testing with these groups to find what will matter in this new world and how we see the LLMs and I do have Sameer here with me, and I'm going to -- before we run out of time, use your question to turn it to him to talk a little bit more about what we're doing with AI and how we're using that to accelerate really all of our strategies. And if you don't mind, I'm just -- I'm going to give him the chance to do that now. It's relevant to your question.

Yes. Appreciate [indiscernible] about her prepared remarks about how we're accelerating in AI and the impact it's having [indiscernible] but I think I want to take a minute to talk about where all the acceleration [indiscernible] So first, we talked about [indiscernible] primary data, our priority expertise that we're bringing together with AI in a way nobody else can. Our AI [indiscernible] scale never seen before [indiscernible] and not just providing them [indiscernible] we're becoming [indiscernible].

And then as a second question, could you talk about Pottery Barn. I mean, it was good to see the improvement this quarter, but what areas are you focused on as we look at the rest of the year to even accelerate growth in that brand.

We continue to make improvements on our DTC channel and the way that the customer finds products and shops as Sameer, just told you and that is across the board, but in particular, we've been very focused in Pottery Barn and really having everyone study where we can make those improvements the fastest and also in the photography. So the photography, if you go on, you'll see -- so I think some of the best photography we've had, and it's going to get even better into the fall season. I've had the chance to look at the [ fall film ] with the new product. And I think it's going to really -- it's going to really blow everybody's socks off. I mean it's great. It is appealing. It is fresh and it's also what you would imagine when Pottery Barn -- when it's at its best, what it should look like and multiple layers of different aesthetics that are all working well together. So creatively, I'm excited about how that feeds the brand and the stores have looked great. We've done really well with the stores. And so focusing on the DTC channel is going to really help improve the performance because that has been where it's been lagging. And then from a product perspective, we are seeing, and this is competitive, so I have to be careful not to tell too much, but we're seeing some new things work, and it was what we expected, and we're going to continue to develop more into those looks across the board, both in textiles and in furniture. Those are the big pieces. There's a lot of other things, too, that we're working on in the store experience. And all that will be incremental, and we're very, very confident.

There are no further questions at this time. I would now like to pass the call back to Laura Alber, Chief Executive Officer, for closing remarks.

Okay. Well, thank you all for your patience on this call. I hope you could hear everything. And we appreciate your support. We're confident in our business, and we can't wait to talk to you next time.

This concludes today's call. Thank you for attending. You may now disconnect.

Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning and thank you for joining our fourth quarter earnings call. Before we get started, 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 our annual guidance for fiscal '26 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances 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. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call 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.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you today about our fourth quarter and our full year 2025 results. In 2025, we delivered sustainable profitable growth in a dynamic environment. This performance is a testament to strong consumer demand for our distinctive products and brands and our world-class team.

In Q4, our comp came in at 3.2%. We drove an operating margin of 20.3% with earnings per share of $3.04. We delivered these results despite no material changes in the macro environment and continued unpredictability around geopolitics and tariffs. Normalizing for the 53rd week last year and the tariff impact this year, we delivered substantial operating margin improvements versus last year. As we look forward to 2026 and beyond, we are confident in our competitive advantages that have allowed us to take market share, and our focus is on widening that advantage.

Just a few things on Q4 before we spend more time on the year and our outlook for 2026. In Q4 2025, we saw strength and momentum across our strong portfolio of brands and in our channels. Our retail teams drove a 4.3% comp in the quarter, and there was a continued acceleration in our gift-giving brands. Both Williams-Sonoma and our Pottery Barn Children's business outperformed, with Williams-Sonoma driving a 7.2% comp and our Children's business driving a 4% comp. And West Elm continued to pick up the pace with a 4.8% comp. Finally, our DTC channel was strong due to an improved customer experience, continued personalization and incredible service. Thank you to our teams. They continue to define leadership in our industry across product, service and disciplined execution.

Turning to the full year. We outperformed the industry with a comp of 3.5%. We delivered an operating margin of 18.1% and full year earnings per share increased 1% to a record $8.84. We beat internal and external expectations on both the top and bottom lines. And in fact, we raised our guidance twice during the year. Before we get into the year, let's talk about tariffs. The tariff landscape was uncertain and unpredictable in 2025, and we expect it will remain that way in 2026.

As we all know, policy can shift quickly. But as you saw in '25, we have proven that we are resilient and capable of mitigation. As we look to 2026, we will continue to execute our mitigation strategies, which include vendor negotiations, re-sourcing where it makes sense, supply chain efficiencies, cost improvements and select pricing actions. We will stay flexible and continue to adjust quickly as the tariff environment evolves. We entered 2025 with a focus on 3 key priorities: returning to growth, elevating our world-class customer service and driving earnings.

Let me highlight the progress we made on each of these priorities in 2025. Starting with growth. We have been focused on building growth strategies across our portfolio of brands. In 2025, we drove positive top line comps in all of our brands. And even as full price selling increased, we gained market share. We focus on newness and innovation in product and brand development. We are not just competing on price. We are really competing on and winning on authority, aspiration, quality, design, exclusivity and service.

Collaborations were also an important part of our growth strategy in 2025. These partnerships drove relevance and excitement. They continue to bring in new customers while increasing engagement with our existing customers. B2B was another standout for the year. In 2025, B2B grew 10%. We continued to win because we've paired design expertise with commercial-grade products and end-to-end service. That combination is a clear market differentiator in the B2B space.

Our emerging brands also delivered strong performance in 2025 with double-digit comps all year. We've invested in the growth of our emerging brands with expansion in categories and some new product development. Our ability to incubate and develop brands in a portfolio approach is one of our long-term advantages.

Our second priority for 2025 is customer service, and we are very proud of our progress. Our goal stayed simple: to deliver the perfect order on time and damage-free every time. Our supply chain team focused on operational excellence every day. They made industry-leading progress again on supply chain delivery and customer service metrics. Also, we are pleased with our improved customer handling by both our teams and our AI capabilities.

That brings me to our third priority, driving earnings. Our profitability in 2025 reflected strong execution across the company. We've maintained tight control on SG&A. We also stayed lean on employment with a focus on productivity. The implementation of AI helps by automating work and allowing our teams to do more with the same resources. We also extended AI more deeply across our e-commerce and operations platforms. For example, we extended personalization, deepened product discovery and ranking and increased the influence of data-driven recommendations. These enhancements are improving relevance, engagement and monetization efficiency across our brands.

AI is also embedded in friction reduction, from smarter product discovery to accelerated checkout experiences, supporting stronger conversion and a more intuitive shopping journey. Beyond digital e-commerce, AI and advanced analytics continue to improve forecasting, routing logic and customer service workflows, driving operational efficiency across our supply chain and care operations. What differentiates Williams-Sonoma is how AI amplifies our proprietary data, vertical integration and deep brand expertise. Because we control the full ecosystem, we can apply AI in tightly integrated and scalable ways. In summary, AI is delivering measurable impact today and strengthening our long-term competitive advantages.

Looking ahead, we are confident in our competitive advantages. And as I said earlier, we plan to further widen our moat. We have a powerful portfolio of brands, an in-house design team that drives exclusive product and newness, a vertically integrated sourcing and supply chain model and leading omnichannel capabilities. And underpinning all of this is our experienced leadership team who knows how to execute.

In 2026, our plan is centered on the same 3 priorities we laid out last year. We just changed the word returning to growth to accelerating growth. We're going to accelerate growth, deliver world-class customer service and drive earnings. These priorities all relate to one another. Growth creates leverage in our operating model and improved customer service drives loyal and satisfied customers. When the customer is happy, our costs go down, driving earnings.

Let's start with growth. We're focused on 4 areas: brand growth, product pipeline, brand heat and channel experience. First, brand growth. In 2026, we're focused on comp growth throughout the company, specifically accelerating the Pottery Barn comp and building on the momentum of the West Elm comp. We expect Williams-Sonoma to continue performing well, supported by premium quality, authority in the kitchen and strong seasonal storytelling. We're planning for growth in the children's business with Baby and Dorm as highlights. And our emerging brands will contribute meaningfully, led by Rejuvenation. Finally, B2B remains a major opportunity for growth.

Second, product pipeline. In 2026, our product pipeline will include an increased level of product newness. We'll increase newness by offering new collections, finishes and design details that are timely, on trend and unique. Also, we will expand into proven collections that are built around newness that performed well last year, adding SKUs to add sales. We will also lean into advantaged growth categories that expand our reach and create new reasons for customers to shop with us. A great example is West Elm Office, our new collection of modern and flexible office furniture made with high-quality materials with endless configurations. We see other outsized opportunities for growth in Dorm, Baby and certain Pottery Barn categories. And at Williams-Sonoma, we'll continue to expand our successful branded and exclusive assortment. This strategy increases differentiation and supports value and margin.

Third, brand heat. We'll continue to create excitement and buzz for our brands. First, collaborations will be a key driver with all brands delivering double-digit sales growth in collabs. Second, we will increase our social and influencer partnerships, and we will improve our storytelling across our websites, emails and catalogs.

Our fourth growth initiative is channel experience. We will continue to improve how customers discover and shop our brands, and we will build on the momentum we've seen in both DTC and retail. In DTC, our plan is to accelerate growth with elevated discovery both onsite and externally. We will also drive DTC advantage categories, and we will continue to use AI to create more personalized shopping journeys that improve engagement and conversion. In retail, we will build on our momentum by expanding Take It Home Today, scaling Design Services 3.0 and investing in new stores, repositions and relocations where the returns are compelling.

Now turning to delivering world-class customer service. We have always been a leader here and will continue to raise the bar as we keep pursuing the perfect order on time and damage-free every time. We believe we have continued opportunity from supply chain efficiencies across distribution centers, shipping costs, returns, replacements and damages. AI is a key enabler here. Our AI service initiatives are expected to further reduce call center escalations and accommodations while also improving inventory in-stocks and accuracy for customers. And we are expanding AI tools to enhance supply chain intelligence, including better visibility into inventory and shipping.

Finally, driving earnings. In addition to regular price testing, we will continue emphasizing full price selling and improving product margin by reducing markdown depth. We will also continue to drive sourcing efficiencies through vendor cost reductions, resourcing and organizational productivity. We will stay disciplined in controlling variable costs, including employment and ad spend, and we will drive AI-enabled efficiencies, including savings in engineering costs, care center payroll and creative costs.

Turning to our outlook for 2026. Our assumptions reflect what we know today. We are not building into our assumptions a meaningful housing recovery. And allowing for all the uncertainties we know are out there and that we've discussed, we are guiding comp brand revenue growth of 2% to 6% with a midpoint of 4% and an operating margin in the range of 17.5% to 18.1% with a midpoint of 17.8%. This outlook reflects our current initiatives and the tariff environment in place today.

Now let's review our brands. Pottery Barn ran a negative 2.3% comp in Q4 after delivering positive comp in each of the first 3 quarters. While Q4 was disappointing, Pottery Barn ran a positive 0.4% comp on the year and Pottery Barn's 2-year comp improved over the year. Different than other quarters, the percentage of our decorating assortment is larger in the fourth quarter, and that assortment relied heavily on last year's programs and sales did not meet our expectations. While furniture was better, it was not enough to offset the softness in non-furniture.

A highlight was our retail performance, which was strong in Pottery Barn with customers responding to our inspirational stores and the in-person shopping experience. But DTC lagged retail, hence the lower comp. As we look at 2026, we are focused on driving stronger growth in Pottery Barn, and we are working as a team on quarter-by-quarter strategy and execution. Pottery Barn is refocusing on its heritage aesthetic and strengthening its product pipeline. We are also optimizing the core assortment, rebuilding proprietary collections and creating more brand heat through collaborations, influencers, storytelling and store events. And we are investing in both digital and retail with a focus on conversion and personalization. The good news is that we are seeing better comp performance quarter-to-date.

Now I'd like to talk about our Pottery Barn Children's business, which delivered a strong fourth quarter running a positive 4% comp. For the full year, Kids and Teens delivered a positive 4.4% comp with strength across both furniture and non-furniture. Collaborations and licensing remained key drivers, led by fashion favorite LoveShackFancy and the launch of the NHL collection. Innovation was strong and holiday gifting outperformed driven by high-quality personalized gifts across life stages.

As the largest specialty retailer of home furnishings for children, we see significant growth ahead. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited to launch Dormify in late April, which expands our reach in the college and dorm market and strengthens our position with the next generation of customers.

Now let's talk about West Elm. West Elm had a positive 4.8% comp in Q4 accelerating from Q3 and delivered a positive 2.9% comp for the full year. I'm proud to say that West Elm is officially on a roll. West Elm made improvements across product, brand heat and channel excellence. New introductions in both furniture and non-furniture drove results, and the brand's mix shifted meaningfully towards new products. In Q4, the brand delivered positive comps across the board.

Retail also performed well in West Elm. When customers walked to the stores, they saw more newness and better availability, and that showed up in the results. The strength in the brand and at retail gives us confidence to return to store count growth with 5 openings planned in 2026.

Finally, collaborations have been a big part of the strategy at West Elm, and we could not be more excited than right now when we are launching our collaboration with Emma Chamberlain, a leading Gen Z voice known for authenticity and unique style. With over 14 million Instagram followers, her collaboration with West Elm marks her first venture into the home space. If you haven't seen it, be sure to check out the exciting personality-driven assortment which launched yesterday.

Now let's review the Williams-Sonoma brand. Williams-Sonoma finished 2025 strong, with a positive 7.2% comp in Q4 and a positive 6.9% comp for the year. The Williams-Sonoma brand continued to outperform across the board. 2026 marks our 70th anniversary. And at 70 years, this brand is not mature. It is gaining momentum. The core of our kitchen business is accelerating, and our pipeline of proprietary in-house design products and market exclusives continue to separate us from the competition.

In Q4, customers came to us for holiday gifting, cooking and entertaining. Also, Williams-Sonoma benefited from a strong gift assortment with products that perform, design that is distinctive, and assortments that reflect both who our customer is and who they aspire to be. 2025 was our biggest year ever for in-store events at Sonoma. We held skill series, classes on Sundays, and we hosted 120 celebrity chef and influencer book signings. Highlights from the events in Q4 included signings with Martha Stewart, Trisha Yearwood and Wishbone Kitchen. We look forward to welcoming customers into our stores throughout 2026 with even more opportunities to learn, engage and be inspired.

Now I'd like to update you on B2B. B2B had another record-breaking quarter at 13.7%, anchored by our largest contract quarter in our history. Both contract and trade delivered double-digit growth, and corporate gifting had its best quarter ever. We saw strength in our core hospitality and residential designer businesses, and we gained momentum in emerging verticals like higher education, sports and entertainment. We also delivered several marquee projects including the Waldorf Astoria Beverly Hills, the Hilton Canopy (sic) [ Canopy by Hilton ] in New York City, the Opryland Hotel in Nashville, multiple locations for WeWork and corporate gifting for several premier clients including the New York Yankees. For the full year, B2B grew 10%, and we exited the year with a strong pipeline heading into '26. We remain excited about B2B as a growth engine.

Now I'd like to update you on our emerging brands, which continue to deliver strong growth and profitability. Rejuvenation had another quarter of double-digit comp growth, exceeding both our top line and bottom line expectations. Performance is driven by momentum in cabinet hardware, bath and lighting as customers remain highly engaged in project-driven purchases. Product innovation continued to build with high-quality, design-driven products, distinctive details and customizable options. With only 13 stores and great online growth, we are thrilled with the progress in Rejuve, and we continue to believe in the potential for Rejuvenation to be our next billion-dollar brand.

Mark & Graham finished 2025 also with solid momentum driven by a record-breaking holiday season and positive comps. We entered 2026 well positioned with a focused pipeline of launches across key gifting occasions, reinforcing the brand's growth opportunity ahead. And I can't forget our newest brand, GreenRow. We're thrilled that on March 6, GreenRow opened the brand's first store in SoHo, New York. And if you're in New York, I'd encourage you to stop by and see it in person. The store truly captures the entrepreneurial spirit that exists in our company that allows us to bring new concepts to life and scale them profitably. We look forward to building the business of GreenRow in 2026 and beyond.

Finally, I'd like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico and the U.K. due to differentiated product, omnichannel enhancements and growth in our Design and Trade businesses. We're particularly encouraged by the customer response to the launch of Pottery Barn in the U.K.

As we reflect on the year, what a year it was. We had many highlights and we had a lot of things coming our way that we didn't expect. However, at Williams-Sonoma, Inc., we delivered. We delivered a strong operating margin and record EPS. Our powerful portfolio of brands, strong channel execution and growth strategies drove our results in 2025. As we look to 2026, we are focused on accelerating this growth. We are focused on delivering world-class customer service, and we are focused on driving earnings. We are confident in our future growth strategy and our profit profile. Our company is competitively distinct with advantages that set us apart and a team that delivers.

And with that, I want to thank our teams again for their hard work and their commitment. And I also want to thank our vendors and our shareholders for their partnership and support. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. We are proud to have delivered another quarter of growth with strong earnings despite the headwinds from tariffs and anemic housing turnover. In fact, we've generated consistently strong earnings for several years. And now top line growth for 5 consecutive quarters. That execution and momentum gives us confidence as we transition into fiscal year '26.

Our ability to perform quarter after quarter reflects Williams-Sonoma, Inc.'s competitive advantages in the home furnishings industry, including a powerful multi-brand portfolio, spanning categories, aesthetics and price points to meet customers where they are. Meaningful size and scale enabling us to capture market share and capitalize on attractive white space opportunities. A differentiated multichannel platform that serves customers seamlessly across e-commerce, stores and business-to-business. A relentless focus on customer service, which drives efficiency and cost savings across our supply chain. And finally, a proven operating model that consistently delivers highly profitable earnings.

Now let's turn to the numbers and see how our competitive advantages and strong execution produce results. I'll begin with our fourth quarter performance, then review our full year fiscal year '25 results and finish with our outlook for fiscal year '26. As a reminder, fiscal year '24 was a 53-week year for Williams-Sonoma, Inc. For Q4 fiscal year '25, we are reporting comps on a comparable 13-week versus 13-week basis. All other quarter-over-quarter comparisons are 13 weeks versus 14 weeks.

We estimate the additional week in Q4 fiscal year '24 contributed 510 basis points to revenue growth and 60 basis points to operating margin. Q4 net revenues finished at $2.36 billion for a positive 3.2% comp. Positive comps in both our furniture and non-furniture categories drove our results, with our furniture trends accelerating from Q3. With the industry declining in the quarter, we gained market share even as we increased our penetration of full price selling. From a channel perspective, both retail and e-commerce posted positive comps, with retail up 4.3% and e-commerce up 2.6%.

Moving down the income statement. Q4 gross margin was 46.9%, down 40 basis points versus last year. The main driver of our lower gross margin was a 170 basis point decline in merchandise margins as the impact of higher tariffs flowed through our weighted average cost of goods sold. Occupancy costs contributed another 80 basis points to the deleverage, largely related to the 53rd week. Partially offsetting these headwinds were shrink and supply chain efficiencies. Shrink added 160 basis points due to favorable year-end physical inventory results. And supply chain efficiencies added an additional 50 basis points. Our relentless focus on customer service continued to produce margin benefits from reduced returns, accommodations, damages, replacements and shipping expense.

Continuing down the income statement, Q4 SG&A was 26.6% of revenues, up 80 basis points versus last year. The main driver of the 80 basis points deleverage was general expense, which was up 120 basis points from last year. This increase was due to our lapping of an indirect tax resolution and a favorable insurance settlement in last year's results. Employment and advertising expense leverage partially offset the impact from general expense. Employment expense leveraged 30 basis points, primarily due to lower variable labor costs across our distribution and customer care centers. Advertising expense was 10 basis points lower. Our in-house marketing team optimized spend while driving a quarter-over-quarter acceleration in e-commerce comps. On the bottom line, Q4 operating margin was 20.3%, down 120 basis points versus last year. Diluted earnings per share were $3.04 per share.

Turning now to our full year fiscal year '25 results. There are 2 items in fiscal year '24 that I want to remind you about. First, in the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment related to freight accruals from prior years. This benefited fiscal year '24 operating margin by approximately 70 basis points. Second, the 53rd week in fiscal year '24. For the full year, we are reporting comps on a comparable 52-week versus 52-week basis. All other year-over-year comparisons are 52 weeks versus 53 weeks. We estimate the additional week in fiscal year '24 contributed approximately 150 basis points to revenue growth and 20 basis points to operating margin on full year results.

Full year '25 net revenues were $7.8 billion at a positive 3.5% comp. All brands posted positive comps for the full year, driven by growth across both our furniture and non-furniture categories. From a channel perspective, both channels contributed to the strength, with retail up 6.4% and e-commerce up 2.2%. E-commerce was more than 65% of total revenues for the year.

Full year gross margin was 46.2%, a 30 basis point decline versus the prior year. The decrease was primarily driven by the 70 basis point impact from the prior year out-of-period freight adjustment, a 40 basis point reduction in merchandise margins related to tariffs, and 20 basis points of occupancy deleverage. These pressures were partially offset by 50 basis points of supply chain efficiencies and 50 basis points of benefit from favorable shrink results.

Full year SG&A expense increased 10 basis points to 28%. Advertising expense leveraged by 30 basis points, partially offset by deleverage in employment and general expense. Employment deleveraged by 20 basis points due to higher performance-based incentive compensation, while general expense deleveraged by 20 basis points as we lapped the prior year indirect tax resolution and the favorable insurance settlement mentioned previously. On the bottom line, full year operating margin finished at 18.1%, 50 basis points lower year-over-year. Diluted earnings per share achieved a record $8.84, up 1% year-over-year.

Turning to the balance sheet. We ended the quarter with over $1 billion in cash and no outstanding debt. Merchandise inventories were $1.5 billion, up 9.8% year-over-year. Included in year-end inventory is approximately $80 million of embedded incremental tariff costs. Excluding these tariff-related costs, inventories would have been in line with sales growth. Overall, we believe our ending inventory levels and composition are well positioned to support our fiscal year '26 guidance.

Turning to cash flow and capital expenditures. We generated over $1.3 billion in operating cash flow in fiscal year '25. We reinvested $259 million in capital expenditures to support our long-term growth and delivered an industry-leading 51.6% return on invested capital on that spend. This resulted in $1.1 billion of free cash flow, and we returned nearly $1.2 billion to shareholders in fiscal year '25. That return included share repurchases of $854 million or 4% of shares outstanding at an average price of $174.70. Additionally, we delivered $316 million in dividends to our shareholders, reflecting a 13% year-over-year increase.

Wrapping up my fiscal year '25 remarks, we are proud to have delivered growth and strong earnings for our shareholders despite the headwinds from tariff policy and anemic housing turnover. These results are a direct reflection of the exceptional talent and dedication of our team at Williams-Sonoma, Inc. I want to thank our team for their hard work and for delivering such strong performance.

Now let's turn to fiscal year '26. The macroeconomic, geopolitical and tariff environment remains uncertain. As we've demonstrated, we know how to navigate uncertainty and deliver consistently strong earnings. As we look ahead to fiscal year '26, we see significant opportunity to not only deliver strong earnings, but more importantly, accelerate top line growth. Our guidance assumes no meaningful changes in the macroeconomic environment or housing turnover and does not include any benefit from the OB3 tax legislation. Our focus remains on what we can control, accelerating growth, delivering world-class customer service and driving earnings.

We expect fiscal year '26 net revenue comps to be in the range of 2% to 6% with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. On the top line, our guidance reflects our confidence in our strategies. We remain focused on accelerating growth through our compelling product lineup, continued investment in collaborations and disciplined execution across our growth initiatives, including Dorm, Rejuvenation and Business-to-Business. And if there are more favorable macro conditions, we see potential upside to that growth.

On operating margin, our guidance reflects our best estimate of the tariff impact on fiscal year '26 results based on 3 key assumptions. First, it reflects our estimate of how tariffs already paid and those we expect to pay in fiscal year '26 will flow through our weighted average cost of goods sold. As higher tariff costs are embedded in our inventory, we expect the impact on operating margin to be front half weighted and then moderate over the balance of the year.

Second, our guidance assumes that all tariff rates currently in effect remain in place for the balance of fiscal year '26. This includes the Section 232 tariffs, the current Section 301 tariffs and the Section 122 tariffs at the announced rate of 15%. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate.

Third, our guidance does not contemplate any refund of IEEPA tariffs given the uncertainty around both timing and process. It's important to recognize that tariff policy has been volatile and subject to multiple revisions. Given the ongoing uncertainty, it's impossible to say where tariffs will ultimately land and difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based upon the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance.

Turning now to capital allocation. Our fiscal year '26 plans prioritize funding our business operations while continuing to invest in long-term growth. We expect to spend approximately $275 million in capital expenditures in fiscal year '26. About 95% of that investment will be focused on strengthening our e-commerce capabilities, optimizing our retail fleet and driving supply chain efficiency.

A key shift in the plan is a near doubling of capital investment in retail, reflecting the meaningful opportunity we see to accelerate growth through retail stores. Our stores are a competitive advantage, powerful brand billboards that drive profitable sales. Our free interior design services continue to differentiate us. More than half of retail sales involve a design appointment, helping drive the 6.4% retail comp we delivered in fiscal year '25. We will remain disciplined, continuing to close underperforming stores that don't meet our profitability thresholds. In fact, since 2019, we've closed about 18% of our fleet.

Starting in fiscal year '26, we're investing to drive more retail growth in 2 ways. First, we'll continue repositioning stores from older malls into more vibrant lifestyle centers. We expect to complete 19 repositions in fiscal year '26, more than we've done in any single prior year. Second, we expect to open 20 new stores in fiscal year '26, primarily across West Elm, Williams-Sonoma, Pottery Barn Kids, Rejuvenation and our first 2 GreenRow locations. These expected 20 store openings represent our most openings in a decade. Every project meets our strict profitability and return on investment criteria.

We expect to end fiscal year '26 with approximately the same store count as we ended fiscal year '25 due to store closures. After fiscal year '26, we anticipate store count growth in the years that follow of approximately 1% to 3% per year. Embedded in our fiscal year '26 guidance is approximately 70 basis points of noncomp growth from this real estate activity.

Turning now to our commitment to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases. On dividends, today we announced that our Board of Directors authorized a 15% increase in our quarterly dividend to $0.76 per share. Fiscal year '26 will mark our 17th consecutive year of dividend increases, an achievement we're proud of and remain committed to sustaining. On share repurchases, we have $1.3 billion remaining under our current authorizations, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns.

Looking beyond fiscal year '26, we are reiterating our long-term outlook for mid- to high single-digit revenue growth and operating margins in the mid- to high teens. It's worth noting that the high end of our '26 guidance falls within our long-term outlook. Wrapping up our comments, we are proud to have delivered strong results for our shareholders. As we look ahead, we are focused on accelerating growth, delivering world-class customer service and driving earnings. We're confident we'll continue to outperform our peers and deliver shareholder returns for these 5 reasons that remain consistent.

Our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital-first but not digital-only channel strategy, the ongoing strength of our growth initiatives and the resiliency of our fortress balance sheet. Before we open the line for questions, I'd like to mention that our 2026 investor presentation has been released and is available on our Investor Relations website. I encourage everyone to have a look. With that, I'll open the call for questions.

[Operator Instructions] Our first question will come from the line of Chuck Grom with Gordon Haskett.

Congrats on a great year. Laura, can you talk about the opportunities for store growth in 2026 and beyond, particularly as you incubate new concepts, especially Rejuvenation? Also, how are you thinking about expanding B2B over the next few years? And then, Jeff, any handholding on margins and phasing throughout the year in addition to the tariff commentary?

I love the store growth question because it's a big pivot for us. We have been talking about our optimization strategy at retail and focusing on more profitable stores and all the moves we've made, and we've been reducing our fleet. And now as we look forward, we don't see that as what our future holds. We see store growth. We actually -- this year is an inflection point and we're going to be net neutral at the end of the year. We have the most new store openings that we have had in how many years, Jeff? 3?

Over a decade.

Over a decade, so even better than that. And so we're opening this year 20 new stores, 18 repositions, net flat. And what do we see? We see growth in West Elm. We have growth in Pottery Barn. We have embedded opportunity in Rejuvenation. We shall see about GreenRow. We opened our first store, like 2 weeks. We'll see how that works. We have another one on the docket that we'll open later this year. And there's more kids stores to open now. So we're excited about that change in trend and how profitable our stores are and how good they look. It's a big deal for us in terms of our growth algorithm.

Second question on B2B. As you look at the macro and think about all the different opportunities, it is one that's continuing to be the outsized opportunity. And we had great growth last year, as you saw, and you heard in our prepared remarks. And I think it could even be better this year, frankly. I love seeing the contract outpace the trade because it's more repeat business. And the combination of all the things that we do together gives us a competitive advantage. And I just think we have the best sales team in retail selling our B2B. And I'll hand it back to Jeff on margin. If you want to make a comment on the other 2, that's great, too.

Well, I think, Laura, both Rejuvenation, retail as well as B2B, they're all good examples of how we're really focused on accelerating growth. And we see a meaningful opportunity to do so in fiscal year '26 as we've guided. And I think Laura touched on those high points. I'll say, Chuck, I'm impressed you got 3 questions in one.

Diving right into the operating margin guidance for next year, we're guiding operating margins to be in the range of 17.5% to 18.1%. And really, tariffs are the big story here. I think everyone knows that. And there's 3 things to consider when we think about how tariffs are going to impact our operating margin in '26. The first is the tariffs we've already paid that are embedded in our inventory costs. Those will take a little while to flow through into our weighted average cost. The second thing to consider is the tariffs we're going to pay at the newer rates that have been announced. And then finally, it's just the uncertainty of the environment.

So there's really 3 key assumptions that we've shared about how all these tariffs are going to flow through our operating margin. The first and most important thing to understand is it's not about a blended tariff rate. It's about how the tariffs flow through our weighted average cost of goods. And that's really a function of the cost that we ended the year with that are embedded in our inventory. And as we said on our prepared remarks, we expect the impact on our operating margin will be front half weighted, heavily front half weighted and then moderate over the balance of the year as we start to comp the impact of tariffs in last year.

And second, our guidance assumes all tariff rates currently in effect remain in place for the balance of fiscal year '26. Just to be clear, this includes the Section 232 tariffs, the current Section 301 tariffs and Section 122 at what the administration has announced is 15%. And while we know the Section 122 tariffs expire in July, our guidance assumes it will be replaced with tariffs at a similar rate when they expire.

And the third piece, and I'll just say this, I think it's a given, but our guidance reflects our best estimates of tariff impact based upon the tariffs in place as of this call. As we all know, tariffs have been subject to multiple revisions and it's impossible to say where tariffs will ultimately land and what impact they will have on our business. Taking a step back, I think what we would observe is, in '25 we demonstrated we could navigate the tariff uncertainty and deliver consistently strong earnings, and we're guiding that we believe we can do so again in fiscal year '26.

Our next question will come from the line of Peter Benedict with Baird.

So I guess one question would just be around with the pivot to retail growth. You mentioned design services, you mentioned Design Services 3.0. I was curious if you could maybe expand on that. What's changing? What's different there? That's my first question.

Yes, sure. So we've been really building our design services as a percent to our total. And we've told you how big that has been in Pottery Barn. The other brands have continued to have opportunity as a percent to total. And in addition to purchasing homes with the big pieces like furniture, we have been adding the second layer of accessories. And that was really 2.0 for us and all the accessories that go with and then all the holidays that go with.

The biggest opportunity that we see in the future for design services is how we're going to use AI and how we're going to put it in the hands of our sales associates to better decorate their homes. There's so much that we're doing with content and design services and outward and the combination of all that together with our people. And I'll let Sameer, who's here, mention a few things about that.

Yes. Thanks, Laura. It's just really exciting, the progress that we're seeing on the AI front. You heard Laura talk earlier in the prepared remarks about our strategies, and we're only starting to see it accelerate. And what's really exciting about what we're seeing with the evolution of AI and how customers are using it, how they're engaging with it, is that it really starts to play to our strengths as a business.

AI works well when you have category authority. AI works well when you have expertise. And as customers are using it to find where there is value, where there is quality, where there are designs that meet their goals, both off our sites within these LLM engines, but also now on our site as we are building these AI tools to help guide them through product discovery, to guide them through interior design.

You've probably seen what we've launched with Olive on the Williams-Sonoma site as a culinary authority to help customers with real problems and connect the dots between inspiration, between guidance and ultimately between -- and ultimately towards shopping. So we're really excited about the progress we've made on the AI front, and we're really excited about what's yet to come.

Our next question will come from the line of Oliver Wintermantel with Evercore ISI.

Could you maybe talk a little bit about quarter-to-date trends, if you've seen any disruptions from the winter storms? We heard some other retailers said that there was a disruption. But Laura, I think you said Pottery Barn is actually off to a good start quarter-to-date. So maybe some details on that, please.

So yes, of course, there's been some disruptions in the winter, but it didn't really materially impact our results. And there's always some weather someplace that always impacts us in one way or another, particularly this time of year, but it's not a big factor.

In terms of what we're seeing quarter-to-date, as you know, we don't provide a lot of quarter-to-date commentary. We're not seeing any big impacts from anything. Our consumer continues to be resilient. And it's hard to say exactly where we're going to be there. Easter is ahead of us. There's another Easter shift this year. But everything that we know today is embedded in our guidance.

Our next question comes from the line of Kate McShane with Goldman Sachs.

We wanted to ask about the real estate strategy too, just in terms of the 2 strategies of moving to more vibrant locations and the opening of 20 new doors, just what it means for your occupancy costs in 2026? And will you be able to leverage a higher occupancy cost at that 4% comp at the midpoint?

Good question. I think, as you know, we don't guide individual lines like occupancy or even gross margin and SG&A. I think the story on retail is one really about growth. And we're seeing a meaningful opportunity to drive growth through our retail stores. And look, we delivered a 6.4% comp in retail in fiscal year '25, and we did so very profitably. And that's really because of what we talked about. First, our design services are a competitive advantage, and our customers are telling us that they love it and they're responding with opening up their pocketbooks.

The second thing is the product we're delivering. We have really added the newness that we've been talking about in the past several calls to those stores, and we've improved the inventory position in those stores. They're really performing very well. And the third part of why we're delivering such strong comps and why we're confident in investing in the future is just the performance. I mean the performance they've delivered, and it's really a function of the retail repositioning strategy that we've been through.

So although this is a pivot, we're still going to be very disciplined. We'll continue to close underperforming stores that don't meet our profitability thresholds. But we do see a meaningful opportunity to expand from here. Stores that we have repositioned from tired, older indoor malls to these more vibrant, high-traffic lifestyle centers have all seen substantial top line comp improvements over their prior locations as well as bottom line improvements from less occupancy of that individual location. And that's why we're looking to do the most repositions this year that we've ever done.

And then new stores, we're seeing meaningful opportunity there as well to go into white spaces in markets we're not in for certain stores. And there's a big opportunity there for us to continue that in the years ahead. Overall, we don't think it'll have a major impact on our operating margin. It's embedded in our guidance that we've given today. But it's really a story about growth. And as we mentioned, we'll be flat at the end of this year in terms of store count. But as we look beyond '26, we're guiding that we will increase our store count by 1% to 3% per year each year.

Our next question will come from the line of Cristina Fernández with Telsey Advisory Group.

Congratulations on a good quarter and finish to the year. I have 2 questions. The first one is on Pottery Barn, as you look at the fourth quarter performance, I guess, how much of the disappointment was perhaps a lack of newness or the need to expand prices and what changed in the first quarter to turn that from negative to positive?

And then the second question is a follow-up on the tariff impact for the first half. Should we think about the fourth quarter pressure, the 170 basis points on the merchandise margin as a good guide point for the first half? Or could it be higher given the mix of sales in the first half versus the fourth quarter?

Great. Thank you. Thanks, Dana (sic) [ Cristina ]. So Pottery Barn, as you know, is a very strong profitable, loved brand. And as I said in my prepared remarks, we're really happy to see the 2-year comps improving and in particular stabilization in the furniture trends. As you all know, Q4 has a higher percentage of decor in Pottery Barn substantially than other quarters. And let's remember that post-COVID and housing slump, we were focused on decorating as a growth vehicle instead of furniture because people weren't buying much furniture, probably over-rotated a bit, to be honest with you. It reached an all-time high and saw a little bit of a giveback.

But we also -- in retrospect, we're self-critical. We're always looking for rooms -- places to improve. And we probably had too much reliance on bestsellers from last year, and we need more units. And as we go into the first quarter and into the year, obviously the complexion of the categories changes back to be more balanced and that's why we're seeing the improvement, we believe.

All right. Now transitioning to your second question on what we should think about in terms of operating margin in '26. As you know, Cristina, we don't guide the individual quarters, but I will help you with the shape of the year is that the big factor in the first half of the year is going to be the embedded tariff costs we've already paid. We're on weighted average cost accounting, so it takes a little while for that to work through with our operating margin. So as we've guided, the impact will be heavily weighted to the front half and then slowly moderate across the back half as the impact starts to wear off and we start to comp tariffs we paid last year.

Our next question will come from the line of Jonathan Matuszewski with Jefferies.

Nice quarter. Laura, last quarter you remarked that there were pockets of your assortment that remained underpriced. So how should we think about the magnitude of pricing that's embedded at the midpoint of 4% comps for the year?

Well, I don't really think about it like that. I mean I don't think about the midpoint of range for the pricing. I will comment about pricing and then, Jeff, I don't know if you want to make a comment. But on the pricing, whether it's because of tariffs or just all the time, we are constantly looking for the best price value relationship and how to give our customers the winning combination that makes them buy from us. And the best thing we can ever do is give them a design they can't resist at fair price, right? They can count on us for quality. They know that they're going to get great service. We've made such improvements in service. And we're also going to really help them put it together with everything else in their house, which is a big deal because a lot of the other players, especially the online players, it's one and done and you're not decorating. You're just buying an item, maybe for your garage.

So in terms of pricing, there are pockets always where, gosh, we put something out and it blows out and we say, oh, could have been a little higher. And think about that for next time and make adjustments. And there are some items and categories that are, we still think, undervalued. It's very competitive [ intelligence ], so I don't really want to go through them all because I don't want to give that list of things to our competition to look at. But we do see some opportunity. And at the same time, we always look at the opposite too, which is where are we sitting on the price? Did we get cost concessions? Should we drive more units and take the price down slightly? So it's a pricing testing mindset in the company, and we share it across brands and how pricing affects demand.

Yes, I would just say, Laura talked about, when we think about pricing, it's category by category, SKU by SKU, really looking at each one of those categories, each SKU and how is it compared to its competition. It's a little -- for us, it's a little divorced from how we think about growth and how we think about our guidance. And that -- from that standpoint, what we're really thinking about when we look at guidance is we're looking at our trends. And last year we delivered a 3.5% comp. And in fact, if you look at our Q4 results, our 2-year comp accelerated, which we see as a positive indicator.

And then we look at the confidence we have and momentum we have with our growth strategies. Things like our white space opportunities that you've heard us talk a lot about, which includes things like West Elm Office, which we launched in January, things like Dorm, things like Baby. We have white space opportunities that are going to be additive to our results. Then we have emerging brands. We talked a lot about Rejuvenation. This is a brand that's been double-digit comps for over 2 years and that we just see continued opportunity to grow that. We think over the long term that can be a billion-dollar brand.

We touched on B2B. It just delivered another double-digit quarter. It was up 14% comp. It had its largest quarter of contract volume to date, and we exited the quarter with a very, very strong book of business and leads going into fiscal year '26. And then there's retail. We've talked a lot on the call about retail is that it delivered a 6.4% comp in '25 and we see meaningful opportunity to expand that.

So when we think about our comp range and the midpoint of our comp guidance was a 4.0%, it's really about our strategies and how we think that we have momentum behind our business. And the fact of the matter is we are taking market share in this industry, and we see an advantage to an ability to leverage our competitive advantages and take even more market share.

Our next question will come from the line of Max Rakhlenko with TD Cowen.

So first, Laura, can you speak to the health of the consumer and their willingness to stomach tariffs in the category? And just what's your take on the industry's ability to maintain higher prices if tariff pressure does end up easing? And then, Jeff, just quickly, any more color on the shrink benefit that you saw in the quarter? Should that continue into next year and just how to think about that?

Thanks, Max. In terms of the consumer, I can only comment about what we're seeing. I'm reading and hearing that other people are seeing very different things. And you can see a lot of stepped-up promos in the competition. And so a lot of like site-wide with 20% off here and 20% off there. And that's particularly for a lot of the kind of smaller companies that are trying to be sold or that are trying to establish themselves. They're playing the stepped-up promo game. There's no sizable new entrants that we're seeing in the market.

But I can comment that our customers are responding to our aesthetic, our newness, our collabs. They love them. I don't know if you got a chance, Max, to look at what we're doing with Emma Chamberlain and West Elm. That's the kind of thing that they are delighted by. I mean she's got 14 million followers, so fun. She's such a great marketer and the products really, really easy to buy. And that's how we're making the [ weather ] happen in our brands is stuff like that. Furniture is [ stable to up ]. I said that. B2B is growing.

So we're seeing nice response from our consumers. But it's nothing to take for granted, right? Every quarter, every brand, we have strategies to improve the product line, to improve the mix, to improve our value equation, to improve our service and to drive brand heat. And that is a big part of who we are and why we continue to deliver.

And the second part of your question on shrink, it's simple. After completing physical inventory and reconciling all the inventory accounts, we had minimal shrink. And the thing is, I've been doing retail for a long time, you simply never know until you take physical inventory and reconcile everything. And we attribute the favorable shrink results to our ongoing supply chain improvements. When you have fewer returns, fewer damages, fewer replacements, less out-of-market shipping, better sightline on the inventory, and we think that's finally coming through in terms of physical inventory results. In terms of what it means for '26, it's not a material driver and any impact of shrink is embedded in our guidance.

Our next question will come from the line of Brian Nagel with Oppenheimer.

Nice quarter, congratulations. Nice year, congratulations. I have 2 questions. I guess one is kind of short term and then maybe a longer term one. So Jeff, on the short-term side, going back to the prepared comments, I mean, there seemed like there were a lot of -- if you look at gross margin, there were a lot of kind of one-off items here in the fourth quarter. So I guess the question I want to ask is, I mean, how should we think about -- as we look at that fourth quarter gross margin, is there a way to frame kind of what -- if it was a more normalized, I guess, year-over-year change? And then as we look into '26, recognizing you don't give specific guidance, but how should we think about kind of the puts and takes on the gross margin side?

Brian, it goes back to what I've been saying on the call in the prepared remarks. When we think about the drivers operating margin and flows a little bit through the gross margin, it really comes down to how the tariffs are going to impact us in '26. And like I said, there's 3 pieces here. One are the higher tariff costs we've already paid that are sitting on our balance sheet that have to work their way through our weighted average cost. And then there's the tariffs that we're going to pay in '26. And then we do comp somehow later in the year as we head into Q3, Q4, we start to comp the tariffs. When you put all that together, our guidance is that the impact of tariffs on operating margin will be heavily front half weighted and then moderate over the balance of the year as we start to comp it and the impact of the embedded tariffs work their way through our weighted average cost.

Our final question will come from the line of Zach Fadem with Wells Fargo.

So just a couple more on the gross margin line. First of all, Jeff, what is the weighted average tariff rate today and how has that changed over the last 2 quarters? And second, can you remind us how your freight contracts renew and how should we think about the impact of higher freight and oil today?

I'll take the second one first in a way higher oil costs are impacting our transportation costs. And I would just simply say it's very early, and it's a little difficult to tell how this plays out. I think we would all agree there's a lot of uncertainty about what's happening geopolitically in the world and what that means for price of oil and how it trickles through transportation. We are seeing some noise out there of higher prices. But overall, it's all what we know today is embedded in our guidance. And it's such an area of uncertainty that our estimates that we're providing today are just what we understand is going to happen. In terms of gross margin, remind me what your question was.

Tariff rate today and how that's changed over the last 2 quarters.

We're not going to provide the specific tariff rate. As everyone has heard me say, we're not going to go up and down on the basis points or specific tariff rates every single quarter simply because it's been changing so much that every time there's a change, every time there's a tweak, it's going to be virtually impossible to get back on the phone with everyone and explain the latest permutation. Our guidance assumes that the higher tariff rates that we paid in fiscal year '25 that are remaining on our balance sheet flow through our weighted average cost.

So it's -- from that standpoint, it's still pretty high because those costs are still embedded in our inventory. But they'll work their way through our weighted average cost of goods primarily in the front half of the year. And then as we said, our operating margin -- the impact on our operating margin will moderate as we get through the back half of the year.

And I'd like to just comment a little bit on the cost of the war. Again, as Jeff said, there's been no huge cost increase that we've seen as of yet. We've seen some transportation costs increase, on air, for example, and we've seen some domestic rates increase as well, but that's not material yet. We have not put in our guidance a material cost increase over the year that would come from cost of goods going up substantially or transportation going up substantially. Let's remember that we're not sailing in the Straits of Hormuz, thank God. And we haven't actually seen our shipping times affected yet. So we don't expect either supply chain delay as of yet. But as we all know, we can't predict this.

So to Jeff's point, we think we've done the best job we can putting into our guidance a reasonable estimate and yet we don't have a crystal ball on what this could mean longer term. What we're focused on, as you guys know, and wrapping this up is really how do we deliver in any environment. And you've seen us do this with the same experienced management team through COVID, post-COVID giveback and now, through all this geopolitical uncertainty and tariff chaos. And it is noisy out there, but we tend to be able to handle it better than most and be ahead of it. And so we'll take it as it comes, and we'll continue to update you.

This concludes the question-and-answer session. And I'll hand the call back over to Laura for any closing comments.

All right. Well, thank you all. I hope it's getting warmer across the country for all of you and some sunshine is out. And please go visit our stores and see what we're doing. We appreciate your support, and we can't wait to update you throughout the year. Thank you.

This concludes today's call. Thank you all for joining. You may now disconnect.

Welcome to the Williams-Sonoma, Inc. Third Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our third quarter earnings call. I'm here today with Laura Laura Alber, our Chief Executive Officer; Jeff Howie, our Chief Financial Officer; and Sameer Hassan, our Chief Technology and Digital Officer. Before we get started, 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 our updated guidance for fiscal '25 and our long-term outlook.

We believe these statements reflect our best estimates. However, we cannot make any assurances 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. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website.

Now I'd like to turn the call over to Laura.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our third quarter. First, I'd like to take a moment to thank our team for their continued hard work. Everyone at Williams-Sonoma Inc. has been focused on our key 3 priorities this year, which are returning to growth, elevating customer service and driving earnings. And that focus continues to drive our results. .

We are proud to deliver strong results in the third quarter of 2025 with an accelerating positive top line comp and continued outperformance in our profitability. In Q3, our comp came in above expectations at 4%, driven by another quarter of positive comps across all of our brands, and we continue to deliver on the bottom line despite the substantial tariff headwinds.

Our operating margin came in at 17%, expanding 10 basis points with earnings per share of $1.96, growing 5% year-over-year. We are encouraged by our continued strong year-to-date performance through Q3 and are confident in our outlook for Q4. And therefore, we are reiterating our outlook for the full year comparable brand revenue growth to be in the range of 2% to 5%, and we are raising our bottom line guidance 40 basis points to an operating margin of 17.8% to 18.1% versus 17.4% to 17.8%. We drove this improvement in performance despite continued geopolitical uncertainty and no substantive improvement in the housing market.

And we continue to gain market share and outperform the industry, which declined again in Q3. Our continued strong results reflect the power of our operating model, industry-leading channel experiences and strong portfolio of brands. We continue to see exceptional performance in our retail channel, which ran a positive 8.5 comp in Q3. Retail continues to benefit from an improved in-store experience with more inventory availability, enhanced design services and events and the opening of 14 beautiful newly remodeled or repositioned stores so far this year with 7 more to come in Q4.

This investment is paying off with almost all of them beating the performance of the prior location. Our stores service brand billboards, and we believe a refreshed store improves customer perception of our brands. As we move into the final quarter of 2025, I want to highlight the specific progress we've made on our 3 key priorities. Starting with growth, our core brands continue to deliver strong results from positive momentum in furniture.

Our focus on innovation has driven strong and improving furniture comps. Additionally, we are focused on incremental growth categories like Pottery Barn Dorm and West Elm Kids. We're also broadening our reach through strategic collaborations. These initiatives attract new customers while keeping our brands fresh and relevant. Our B2B business also remains an important growth engine, up 9% this quarter with strength in both trade and contracts, and our emerging brands, Rejuvenation, Mark, Graham and GreenRow continue to perform exceptionally well.

Together, they delivered a double-digit comp, and we're excited to have recently opened our 13th Rejuvenation store in Salt Lake City. This year, we're also very proud of our improvements in customer service. We are committed to flawless execution delivering orders on time, damage-free every time, and we're proud that this year, we have record metrics. We're focusing on furthering our improvements through fewer split shipments and faster fulfillment.

Finally, our third key priority, driving earnings. Our focus on revenue growth, elevating customer service and maintaining cost discipline has delivered strong earnings with our year-to-date earnings per share growing 5% in a very tough tariff environment. Also in Q3, we used AI as a key business driver to accelerate our strategy. Across our portfolio, AI-powered chat experiences are now live for all brands, providing customer service, delivery support and product guidance. These agents are improving speed, consistency and satisfaction, and we are now resolving over 60% of chats without human assistance, reducing handle times from 23 minutes to just 5 minutes.

Another notable milestone this quarter was the launch of Olive, our new AI culinary and shopping companion for the Williams-Sonoma brand. Olive helps customers plan, cook and shop with confidence combining our culinary authority with cutting-edge technology to create a differentiated experience. What makes Williams-Sonoma unique is how AI can amplify our differentiated foundation with our proprietary data, our vertical integration from design to delivery, our multichannel engagement and our expertise in home design in the culinary space.

Our strong balance sheet, coupled with our tech capabilities allows us to apply AI in ways that can drive real scalable impact for our business that others cannot. Looking ahead, we see opportunity to drive down costs and drive up sales with AI, and our early results are reinforcing that confidence. We're using AI to enhance what we do best, guiding customers through shopping and design decisions. Additionally, AI is driving improvements in productivity and empowering associates with tools to amplify their creativity and expertise.

Now I'd like to update you on tariffs. Since we last spoke, there have been notable changes in tariffs, such as a new tariff on some furniture, including imported upholstery kitchen cabinets and bath vanities. And now the 20% additional China tariff are down from 30%. Net-net, these changes are a push to our current estimated impact. As we look forward to the future, predictability in the tariff environment and a reduction in the [ India ] tariff would certainly be a positive for us.

In the meantime, we continue to be actively and aggressively mitigating what we can with our previously discussed 6-point plan. To remind you, first, we are obtaining cost concessions from our vendors. Second, we are resourcing goods to get the best cost for our customers. Third, we're identifying further supply chain efficiency. Fourth, we are controlling costs. Fifth, we are expanding our Made in USA assortment, production and partnerships. And last, we are taking select price increases with a focus on maintaining competitive pricing.

Now let's review our brands. Pottery Barn ran a positive 1.3% comp in Q3. We are pleased with the improvement we saw in large ticket, including furniture, upholstery and lighting. Our Pottery Barn stores continue to outperform, led by our standout design crew services and our increased take at-home today assortment. Our strategy of focusing on improving retail inventory availability, refreshing product assortments and enhancing design services is working. We have opened 6 beautiful new remodels or repositioned Pottery Barn stores so far this year with 3 more to come in Q4.

Finally, across the brand, we continue a major change that we have made all year, which is to substantially reduce promotions in Pottery Barn. Now I'd like to talk to you about our Pottery Barn Children's business, which ran a 4.4% comp in Q3. We saw acceleration in furniture fueled by successful new product launches, continued growth in collaborations and back-to-school and Dorm was a particular highlight in the quarter. In fact, back-to-school delivered double-digit growth, an acceleration from Q2. Our brands have become a destination for high-quality study solutions, durable backpack and on-trend dorm decor.

Additionally, our enhanced dorm design tools and pickup near campus options have been important for gaining share in a very fragmented market. Now let's review West Elm. West Elm ran a positive 3.3% comp in Q3. We continue to make progress against the brand's 4 key pillars: product, brand heat, channel excellence and operational efficiency. Throughout the year, West Elm has brought in new successful collections in both furniture -- and on Furniture, where the brand was previously underdeveloped. West Elm has significantly shifted the composition of their sales towards new products and the cumulative effect of new introductions since the fall of last year continues to produce results.

Retail and West Elm was also a highlight due to improved in-stocks and more new furniture and more new fabrics displayed on the retail floor. And we've opened 2 beautiful new remodels or repositioned West Elm stores so far this year, with 1 more to come in Q4. To remind everyone, we have 119 stores in West Elm. And based on results, we are looking forward to returning to retail unit growth in this brand. As you can hear, we are quite excited by the momentum at West Elm.

Now let's review the Williams-Sonoma brand, which continues to fire on all fronts and we had a positive 7.3% comp in Q3. Williams-Sonoma remains focused on premium quality products that are expertly crafted combining style and functionality. In Q3, we celebrated many successful culinary stories from the food and flavors of Spain to authentic Indian flavors through a collaboration with Palak Patel, Founder of The Chutney Life. We also recently launched a Wicked collection featuring limited-edition, Le Creuset Dutch ovens inspired by Elphaba and Glinda.

And as we continue to connect our customers to the world's best chefs and products, we are seeing great traction with in-store events. Across the country, we hosted 42 in-store book signing events in Q3. We welcome the fans of celebrities and celebrity chefs like Neil Patrick Harris, David Burke and Melissa King into our stores for amazing cooking demos and cookbook signing.

Finally, we've opened 6 beautiful remodeled or repositioned Williams-Sonoma stores so far this year with 2 more to come in Q4. Now I'd like to update you on B2B, which grew 9% in Q3 with both trade and contract delivering strong comps. Leveraging our design expertise and commercial-grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator, and we are seeing continued momentum. Our biggest success story in Q3 was an increase in commercial workspace wins, including projects with Google, WeWork, TurboTax and PayPal.

Q4 brings the ramp-up of our growing corporate gifting program, including our leading assortment of quality giftables that can be customized with logos and company branding. We're also a destination for seasonal favorites that make a perfect client and employee holiday gift, If Any of You Need Help.

Now I'd like to update you on our emerging brands. With our proven ability to incubate and scale brands in-house, we are confident in the continued growth of our concepts and their ability to deliver profitability to our results. Rejuvenation delivered strong double-digit comps in the quarter, continuing an upward trajectory fueled by product innovation and category expansion. Our high-quality product offer and proprietary designs are resonating with customers.

Both channels are performing well, and we continue to open new retail locations to drive brand awareness. This quarter, we expanded our Rejuvenation store count to 13, with the opening of 2 new storefronts 1 in Nashville and 1 in Salt Lake City. The brand also saw a strong performance from its first ever lighting collaboration. Mark and Graham delivered its best Q3 in brand history, driven by successful new categories, [ MMG Kids ] and Bark & Graham as well as continued growth in personalized corporate gifting.

As we head into the peak gifting season, the brand is well positioned with thoughtful, personalized gifts for all occasions. I'm also excited to talk about our newest brand, GreenRow, which delivered strong growth this quarter. In Q3, we launched the largest holiday collection to date with handcrafted decor and gifts made from up cycles and natural materials. The brand's colorful and unique products have had a great response and the product line is incredibly beautiful in person.

Therefore, we believe retail stores are the next leg of growth at GreenRow and are looking to test a few store locations as soon as possible. Finally, I'd like to share one highlight in our global business. In the U.K., we broadened our brand presence with the launch of Pottery Barn Online and the opening of a pop-up store in our West Elm Tottenham Court Road in London. And so far, we're quite pleased with the performance of Pottery Barn in this new market.

In summary, we're pleased with our execution and continued outperformance in Q3 marked by accelerating positive comps and strong profitability. Across the company, we remain dedicated to enhancing our channel experiences and strengthening our brands. Each and every day, we prioritize innovation, product design and exceptional customer service. These are the qualities that set us apart in a fragmented industry and position us to capture additional market share.

We see tremendous opportunity to continue to lead our industry as we execute on our vision to own the home and the places where our customers work, stay and play. As we enter the final quarter of the year, we're filled with optimism for a strong finish. This holiday season, we're ready to showcase our best across our stores and online. From all of us, we wish you and your family on joyful Thanksgiving next week and a happy holiday season.

Before I hand things over to Jeff, I want to take another minute to express our thanks to our team, our vendors and all of our partners for their ongoing dedication and contributions to our company's success. We appreciate everything they do. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. Our results this quarter reflect Williams-Sonoma, Inc.'s competitive advantages in the home furnishings industry, including the following: the strength of our multi-brand portfolio across different categories, aesthetics and price points. Our size and scale, providing the ability to drive market share gains as we maximize white space opportunities. The competitive advantage of our multichannel platform, serving customers where they choose to shop online, in-store or business to business.

Our focus on customer service and full price selling, creating efficiency and cost savings across our supply chain. And finally, the power of our operating model to deliver highly profitable earnings. Our headlines for this quarter demonstrate these competitive advantages. We delivered positive comps for the fourth straight quarter. Furniture and nonfurniture categories both ran positive comps, reflecting strength across all categories of our offering.

White space opportunities, such as Dorm, West Elm Kids and Rejuvenation grew double digits. Retail, e-commerce and business-to-business all drove positive comps. Our supply chain team achieved best-ever results across nearly all customer service metrics while simultaneously improving efficiency and reducing costs. And despite the headwinds from tariffs, we drove operating margin expansion of 10 basis points to 17% and EPS growth of 5% to $1.96 per share.

Our results this quarter would not be possible without the team we have at Williams-Sonoma, Inc. I'd like to thank our talented, dedicated team for delivering these outstanding results. Now let's dive into the numbers. I'll start with our Q3 results and then update guidance for fiscal year '25. Q3 net revenue finished at $1.88 billion for a positive 4% comp. All brands delivered positive comps driven by positive comps in both our furniture and nonfurniture categories.

We gained market share in the quarter, even as we increased our penetration of full price selling. From a channel perspective, both channels delivered positive comps, with retail up 8.5% comp and e-commerce, up 1.9% comp. Moving down the income statement. Gross margin exceeded our expectations, coming in at 46.1%, 70 basis points higher than last year. Higher merchandise margins and supply chain efficiencies drove this gross margin improvement, offset by slightly higher occupancy costs.

Merchandise margins delivered 60 basis points of our gross margin improvement, exceeding our expectations. The factors contributed to this improvement in merchandise margins. First, the impact from tariffs is taking longer than anticipated to flow through to our gross margin. This is due to the delayed effective dates of the tariffs and our aggressive front-loading of inventory before tariff effective dates. Second, we are seeing margin upside from our 6-point tariff mitigation plan, including price increases, as well as strong consumer response to our full-price product offering.

And finally, lower inbound transportation costs are helping offset tariff costs. Supply chain efficiencies added 30 basis points to our gross margin. Our focus on customer service and in-stock ready to sell inventory is delivering tangible margin improvements from lower accommodations, damages, replacements and out-of-market shipping expense.

Occupancy costs were up 5.9% and were 20 basis points higher year-over-year. This was because of our retail outperformance and the higher occupancy costs in that channel. To recap, our gross margin results this quarter exceeded our expectations. Our tariff mitigation efforts more than offset the headwinds from tariffs in the third quarter.

Turning now to SG&A. Our Q3 SG&A ran at 29.1% of revenues, 60 basis points higher than last year. Employment expense deleveraged 50 basis points due to higher incentive compensation from our strong results year-to-date. We continue to manage variable employment costs across our stores, distribution centers and customer care centers in line with top line trends.

Advertising expenses were 20 basis points higher year-over-year. Our in-house marketing team continues to test and optimize into different levels of spend. During the quarter, we increased our investment in digital advertising. After testing and proprietary in-house analytics model indicated we could scale efficiently. The higher spend drove an acceleration in year-over-year site traffic and improved revenue per visit.

Our in-house marketing team's ability to test, scale and optimize across our portfolio of brands is a competitive advantage in the home furnishings industry. Finally, general expenses leveraged 10 basis points. On the bottom line, our earnings exceeded our expectations. Despite the tariff headwinds, our operating margin of 17% was 10 basis points above last year and diluted earnings per share grew 5% year-over-year to $1.96.

On the balance sheet, we ended the quarter with a cash balance of $885 million with no outstanding debt. We generated $316 million in operating cash flow during the quarter and invested $68 million in capital expenditures supporting our long-term growth. During the quarter, we returned $347 million to our shareholders. We did this through $267 million in stock repurchases and $80 million in dividends.

Merchandise inventories stood at $1.5 billion, up 9.6% from last year. Our inventory includes $48 million of incremental tariff costs recorded in inventory as well as $30 million of a strategic pull forward of receipts and lower tariff rates than in effect today. Without this incremental $78 million, our inventory level would be in line with our sales trends. Overall, our inventory levels and composition are well positioned to support our upcoming holiday season.

Summing up our Q3. We're proud to have delivered strong results, even as we navigated a challenging tariff environment and historically low housing turnover.

Now let's turn to our guidance for fiscal year '25. First, some housekeeping. In the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment related to prior year's freight accrual. This benefited fiscal year '24 operating margin results by approximately 70 basis points. Our guidance for fiscal year '25 uses our fiscal year '24 results without the out-of-period adjustment as a comparable basis.

Additionally, fiscal year '24 was a 53-week year for Williams-Sonoma, Inc. In fiscal year '25, we will report comps on a 52-week versus 52-week comparable basis. All other year-over-year compares will be 52 weeks versus 53 weeks. On full year '24 results, the additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin. The discrete impact of the additional week on just Q4 '24 was 510 basis points to revenue growth and 60 basis points to operating margin.

Now our guidance. Given our strong Q3 results and our outlook for Q4, we are updating our fiscal year '25 guidance. On the top line, we are reiterating our fiscal year '25 net revenue guidance. We expect full year '25 comps to be in the range of positive 2% to positive 5%, with total net revenues in the range of positive 0.5% to positive 3.5% due to the 53rd week impact from last year.

Our guidance continues to assume no meaningful changes in the macroeconomic environment, or interest rates or housing turnover. Our guide reflects the continued strength in our business, strong customer response to our product lineup and continued traction across our growth initiatives. On the bottom line, we are raising our full year operating margin guidance 40 basis points to a range of 17.8% to 18.1%. This means that despite the tariff headwinds, we are now guiding the midpoint of our fiscal year '25 operating margin to be approximately 20 basis points above last year when excluding the 53rd week impact.

Our higher operating margin guide reflects both the strong results we have delivered year-to-date and the expectation that tariffs will have a greater impact on our margins in Q4. Our updated guidance reflects all the tariffs in place as of this call. This includes the new Section 232 tariffs on furniture, the revised 20% additional China tariffs, the 50% India tariff, the 20% Vietnam tariff and an average 18% tariff on the rest of the world as well as the 50% steel and aluminum tariffs, and a 50% copper tariff.

In fact, our incremental tariff rate has more than doubled from 14% earlier this year to 29% today, inclusive of all the tariffs I just mentioned. We believe the strength of our operating model, combined with the 6-point mitigation plan Laura outlined enables us to mitigate a large portion of these tariffs, which is embedded in our guidance. It's important to note the tariff policy has been volatile and subject to multiple revisions.

It's hard to say where tariffs will ultimately land and what impact they will have on our business. Our guidance reflects our best estimates of the impact based upon the tariffs in place as of this call. Also today, we are providing some further inputs for modeling purposes. We now expect our full year interest income to be approximately $35 million and our full year effective tax rate to be approximately 26%.

Turning now to capital allocation. Our plans for fiscal year '25 continue to prioritize funding our business operations and investing in long-term growth. We expect to spend between $250 million and $275 million on capital expenditures in fiscal year '25. We are investing 85% of this capital spend on our e-commerce channel, retail optimization and supply chain efficiency. We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payouts and ongoing share repurchases.

For dividends, we will continue to pay our quarterly dividend of $0.66 per share, which is a 16% increase year-over-year. We are proud today that fiscal year '25 is the 16th consecutive year of increased dividend payouts. For share repurchases, we announced today that our Board of Directors approved an additional $1 billion share repurchase authorization, bringing our total authorization to approximately $1.6 billion.

We remain committed to opportunistically repurchasing our stock to provide returns to our shareholders. As we look forward to 2026, we will balance our long-term growth potential with the tariff and macroeconomic landscape, and we will provide guidance in March. As we look further into the future beyond '26, we are reiterating our long-term guidance of mid- to high single-digit revenue growth with operating margins in the mid- to high teens.

Wrapping up Laura's and my comments, we delivered another quarter of strong results despite the headwinds from tariff policy and historically low housing turnover. Our focus remains on our 3 key priorities: returning to growth, elevating our world-class customer service and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth for these 5 reasons.

Our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital first but not digital-only channel strategy, the ongoing strength of our growth initiatives and the resilience of our fortress balance sheet. With that, I'll open the call for questions.

[Operator Instructions] Your first question comes from the line of Maks Rakhlenko from TD Cowen.

Great. Congrats on the nice quarter. So first, can you just discuss the elasticity that you're seeing in the business as you selectively increase prices and how we should think about the impact to comps from transactions versus [ ticket ] in 3Q?

Thanks, Maks. We look at prices constantly across our brands, across categories and with our competition. And you know we sell a wide range of products. And so there's not one quick answer to elasticity because in some cases, there's room to take up prices. In other cases, you need to take down prices based on what the market is doing. This is why we're so focused on innovation and bringing new innovative and exclusive products to market because that gets us better pricing power.

Also, I would say that pricing is not just about the product itself, but also the service and the experience. And we have been really, really focused, as you know, on improving our service, which has been a huge driver of our op margin, which I'm sure we'll talk a lot about today. But that's a big -- especially to come up against the holiday season. It's a big deal for customers deciding where to buy their gifts, especially large ticket. if they want to buy some gifts from people they trust, they can return things to and that they're going to stand behind their product quality, and they can get instructions about how to use that expensive espresso machine. So it's not just one metric, and it's not just one category and it's going to be -- the answer is going to be different depending on the product you asked me about.

Got it. And then, Jeff, you noted that it's taking longer for tariffs to flow through. Just how should we consider the impact of tariffs over the next several quarters as it does sound like 4Q will see a pickup? And then -- just any guideposts on modeling for the next several quarters?

Yes, let me explain why the tariffs are taking longer to flow through. I think it's important to unpack that. And first, it's really due to the delayed effective dates. For example, the August 7 reciprocal tariff, which applies in most countries like China and Vietnam, et cetera, had an exception for goods that were on the water that had to be received before [ 10/5 ]. Another example is with the India tariffs that were effective on August 27, there was an exception for goods in the water to be received before 9/17. So this means that these tariffs do not start being applied to new receipts until mid- to late third quarter. And then on top of that, we aggressively front-loaded receipts to bring in inventory at lower tariff rates than are in effect today.

So the combination of these 2 really advantaged us in Q3. As we look to Q4, we've certainly said that the tariffs will have a larger impact upon our margin and that is embedded in our guidance. As we look beyond Q4, it's a little early to talk about '26. There's a lot that could change between now and then, especially with the tariff lens. So we'll save that conversation for March.

Your next question comes from the line of Zach Fadem from Wells Fargo.

Can we start with your take on broader category performance from Q2 to Q3? And whether you saw underlying improvement there? And then just curious, stepping back to how you would frame the improvement we've seen in furnishings in your category relative to some of the broader macro and pressures that we've seen in home improvement and other bigger ticket categories?

zach, we're really pleased with our continuing improvement across quarters and brands and in particular, the West Elm's increase in comps is really exciting for us to see because we expected it to happen. And there's nothing more fulfilling when we see a strategy come to fruition. And I still think there's a lot of room left to go in West Elm as they build out certain categories and seasonal assortments. And we've been continuing to improve our in-store experiences, and that's been really helping. But in terms of the broader merchandise category, the cross brand, we have been aware, as everyone is that the housing market not covered, and that is really most correlated with furniture and to be able to improve our furniture comps without a significant improvement in housing is a really, really strong sign.

And we love that because a furniture collection that we introduced in the season this year we can build up on for next year with new [ piece types ] and also with better inventory stocking positions. And so the continuation of our furniture strength is very important to the short term and the longer term. And then in the holiday seasons, the categories that are exciting, we saw Dorm pick up from Q2 to Q3, back to school, the broader category for that, and it's a strong season and really, really a good season for us. The Halloween product categories were strong [indiscernible] Thanksgiving, also, we're not done with Thanksgiving yet obviously, but we're close. So so we've been pleased with the results there.

It's too early to comment about holiday, and we're actually on the call a week earlier than we were last year. So those of you wondering about the lack of comments there, it's just a little bit too early to comment. But based on what we've seen with the other seasonal holidays, we can see that, that's a competitive advantage for us. There's not many other people out there that have the assortment that allows customers to really decorate and entertain for the holidays. And especially at this time of the year, it's the real strength is a traffic driver for us.

Your next question comes from the line of Cristina Fernandez from Telsey Advisory Group. .

So I want to follow up a little bit on that last comment on holiday. If you look at the implied Q4 revenue guidance, it's pretty wide. So could you comment on the low end versus high end and your ability to continue this comp trend as you face a more difficult year-over-year comparison. .

Thank you, Christina. Holiday launch season and then it includes January. We are really focused on great price selling. And this has been an important part of our margin profile all year and the improvement that you've seen. And when we have amazingly -- we've had great success in our margin improvement, even with the tariffs on top of everything. And as we go into the holiday season, we continue to have opportunity from a year-over-year perspective in pulling back on promotions. And so we're focused on great price selling and hope to have less promotions than last year, hence, the wide range of comp performance. That's one piece of it. The second is when you look at the multiyear numbers we're mindful of strong holiday last year.

Your next question comes from the line of Peter Benedict from Baird.

I guess 2. One would be the market seems to be really concerned about how you're going to be able to digest these tariffs as they ultimately come through despite your ability to do so to date. I think expectations next year for operating margins to be lower in the first half of the year. But maybe, Jeff, I'm not asking for specific guidance, but just how should we think about the ability of the business to just even maintain operating margins in the face of what you know about tariffs as they sit today?

That's my first question. And then my second question would be around unit growth. Laura, it sounded like maybe a little bit more of an offensive posture there, particularly around West Elm. We know that, in aggregate, your units have been kind of coming down. Are you signaling a change there? Should we be thinking about, I'm just thinking about the magnitude of unit growth we might expect as we look out on the horizon.

Peter. So where is the operating margin going? That's a great question. But if we look beyond our current guidance, that's not really a question we're going to answer today. It's too early to start discussing '26 guidance. Our focus is on the holiday season delivering in Q4. And the real reason here is the tariff landscape has been incredibly volatile. Just look at what's happened over the past several quarters. Every quarter, there's been new tariffs, repeal tariffs, everything is changing. .

And there's a lot of uncertainty in this front. I would point out that India is one of our largest sources of goods. And where that tariff is going, which is currently at 50% is an open question. We also have the Supreme Court decision on IEEPA tariffs pending. We'll see where that goes. So it's a little hard to understand beyond our current guidance and beyond this year in Q4 where the tariff landscape is going to impact us. We believe that our 6-point mitigation plan that Laura and I have been articulating all year, combined with the power of our operating model will allow us to offset a large portion of the tariffs but the ultimate amount depends upon where the tariffs ultimately land. What we're really focused on is delivering the current quarter and everything we know about our ability to offset the current tariffs is embedded within our guidance.

In terms of your second question, Peter, where is unit growth going? Look, we've been saying all along that we have done an incredible job, and I want to complement our entire organization regarding our retail repositioning strategy. And there's been multiple legs to the strategy. There's been closing underperforming stores, which I think everyone knows, we've closed about 17% of our stores since 2019. It's about repositioning stores from some of the tired indoor malls to more vibrant lifestyle centers. And it's also been about opening new stores.

And we see opportunity for new store growth, particularly in the West Elm brand with Rejuvenation with GreenRow potentially. And there's a lot of opportunity for us to continue to grow stores. In terms of where overall store count growth is growing, as we've been saying all year, it will be mid-single-digit closures this year. And I think we're not necessarily guiding '26, but I don't think we'll see a substantial change in the overall store count as we look towards '26. There's still more room to go on our repositioning strategy, but there's also a whitespace opportunity to infill. And there's some great new locations that we're working on that will come online in '26 and then '27.

Your next question comes from the line of Chris Horvers from JPMorgan. .

So 2 quick ones. So I guess playing devil's advocate on the compare in the fourth quarter, Laura, furniture pull forwards behind you, there's a lot of momentum around self-help initiatives. And obviously, there's a ticket pricing coming through here. So do you think about where we are in the cycle, particularly with housing not helpful why couldn't the growth rate just stay at the growth rate considering where we are?

And then a quick one 1 gross margin, understanding there was some shift on timing, but asking the question another way, did the drivers in terms of -- in the fourth quarter in terms of the expected tariff headwind versus the expected benefit from the mitigation strategy? Did you change those at all in your outlook?

On pull forward first, I don't see any reason to believe we've seen pull forward of anything for that matter. We absolutely could be at the same comp, if not higher. We have a wide range. I was just explaining the differences of why you might look at it and say it's a little bit lower than where you've been. It's very important that we don't play the promotional game. It's a key aspect of our strategy. At the same time, we're going to have great deals for Black Friday. We have great deals right now for early Black Friday. We bought into them.

We have vendor partnerships on them. But we're not going to have as much -- we hope we're not going to have as many needs to promote as we did last year. And so that's the only hesitation on the comp side. And then in terms of the tariff impact in Q4, it's sizably more than Q4 because of the way that the cost flows through every single quarter. And so we did a fantastic job, great success with our mitigation plan in Q3 and throughout the year, and we will continue to do that. And in fact, it's amazing to see the new opportunities that we're finding in supply chain. Supply chain has been just a tremendous positive this year in delivering op margin. And what's great about it, as you know, is it means the customer is getting their product delivered more smoothly and on time and without damage.

And that's all good for the brand. It's fantastic for the P&L. And there's still room. As we look at Q4 on the op margin side and supply chain savings, there's more to go there. We're really optimistic about our ADC, which is our new DC that came out last year. And honestly, we're doing better than we have been with that, and that could be -- that could really help us, especially because the calendar this year for Christmas similar to last year is pretty tight. So we want to ship it late and ship it perfectly and not disappoint anyone. That's why people come to us and shop online later with us like they do Amazon and others because they trust us to deliver before Christmas. So there's a lot of really good things happening. But in terms of the impact of tariffs. Please don't get ahead of us on Q4 in terms of the margin because the tariffs are going to have a greater impact, as you can see in our guidance and the implied Q4 guidance than they did in Q3.

If you look at our op margin ex tariffs, it's expanding. And so for all those that are worried about this, just realize that this goes into the base and we're done with it, and we move forward, and it's about outperforming our competition and continuing to deliver for our shareholders and most importantly, for our customers and giving them incredibly beautiful, well-designed, high-quality product at the best price in the market.

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Your next question comes from the line of Jonathan Matuszewski from Jefferies.

I had 1 question and 1 follow-up. The first question was just on the consumer. You mentioned a better response to full price selling then it seems like what you planned for. So just from like a strategy perspective here, how does that minimal elasticity kind of inform your customer targeting efforts going forward? And is what you're seeing giving you more confidence to target a higher-end consumer, a higher-income consumer more in the future than in the past? And are there strategies in place to do that that's my first question.

It's a great question. We're lucky where we sit, but we love all our customers. So we're going to give them the best price, it's their apartment, first baby or [indiscernible] And we do see when we look at our [indiscernible] and owning the home that we haven't covered the real super high-end at scale yet. It's not surprising to me that Rejuvenation is doing so well. Why we have such great growth? It's expensive. It's absolutely gorgeous, high-quality products. I hope that you've all visited a store bought some products or seen it in someone's house because when you see it, you understand why we've really grown that business and why we believe so strongly to be our next $1 billion brand that sits at the high, GreenRow sits at the high end.

We haven't talked about [ indiscernible], but what we are seeing it's a new aesthetic. This very, very origin. That is not in the marketplace and it is entirely green products and people care about that. We expect customer cares about that. And so that's at the high end, and we see that we can have retail stores in that brand which tells me it's bigger than you might think. And then there's Williams-Sonoma Home, which we continue to see as an opportunity for us into the future.

But don't mistake the importance of us also covering the upper middle customer, the Pottery Barn, the West Elm and making sure that also those brands are so appealing that people trade into that. If I can decorate your house more beautifully and more affordably than the high end, why wouldn't you come to us? And by the way, we'll do the whole thing for you and we'll set it up. And I think you'll see that we can do it for a fraction of the price of what other people do and have it be super interesting and gorgeous. So we're going after all those pieces, and there's opportunity right across that TikTok to bar from what we define as our value customer, which is different than the market all the way to the high-end consumer.

Your next question comes from the line of Simeon Gutman from Morgan Stanley. .

can I ask on tariffs, again, the 6-point plan seems to be beneficial. And it sounds like the elasticities aren't awful. What's the chance that we get to the fourth quarter or even the first quarter as this inventory turns that the impacts are going to be a lot more minimal than we think. And I'm just trying to size up the conviction that we haven't seen anything yet. And then if some of the [indiscernible] stuff gets, I don't know, validated, do you suspect that industry prices go back down? Or do you think retail prices, especially ones that have already changed, they're just going to hold?

First of all, I just want to say that the last thing I want you to think is that we're immune to tariffs. We've done a really great job of offsetting them so far, but the amount that they hit us in Q4 is sizably different than it was in Q3. So just that's why look at our guidance, please, and understand the impact. IEEPA, there's other tariffs I'm not focused on that. We're focused on how we give in the current tariff environment, the greatest value to our consumers. And where should we be pricing things and where should we be moving things. So I wouldn't spend a lot of time worrying about that. I think it's just one more thing that could change and be kind of distracting in the short term. There's also really good things that -- like if the India tariff is repealed that or reduced by half, that would be great for us. But all that is a backdrop that affects the entire industry. And once it's in and it's rolled through on a yearly basis, we're done with it. So I just -- as I said, just to recap, please don't think that we are in in Q4 and beyond. We will offset as much as we possibly can. We've done a better job than I think we even thought we could do in offsetting all of it this quarter. But we have 2 things going on in Q4 that I want to make sure, Jeff reminded you in his prepared remarks. I'll let him remind you again about the 53rd week.

Yes. I mean a couple of other things that I want to highlight, too, Simeon, is and as Laura said, don't get ahead of us there. we did have an improvement in our merchandise margins and particularly against what we expected in Q3. But it goes back to the timing factor that I talked about, I think on the first question, the effective dates were delayed for all the tariffs. So as we get to Q4, there will be a substantially larger impact to our operating margin than there was in Q3. And our guidance embeds in there our best estimates of what that impact is inclusive of all of our tariff mitigation efforts. So I can't say it any other way other than we do not expect a repeat of Q3 in Q4, which is what our guidance is. .

In terms of the 53rd week, I do want to remind everyone that this is a 53rd week for Williams-Sonoma -- we are coming up against the 53rd week for Williams-Sonoma, Inc. On the year, it was worth 150 basis points to revenue growth and 20 basis points to operating margin. But in Q4, where the 53rd week comes into play, it had a pretty big impact at 510 basis points of revenue growth and 60 basis points of operating margin growth. So just on that, the 53rd week and those 60 basis points, we would be down normally on a year-over-year 13-week -- I'm sorry, yes, 13-week to 13-week comparison.

Your next question comes from the line of Steven Zaccone from Citigroup. .

I wanted to ask on Pottery Barn because business decelerated a little bit there on the 2-year stack, and it's actually lagging the rest of the segments of the business. You referenced some pullback in promotions. Can you just talk about what's new this year because I think that's been the strategy for the past couple of years. And when you think about the performance of that business, what are you seeing from a competitive perspective. Any sort of kind of trade down from the consumer [indiscernible] and some of the earlier questions around pricing, is there anything to call out from a pricing perspective, competitive wise was?

We haven't seen that yet. Pottery Barn furniture [ has improved this year, especially on the multiyear stack, and that's been good to see. They did have more promotions to reduce out of their base than you might have expected. And so we continue to work on that and there's still opportunity.

Your next question comes from the line of Chuck Grom from Gordon Haskett. .

Just -- Laura, just bigger picture, a lot of people have asked about tariffs. I want to ask a little bit about category growth and how you see sustainability moving into 2026. Broadly speaking, a lot of your peers are doing better. Do you think that continues? And then one more near term, just cadence throughout the quarter. Some of your peers have had a lot of volatility, anything you want to highlight for us and anything you want to speak to so far in November.

Yes. We don't talk about units. I do want to talk about the excitement we have as we look forward. We have not seen a housing recovery. It's like the worst housing market in the last 4 years, as you know. And that is a big deal. Now there's really not a lot of great signs that it's getting better quickly, but there are some green shoots. And I personally am very optimistic about housing next year. That would be a big change for us if that happens because we know that when you move, you buy a lot. when you refurnish your house. And we've been very good at getting the remodeler and the redecorator to come to us, but we're excited to be ready with a much more powerful furniture supply chain than we've ever had before when those sales come to us.

And we know that when that turns and you see upside again, it's a really big deal. Some people I don't think they're going to be ready for it. But the things we've done to really improve our supply chain are so strategic. I believe and have always believed that the person that owns the furniture network is the one who wins the whole thing. And that is where we've been focused and we continue to build and have all sorts of tech projects in play to make that happen. And you can see it in our numbers this year, how much improvement year-on-year. I read through last year's script, -- and it's funny when you read it because we were talking about all the supply chain improvements then. But I think if you ask me, I wouldn't have expected that we would have this much more. And yet we still have more. And that's what's exciting when you think about the power of our operating model in this multi-brand, multichannel company and where this could go in the future as [indiscernible].

.

Your next question comes from the line of Michael Lasser from UBS. .

Laura, 1 of the interpretations of your -- some of your comments over the last hour, is that Williams-Sonoma has gone through this significant change where it's reduced promotion, improved its profitability while it's been able to drive consistent sales growth. And now it may be at the point at which it can no longer lower promotional activity without it having some impact on the sales. Is that the right interpretation of what has been said on this call? And second, was the magnitude of the benefit to your margin in the third quarter from selling older, lower cost inventory at new higher prices equal to or greater than it might have been in the second quarter that we should think about these not repeating in 2026, understand that you're not providing any guidance on 2026 at this point.

In terms of your first question, I mean, you took some liberty there, Michael. I think what I'm saying is that key strategies for our company continue to work. And it has been a focus on innovative product design, high quality, high service and a regular price business, investing in our brands, investing in our tech stack, our supply chain to deliver great operating margins. But I will remind you, our key -- our first initiative this year was return to growth. I kept joking it's 1, 2 and 3 return to growth. We are obsessed with where we can grow, what brand it is, which categories it is and how we outperform. So do not mistake that, that is where we're headed and what we're driving towards. On the second question, I'll hand over to Jeff.

Yes, Michael, honestly, I'm not tracking with you on the question because actually, our margin expansion year-over-year in Q2 was -- gross margin was 220 basis points. It was only 70 basis points in Q3 with the difference, of course, being the impact of the tariffs. So I'm not sure I understood your question, but there was a greater impact of the tariffs in Q3.

And while certainly, we have our mitigation efforts, the tariff impact will increase sequentially quarter-over-quarter every year this year. And as we've said on the call, it will have an impact on us in Q4 in a much more substantial way than it did in prior quarters this year.

Your next question, and this will be the final question comes from the line of Oliver Wintermantel from Evercore ISI.

And yes, I think the message on gross margin in 4Q came across. I just wanted to focus on SG&A.. You guys had lower general expenses for the last several quarters. And especially in 4Q, I think there was 80 basis points in incentive comp headwind and advertising was also up a headwind of 30 basis points in the fourth quarter. So maybe could you talk a little bit about SG&A moving parts into the fourth quarter? How you expect that to shake out?

Yes. I mean, as you know, we don't guide to specific lines. We guide the top line and the bottom line is it gives us the flexibility to pull different levers as we see results come in. In Q3, our higher employment expense was really almost entirely attributable to higher incentive compensation due to our strong performance year-to-date. And then as I explained in our prepared remarks, advertising deleveraged about 20 basis points because we saw some opportunities during Q3 to spend some additional advertising in the digital space.

and one of our competitive advantages is our in-house marketing team that has ability across our portfolio of brands to test scale and optimize our spend. And they saw some opportunity to spend in Q3 that gave us great returns, drove incremental traffic to the web and higher revenue per visit. And so we leaned into that. So as we think about Q4, we don't guide to specific lines, but our approach is always the same as we're looking to control our SG&A. But where we see opportunities that are going to give us good return on investment, we will, of course, lean into those. But it all depends upon the overall macro.

And I thought that it might be worth spending another minute even though we're a couple of minutes past the hour, talking about our SG&A reductions due to our AI initiatives. because you're joking earlier that we have a 6-point mitigation plan for tariffs, but I think maybe we should launch our 7 as AI because we're seeing some really exciting results, both on the sales side and also on the margin side. I'll let Sameer make a few comments about that before we close the call.

Sure. Thank you, Laura. Like Laura mentioned earlier, in Q3, we are seeing really, really impactful results. She shared a couple of the data points around our customer service automation. She shared our launch of Olive, our AI agent that's customer-facing. if you haven't used that, I really encourage you to go on the Williams-Sonoma site today, super helpful for planning for the holidays and is driving sales, driving engagement, driving loyalty, it's really exciting.

And we're already -- just on the topic of SG&A, we're already seeing reduced payroll costs where automation absorbs -- AI automation absorbs repeatable work, reduced vendor costs, when we streamline external spend. And we're also seeing the same tech grow the top line. In supply chain, we're cutting out of market shipments, improving routes, lowering damages, replacements, trimming shipping costs, inventory, we're using AI to raise in-stock rates on key items, all the stuff supports conversion. It's driving down costs, but it's also driving the top line, digital guided journeys, better content coverage. All of this is driving SG&A leverage, all of it's driving reduced costs, but it's also driving demand leverage, which is really exciting to see it impact both on the cost side as well as the top line side. So we really see this compounding benefit as we head into 2026. I'm really excited about the continued impact we're seeing from our AI road map.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Laura Alber for closing remarks. .

Yes. Thank you all for joining us today. As I said earlier, I wish you all a very happy Thanksgiving with your families. Hopefully, you get a chance to stop by our stores and do some shopping. Look forward to talking to you in the new year. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Welcome to the Williams-Sonoma, Inc. Second Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining our second quarter earnings call. I'm here today with Laura Alber, our Chief Executive Officer; Jeff Howie, our Chief Financial Officer; and Sameer Hassan, our Chief Technology and Digital Officer.

Before we get started, 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 our updated guidance, for fiscal '25 and our long-term outlook. We believe these statements reflect our best estimates. However, 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. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website.

Now I'd like to turn the call over to Laura.

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I'm excited to talk to you about our second quarter. Before we get into our results, I'd like to acknowledge our team for their hard work. Their commitment, creativity and focus continues to drive our success. We're proud to deliver strong results in the second quarter of 2025 with another positive top line comp and continued outperformance in our profitability.

In Q2, our comp came in above expectations at 3.7%, with all brands, again, running positive comps. And we exceeded profitability estimates with an operating margin of 17.9% and earnings per share of $2, with earnings growth of nearly 20%. This was our second quarter of accelerated positive comps coming out of 2024 despite continued geopolitical uncertainty and no material improvement in the housing market. And we continue to outperform the industry, which declined in Q2. This growing outperformance was driven by positive comps in both furniture and nonfurniture and strong performance in our retail and e-commerce channels.

As we move into the second half of 2025, we are continuing to focus on 3 key priorities: first, returning to growth; second, elevating our world-class customer service; and third, driving earnings. Let's take a moment to review how we're advancing these priorities. First, in our core brands, we have increased our newness offer and our focus on categories where there is substantial white space in the market. Our product development competency is a distinct competitive advantage and allows us to deliver exclusive high-quality merchandise at a compelling value.

And our focus on innovation is driving results, particularly in furniture, where newness pushed us into positive furniture comps. Our growth strategy also includes diversifying our assortment in seasonal decor, textiles and housewares. And strategic collaborations are another critical part of our growth plan. These collaborations continue to expand new customer growth and drive sales and most importantly, drive relevance and excitement for our brands and our customers.

Also, our B2B business remains an important part of our growth strategy. B2B grew 10% in Q2 with both trade and contract performing. We continue to build a loyal expanding client base across multiple industries by leveraging our design expertise and commercial-grade product range. Our emerging brands, including Rejuvenation, Mark and Graham and GreenRow, together also continue to grow double digits.

We have a proven ability to build and scale brands. and we are particularly excited about Rejuvenation, which drove its seventh consecutive quarter of double-digit comps in Q2. We currently have 11 Rejuvenation stores and we'll be opening up our 12th store in Nashville in September. We continue to believe that Rejuvination will be our next billion-brand.

Beyond growth, our next priority is to focus on customer service. We are committed to providing flawless customer service with orders that are delivered on time and damage-free every time. Our operational performance continues to be better than our benchmarks. And we are focused on further optimizing these metrics by minimizing returns and damages, reducing split shipments and decreasing fulfillment time. We see even further opportunity for supply chain efficiencies in the long term as we implement AI capabilities. And finally, the cumulative results of our focus on returning to growth, improving customer service, and tightly controlling expenses will enable us to drive our third key priority, strong earnings.

Now I'd like to share an update on the opportunity we see with AI at Williams-Sonoma. We don't view AI as a standalone function. It is embedded across our business. Our strategy is organized into 3 areas: enhancing the customer experience, optimizing our supply chain and automating internal operations. On the customer experience, we are already seeing strong results from our new AI-powered customer service assistant, which we launched with Pottery Barn Kids earlier this summer and are scaling across all of our brands this week. It is improving issue resolution rates and speed while reducing cost, creating a better experience for both customers and associates.

We are also advancing our next generation of digital design tools and preparing to launch a culinary companion that will help customers with everything from cookware discovery to holiday entertaining. In the supply chain, our vertically integrated model gives us unmatched control from design sourcing to final mile delivery. This enables us to apply AI end-to-end, improving forecasting, optimizing inventory and increasing delivery accuracy. Few in our industry have the breadth of ownership to unlock this level of efficiency.

And finally, we are driving meaningful efficiency gains in our internal operations. Through our proprietary AI platform built to rapidly create secure business-specific applications and through partnerships with best-of-class providers, we are automating workflows across functions such as finance, HR and technology.

Early adoption has already yielded measurable improvements in productivity, software development velocity and creative production. The foundation across all of this is our proprietary data, combined with decades of expertise in design, culinary and omnichannel retail. We are already seeing very real impact in financial results from these investments from higher conversion and sales growth to measurable cost savings and productivity gains. AI is not just a future opportunity for us. It is delivering results today, and we believe it positions Williams-Sonoma to lead our industry in applying AI with both creativity and discipline.

Turning to guidance. We are encouraged by our strong sales trends so far in 2025, and therefore, we are raising our top line guidance. We now expect full year comparable brand revenue growth to be in the range of 2% to 5%. In terms of how that incremental revenue flows through to our operating margin, we expect that this additional top line growth will be pressured by incremental tariff costs. Therefore, we are not raising our operating margin guidance and we are reiterating our expectation that our full year operating margin will be in the range of 17.4% to 17.8%.

Since we last gave guidance, the tariff environment has evolved. Specifically, our incremental tariff rates have doubled since our Q1 earnings call. Jeff will walk you through more details around our updated guidance. I would like to update you now on our tariff mitigation efforts. We continue to be actively and aggressively mitigating what we can with our 6-point plan.

First, we are successfully obtaining cost concessions from our strong vendor community. This includes reductions on current products, but also reductions in price on the newness that we are bringing in and developing. Second, we are actively resourcing goods to get the best cost for our customers. Third, we are identifying further supply chain efficiencies in our network. Fourth, we are optimizing expense through tight cost control and financial discipline. Fifth, we are expanding our made in the USA assortment, production and partnerships. And lastly, we are carefully taking select price increases on products with a focus on maintaining competitive pricing. We expect the next time we talk about tariff with you, the landscape may be different. But for today, all effective tariffs are reflected in our updated guidance.

Now let's review our brands. Pottery Barn ran a positive 1.1% comp in Q2, and since 2019, the brand ran a 42.6% comp. Pottery Barn is executing its strategy to step up innovation, provide better value, improve channel experiences and reduce promotions and we are pleased with the initial reads of our fall launch. In particular, customers continue to respond to our innovation in proprietary design and furniture.

Our Pottery Barn stores are a key part of our success and continue to outperform. Customers have shown their love for the in-store shopping experience. and we have responded by focusing on improving retail inventory availability, refreshing product assortments and enhancing design services. We are pleased to see our strategies working at Pottery Barn. We believe the brand will continue to improve its sales trend through increased newness, exciting brand collaborations and strong design services.

Now I'd like to talk to you about our Pottery Barn children's business, which ran a 5.3% comp in Q2, representing the sixth consecutive quarter of positive comps. And since 2019, Pottery Barn Kids and Teen ran a 25.9% comp. Innovation across our product offering and the shopping experience has been key to delivering this growth. The children's business continues to see strong response to our new product launches as we address evolving trends in furniture and decor, and our effective collaborations are driving demand and new customer growth. In these life-stage brands, the journey starts with Baby. In the Baby business, we delivered growth in nursery furniture and our expanded offering of Keepsake gifts.

Moving to our back-to-school business, which has been strong. We are focused on offering high-quality gear at-home study solutions and everything students need for the dorm. We continue to acquire new customers with our dorm decorating solutions, market-leading quality and exclusive collaborations. We are making shopping easier through our enhanced pickup near campus program. Our customers can ship to any of our over 450 Williams-Sonoma Inc. stores nearest to their school.

Additionally, we've expanded our offering in store and provide free design services for dorm. And in the quarter, we acquired the intellectual property of Dormify which we believe will expand our presence in the dorm space as we develop it as our tenth brand. As we look to the balance of the year, we feel confident in our pipeline of product innovation and our consistent brand promise. We continue to focus on quality, sustainable goods that are built to last over the childhood years at a compelling value.

Now let's review West Elm. West Elm ran a positive 3.3% comp in Q2. Since 2019, West Elm has grown 41.9%. We continue to make progress against the brand's 4 key pillars: product, brand heat, channel excellence and operational efficiencies. In Q2, West Elm drove positive comps in both furniture and non-furniture. Product innovation is driving strong performance with newness up double digits year-over-year. Fall is on track to be the brand's most successful launch of the year with standout collections across all categories.

Collaborations are also an important part of West Elm's growth. The brand's collaboration with award-winning designers, Pierce & Ward, continued to be a huge success throughout Q2. This collection is West Elm's top-selling collaboration to date. The codesigned line received widespread of claim earning top-tier press coverage. Also in July, the brand launched their second Kids collaboration with Joseph Altuzarra. We're excited by the momentum at West Elm. Their growth strategy is working, and we have a sizable opportunity for this brand.

Now let's review the Williams-Sonoma brand. We're thrilled to report the brand's third consecutive quarter of positive comps, running a 5.1% comp. And since 2019, the brand ran a 39.9% comp. Our design-led approach and exclusive partnerships continue to expand our market reach and relevance. Customers are responding to our inspirational product stories with amazing chefs and innovative product launches to introduce color into their kitchens as well as new technologies from chef-driven collaborations to the ongoing success of Williams-Sonoma exclusive products we are providing our customers with what they want. We're thrilled to build on this momentum with additional launches planned for the second half of the year across all categories.

I also want to mention that in early July, we kicked off our annual fundraising with No Kid Hungry to support their fight against childhood hunger in America. And to date, we have raised over $20 million for No Kid Hungry to customer donations, events, and our tools for change collection of spatulas designed by celebrities, chefs and influencers. I want to thank everyone that has helped us raise both money and awareness for this very important cause.

Turning to the Williams-Sonoma Home business. Strong launches in lighting textiles and decor partially offset softness in the furniture this quarter. In Q2, all non-furniture categories grew, demonstrating our ability to provide elevated decorating updates for the Home.

Now I'd like to update you on B2B growing 10% in Q2, with both trade and contract delivering double-digit comps. Leveraging our design expertise and commercial-grade product assortment, we've built a strong and growing client base across multiple industries. Our B2B offering remains a powerful differentiator, and we are seeing continued momentum.

Now I'd like to update you on our emerging brands which continue to drive strong growth and profitability. Rejuvenation delivered another strong quarter of growth with double-digit comps. The brand's strong performance continues to be fueled by strength in core renovation categories. And product innovation continues to drive growth. In Q2, we expanded finishes across categories, introduced new statement lighting collections and size options to our vanities and bath hardware to better meet project needs.

We also see strong demand in newer hardware categories. Rejuvenation is well positioned to sustain growth through the second half of 2025 and beyond. Mark and Graham ended the quarter with strong momentum also driven by ongoing growth in their new Baby and Pet categories, along with the successful launch of their new back-to-school and early fall collections. As we head into the holiday selling season, corporate gifting becomes a larger focus for the brand, and we're excited by the potential of this great business.

Now turning to our newest and smallest brand, GreenRow. The brand delivered strong growth in Q2, driven by increased demand for core vintage-inspired furniture collections, printed upholstery fabrics and a launch of Fall newness in June. GreenRow continues to innovate with new materials, thoughtful collaboration and uniquely optimistic products. The product line is incredibly beautiful in person, and we are actively looking for a couple of store locations to test this concept at retail.

Last, I'd like to talk about our global business. We continue to deliver strong performance across our strategic global markets, including Canada, Mexico, India and the U.K. In Canada, both retail and DTC channels are outperforming, supported by a differentiated product offering and enhanced omnichannel strategy and the expansion of our B2B program. In Mexico, where we partner with Liverpool, results remained strong, driven by the success of our expanded summer assortment and strategic growth in the design and trade business.

In India, where we work with reliance, growth is driven by new marketing initiatives that are driving brand awareness. And in the U.K. we are leveraging strong trade segment momentum while executing against our plan for the upcoming online launch of Pottery Barn U.K. this fall.

In summary, we are proud of our strong execution and outperformance in Q2 with accelerating positive comps and strong profitability. The current level of macroeconomic uncertainty does not distract us from our focus and determination. Across the company, we are all committed to improving our channel experiences and building strong brands. Every day, we come to work with a focus on innovation, product design and customer service, which differentiates us across the industry.

This differentiation allows us to shine in this highly fragmented industry and ultimately positions us to pick up market share with our 3 key priorities: returning to growth, enhancing our world-class customer service and driving earnings. We are set up well to continue executing in 2025 and beyond.

And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Thank you, Laura, and good morning, everyone. Our results this quarter exceeded our expectations on both the top and the bottom line. Here are some key highlights from Q2. All brands delivered positive comps for the second straight quarter. Furniture and nonfurniture category, both ran positive comps reflecting strength across all facets of our offering. White space opportunities such as dorm and West Elm Kids grew double digit. Our emerging brands continued their streak of double-digit positive comps with rejuvenation having a especially strong performance.

B2B delivered another strong quarter of growth with a 10% comp and a near record quarter in our contract business. Retail and e-commerce both drove positive comps. Our supply chain team delivered all-time best across nearly all customer service metrics while simultaneously improving efficiency and reducing costs.

Our marketing team drove more customer engagement and strong sales with less advertising spend. And we drove EPS growth of nearly 20% to $2 per share. We delivered these results amidst a weak housing market, high interest rates and macroeconomic uncertainty, all while navigating an unprecedented level of tariff volatility.

Our results would not be possible without the talented team we have at Williams-Sonoma, Inc. I'd like to thank our team for their relentless dedication to delivering strong financial results and outstanding customer service. Our team is the best in retail.

Now let's get to the numbers. I'll start with our Q2 results and then cover guidance for fiscal year '25. Q2 net revenue finished at $1.84 billion. Our revenues exceeded the high end of our expectations at a positive 3.7% comp. We gained market share in the quarter, even as we increased our penetration of full price selling.

All brands delivered positive comps for the second consecutive quarter, driven by positive comps in both our furniture and non-furniture categories. From a channel perspective, both the retail and e-commerce channels delivered positive comps with retail up 7.3% comp and e-commerce up 2% comp. Both channels benefited from improved in-stock from our higher inventory levels.

Moving down the income statement. Gross margin exceeded our expectations, coming in at 47.1%, 220 basis points higher than last year. Merchandise margin accounted for 190 basis points of our gross margin improvement. Select price increases and higher full price selling drove this improvement. Our Q2 results saw a minimal impact from tariffs due to our tariff mitigation efforts, including the front-loading of lower tariff receipts in Q1. Supply chain efficiencies drove the remaining 30 basis points of improvement in our gross margin.

We continue to realize expense savings across manufacturing, warehousing and delivery from our focus on customer experience and efficiency. Key metrics, including returns, accommodations, damages, replacements and outbound shipping expense continued to improve year-over-year. Occupancy costs, although up 2.1% on a dollar basis, were essentially flat as a percent of revenue. Overall, our gross margin this quarter exceeded our expectations.

Turning now to SG&A. Our SG&A ran at 29.2% of revenues, 20 basis points lower than last year. Employment expense deleveraged 100 basis points, primarily due to higher incentive compensation from our strong results this quarter. We continue to manage variable employment costs across our stores, distribution centers and customer care centers in line with top line trends. Advertising expense was 80 basis points lower year-over-year. Our in-house marketing team drove more customer engagement and strong sales with less advertising spend.

General expenses leveraged 40 basis points from our higher revenues and are keeping a tight lid on expenses. On the bottom line, our earnings exceeded our expectations. Operating income grew 18% to $328 million. Operating margin at 17.9% was 240 basis points above last year, and diluted earnings per share grew nearly 20% year-over-year to $2.

On the balance sheet, we ended the quarter with a cash balance of $986 million with no outstanding debt. We generated $283 million in operating cash flow during the quarter, invested $52 million in capital expenditures supporting our long-term growth and returned $280 million to our shareholders through $199 million in stock repurchases and $81 million in dividends.

Merchandise inventory stood at $1.4 billion, up 17.7% to last year. Our inventory includes $70 million of a strategic pull forward of receipts at lower tariff rates than expected later in fiscal year '25. And $20 million of incremental tariff costs recorded in inventory. Overall, our inventory level and composition are well positioned to support our sales growth.

Turning up our Q2. We're proud to deliver results that exceeded our expectations on both the top and the bottom line. Now let's turn to our guidance for fiscal year '25. First, some housekeeping. Fiscal year '24 was a 53-week year for Williams-Sonoma, Inc. In fiscal year '25, we will report comps on a 52-week versus 52-week comparable basis. All other year-over-year compares will be 52 weeks versus 53 weeks. The additional week contributed 150 basis points to revenue growth and 20 basis points to operating margin to fiscal year '24 results.

Additionally, in the first quarter of fiscal year '24, we recorded a $49 million out-of-period adjustment related to prior year freight accruals. This benefited fiscal year '24 operating margin results by approximately 70 basis points. Our guidance for fiscal year '25 will use our fiscal year '24 results without the out-of-period adjustment than the comparable basis. As we turn to guidance for fiscal year '25, we remain focused on what we can control, executing our 3 key priorities: returning to growth, elevating our world-class customer service and driving earnings. We're confident in our growth strategy, and we are encouraged by the momentum in our business.

On the top line, we are raising our fiscal year '25 net revenue guidance. We now expect full year '25 comp to be in the range of positive 2% to positive 5%. And with total net revenues in the range of positive 0.5% to positive 3.5% due to the 53rd week impact from last year. Our guidance assumes no meaningful changes in the macroeconomic environment or interest rates or housing turnover. Our higher guide reflects the continued strength in our business.

Strong customer response to our newness and innovation and continued traction across our key growth initiatives. On the bottom line, we are reiterating our full year operating margin guidance of 17.4% to 17.8%. The flow-through from our higher revenue will be offset by both the tariffs announced since our last earnings call and the flexibility we are giving ourselves to protect our key priorities of growth in service.

Regarding tariffs. Our incremental tariff rate has doubled since our last earnings call. At our May earnings call, our incremental tariff rate was 14%. As of today's call, it has doubled to 28%. This includes the additional 30% China tariffs, 50% India tariff, 20% Vietnam tariff and averaged 18% tariff on the rest of the world, as well as the 50% steel and aluminum tariffs and a 50% copper tariff.

We believe the strength of our operating model combined with the 6-point mitigation plan that Laura shared with you, enables us to maintain our guidance despite the doubling of tariffs since our last earnings call. Our guidance reflects our best estimate of the impact based upon the tariffs in place as of this call. Given our strong performance this year and our raising top line guidance, we would expect there to be incremental earnings flow through on the year.

However, tariff policy has been volatile and subject to multiple revisions. It's hard to say where tariffs will ultimately land and what impact it will have on our business. As we navigate this uncertainty, we intend to stay focused on growth and service. Reiterating our operating margin guidance gives us the flexibility to protect these key priorities. The key point here is we are raising our top line guidance based upon momentum in our business.

In reiterating our bottom line guidance, to give us flexibility as we navigate the tariff uncertainty. Also today, we are providing some further input for modeling purposes. We expect our full year interest income to be approximately $30 million and our full year effective tax rate to be approximately 26.5%.

Turning now to capital allocation. Our plans for fiscal year '25 prioritize funding our business operations and investing in long-term growth. We expect to spend between $250 million and $275 million in capital expenditures in fiscal year '25. We intend to invest 85% of this capital spend on our e-commerce channel, retail optimization and supply chain efficiency.

We remain committed to returning excess cash to our shareholders in the form of increased quarterly dividend payout and ongoing share repurchases. For dividend, we will continue to pay our quarterly dividend of $0.66 per share, which is a 15% increase year-over-year. We are proud to say that fiscal year '25 is the 16th consecutive year of increased dividend payout. For share repurchases, we have $900 million available under our share repurchase authorization through which we will opportunistically repurchase our stock to provide returns to our shareholders.

Looking further into the future beyond '25, we are reiterating our long-term guidance mid- to high single-digit revenue growth, with operating margins in the mid- to high teens.

Wrapping up Laura's and my comments, we're proud to deliver another quarter of strong results for our shareholders that exceeded expectations. While tariff policy has produced uncertainty and headwind. We are encouraged by the momentum we see in our business. Our focus remains on our 3 key priorities: returning to growth, elevating our world-class customer service and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder growth for these 5 reasons that remain consistent.

Our ability to gain market share in the fragmented home furnishing, the strength of our in-house proprietary design. The competitive advantage of our digital first but not digital-only channel strategy. the ongoing strength of our growth initiatives and the resilience of our fortress balance sheet.

With that, I'll open the call for questions.

[Operator Instructions]. Our first question comes from Oliver Wintermantel from Evercore.

A question on the comp performance. Could you talk a little bit about the transactions versus ticket or AUR, what really drove most of the comp outperformance?

Good to hear from you. As everyone knows, we don't specifically disclose our AUR ticket transaction metrics. Pricing was one part of the quarter. But our comps are really reflective of the momentum in our business. And we're seeing positive results from nearly every initiative we're after. I talked about that in our prepared remarks.

All brands positive comps. Where Laura talked about how newness and innovation is working, both furniture and nonfurniture deposit comps white space opportunities that I've been speaking about for several quarters like dorm and West Elm Kids, double-digit comp. Our emerging brands, especially Rejuvenation delivered strong double-digit comp and our business-to-business division was another double-digit comp as well, really led by the contract business. So we are seeing strong momentum in our business, and we're very pleased with our comp.

Got it. And as a follow-up, just on the second half on your guidance, you're keeping the operating margin guidance the same, raising the top line.

Could you maybe talk a little bit about the gross margin versus SG&A outlook for the second half of the year? Is the gross margins then pressured by tariffs, but SG&A could be helped by the strong 3.5% comp that's implied for the second half?

As you know, Oli, we don't guide to specific lines, but we guide total operating margin, and we are reiterating our operating margin guidance for the full fiscal year despite the incremental tariffs announced since our last earnings call.

There's 3 key points I want to talk about as it relates to our overall guidance. I think each one is important to understand how we came up with the guidance and how we approached it. Their first point probably has more to do with the top line and that our guidance assumes no meaningful changes in the macroeconomic environment for interest rates for housing turnover. So a lot of headlines coming out of Jacksonville last week, and we haven't accounted for any of that.

Our higher guide on the top line reflects the continued strength in our business. The strong customer response we're seeing in the newness and innovation. And like I just mentioned, the continued traction in our growth initiatives.

The second point I'd like to make is our guidance on the bottom line incorporates the fact that our incremental tariff rate has doubled. At the time of our May earnings, our incremental tariff rate was 14%. Today, doubled to 28%. That's a lot to absorb. With our 6-point tariff mitigation plan that Laura spoke about on our prepared remarks and our higher revenues, we can maintain our operating margin guide that really speaks to the profitability of our operating model.

And the third point I'd like to reference is just general tariff uncertainty. Tariffs have been volatile. It's hard to say where tariffs will ultimately land on what impact they will have on our business. And by reiterating our bottom line guidance, we're preserving the flexibility we have as we navigate the tariff uncertainty.

So yes, our gross margin overall will be pressured from higher tariffs. It will be partially offset by supply chain efficiencies, which is one of our 6 point -- one of the points of our 6-point tariff mitigation plan. And yes, we may pull some levers in SG&A, but we guide only our top and bottom line because it gives us the opportunity to pull different levers as we see business and trends of all. And as you've seen, we know the levers to pull.

Our next question comes from Jonathan Matuszewski from Jefferies.

Good morning. This is Andreas. I'm on for Jonathan. So a question on pricing. So I know you guys raised the comp guidance and considering the select price increases that you've been taking in the past couple of quarters.

Can you provide more insight instead of the pricing strategy for the back half? And just more context around that would be helpful.

Yes. Thank you for the question. It is so important to us that our customers get the best value design and quality for their money. And that hasn't changed despite tariffs or anything else for that matter ever. We continue to try to build more innovation into our product lines and more quality and also be smart about where the costs are and taking out costs that the customers don't care about. So we've been really at it, knowing the pressure that the tariffs would provide to work with our vendor partners to produce a line that everybody can do well with the consumers will respond to.

And as you've seen, we've been surgical about where we've taken some price increases, where, frankly, we were too cheap in the market for what we were selling. And we've seen good results from those things, and we're watching it carefully.

We certainly want to stay competitive, and we want to make sure that our product lines and finishing a whole home is accessible for our customers, so you don't want to move too much. And I feel really good about where we have it through the balance of the year. And we're constantly doing pricing tests to see what matters to our customer against which categories, and we're very thoughtful about it.

Operator, I think we're ready for the next question.

Your next question comes from the line of Peter Benedict with Baird.

The pressure is on after the long pause.

Could you hear me saying, go ahead, ask the question?

Yes, we could.

And why couldn't you unmute yourself?

Well, yes, I think the operator has to do that for us.

But anyway, so I guess my one question will just be maybe an update on your view your ability to kind of resource where you're getting products given the changes in tariffs? I think you talked about made in the U.S.A., I think that you were maybe an 18% mix in 2024, if I recall correctly. Just maybe give us a sense of what's realistic on that front? And also just throughout some of these other markets, what you're doing in terms of resourcing.

Yes. Thanks, Peter. It's a good question. I think you know very well how strong our sourcing capabilities are. We have a lot of relationships all over the world, including the United States. Long-standing relationships, and we know how to move product quickly and effectively.

So we have been carefully threading out the risk outside the United States and making the best decisions we can without making too much knee-jerk reaction because there's so much change that we've seen of tariffs that were once very high going lower, and it's still yet to be seen where it's going to land.

And so flexibility on our key items and having multiple sources, 1 to 3 -- or 2, 3 sources versus just 1 is a key part of our strategy. As it relates to non-USA furniture threats of tariffs, it's early to speculate. I think we're day 5 of a 50-day probe, there's not a lot of information on this subject. But I will say that it's going to be very difficult for the industry even if tariffs are put on to bring a huge amount back to the United States in a short window of time because there aren't the factories available to do a lot of production.

And also, particularly for the lower end of the market, it will be difficult because those consumers are buying mostly Asian products. For us, of course, we will be in a much better position than most, if that were to happen because of our strong USA manufacturing capabilities already, we have most of our -- not most, I said good chunk of our upholstery in the United States as we speak, and we can do more there, and that would be something we'd really push.

We have factories in Mississippi and North Carolina. And then we have our Rejuvenation Portland manufacturing unit that we love and has been running for many, many years. And because we know manufacturing, we know how to move more. So we'd be in much better shape if that were to happen. But I think the administration is realistic in understanding that this can't happen overnight. And we will continue to watch whatever they do and make our changes accordingly.

Your next question comes from the line of Michael Lasser with UBS.

How much price have you seen being taken across the industry thus far? And how much price as Williams Sonoma taken across its various brands? And did that contribute to some gross margin expansion in the second quarter given that you were selling some older lower cost inventory?

You said price? Like retail price?

Yes, ma'am.

Okay. So it's hard to know what other people are doing because there's a lot of up-down pricing in the market. So someone will take price up only to take it down with a promo or an e-mail offer, a credit card offer. There's a lot of promotions continually in our industry. That has not changed and people have really stepped up their everyday discounts.

And at the same time, I do think that they've taken prices up. So it's more very, very muddy to understand what is happening with other people's prices. As I said earlier, we've been very carefully looking at where prices make sense. And you have to remember also we sell everything from Anchovies to Armoire. So depending on what -- like they could move to the higher end of our furniture or the mid prices from the low end, and that also drives AUR, which is why we're always really reluctant to give you those metrics because you could think it's one thing when it's really another.

And as we said, we're pleased and thrilled to see furniture comping. And obviously, furniture is a higher AUR, higher ticket than some of the other categories. So dimensionalizing it is not what we're doing today other than to say that our pricing strategies, our product strategies, are resonating with our customers, and we still have a very accessible, beautiful high-quality line that we're offering.

Your next question comes from the line of Cristina Fernández with Telsey Advisory Group.

Congratulations on the good results. I wanted to ask on the furniture category. It's been positive for the last 2 quarters. What signals you seeing, I guess, more broadly around consumers wanting to shop furniture. And do you think it's just the newness you're offering or a more kind of broad-based improvement?

Yes. I mean, there's nothing that would indicate that there's something going on in the macro, right? I mean, you're not seeing housing improve. Did we hit the bottom could be, but it's really related to the product of we can see it completely linked to the newness we're bringing in.

I mean I talked about West Elm just really hitting it out of park with this fall assortment and a lot more newness on the floor and at DTC, and it's really resonating with our customers, and we're seeing similar response in all of our brands. So where there's strong units, we're seeing strong -- really strong furniture results.

Your next question comes from the line of Christopher Horvers with JPMorgan.

So I did want to follow up on some of the inflation dynamics. It looks like if you use the CPI data, the category saw inflation accelerate around 270 basis points from 1Q to 2Q, your comps accelerated modestly.

So is there -- was there some elasticity perhaps that showed up? Is that just not representative of the price perhaps? Or was there perhaps some maybe pull forward into the first quarter as the consumer try to get ahead of tariffs?

Good morning, Chris, 5 questions in 1.

So let me start with demand pull forward is we didn't not see any indications of demand pull forward in the quarter. If you look at our past 3 quarters, our comps have been almost all in the same ballpark, 3.1%, 3.4%, 3.7%. So there's not a huge indication of any demand pull forward there, they've been consistent. And we haven't seen any short-term spike that will be indicative of a demand pull forward.

I think what's happened in demand is more what Laura has touched on is the customer is responding to our initiatives, and that's the efforts we put in the brands around newness and innovation. It's a lot of our web-based opportunities. It is the way we're merchandising our stores and our websites. It's our emerging brands like Rejuvenation. It's just been a broad-based strength and momentum across our businesses.

Regarding your question on inflation, elasticity. Inflation, pricing was one part of the overall equation for us during the quarter. But as Laura talked about, as we talked about ticket transactions, all that, there's a lot of variables in there for us because of the wide mix of our assortment. And customers can trade between that and the mix can produce a very different result.

And I'm trying to remember the other part of your question. In terms of elasticity, what we're seeing from elasticity is really just depends it's category by category SKU by SKU specific. And the key point is the more differentiated product is, the less elasticity and the more opportunity to take price. The less differentiated, the more commoditized product is, the more pricing is sensitive. Going into more specifics would be playbook. But for us, the thing isn't just about price, it's about that. It's about the quality equation, it's about the service equation and we're winning in all those fronts.

Your next question comes from the line of Steven Zaccone with Citi.

I wanted to focus on the second half and just how you're thinking about the third quarter versus the fourth quarter in terms of same-store sales growth? it seems like the business has had this broad-based strength. Would you expect that to continue?

And then Laura, specifically, holiday was pretty good for retail last year, you saw an acceleration in your business. What's your view on holiday and how the consumer responds?

Yes, really when we think about the back half. But as we said in our prepared remarks, we're pleased with our current sales and the momentum is continuing and getting furniture to positive comp is a huge piece of that equation.

And then we've had great momentum in our most holiday-specific brands, i.e., Kids and Williams-Sonoma. And that is great because when they're doing well, they were naturally giftable than some of our other brands that are more decorate your own home. And so that makes us optimistic. And then, of course, there's the product line. And we've gotten to see it. We've got to see the online demonstration of it, and it's very, very compelling and builds on the things that are working today.

And while we're doing well, there's still a lot of things that we can continue to improve, and I believe we've improved them in the fourth quarter and the third quarter more than we had last year, and that will be good for sales in my opinion.

Your next question comes from the line of Seth Sigman with Barclays.

I'm just trying to understand how the higher tariff costs will start to phase in here? So merchandise margin in Q3 historically has been pretty similar to Q2. If that holds, it would point to pretty meaningful upside year-over-year. But can you just help us bridge Q2 to Q3 on the margins a little bit more even if not gross margin, maybe just broadly?

And then just a related follow-up. As I think about how you've embedded tariffs here for the back half of the year, can you just remind us how to think about how these costs wrap into next year and should we assume that you get better at mitigating it as time goes on?

A lot to go over in that call. In terms of what we're thinking about for Q3 margin. As you know, we don't guide the specific quarters, we provide annual guidance. That gives us flexibility to adjust and pull different levers as we go through and see the business. What we will guide in terms of overall how the tariffs will start to flow into our margins is we do see it accelerate impact accelerating across the year. We're on the weighted average cost method of accounting. And as those higher tariff costs work their way into our cost of goods sold, there will be a gradually building process across the year.

In terms of how we think about next year and what it means, we're only halfway through '25 and there's a lot left in this year to go. I think it's probably too early to start discussing '26 guidance. We're very confident in our growth strategies and really encouraged as we said all morning, by the momentum in our business. The big unknown variable is tariffs.

As you know, we've seen multiple round of changes, revisions, post comments seems almost every other day, we're adjusting to something and we don't have a crystal ball on where it finally lands. So with this in the earnings release, we reiterated our long-term guidance beyond '25. But a lot could change over the next 6 months, and we'll leave it at that.

Your next question comes from the line of Simeon Gutman with Morgan Stanley.

Nice quarter. I wanted to, I guess, hone in again on tariff for a minute. I know you said it's built into the back half. Curious how you thought about demand elasticity for the second half? And I want to sort of put out something how to think about how it impacted the first half for a second, because I think we were under the impression that at least at the initial rates there was some sharing, if that's a fair assumption, but some sharing with vendors. And because it was a relatively manageable amount, you didn't have to raise price as much, but maybe price was taken up in advance.

So now you have a higher run rate for the second half. How does that sharing look like? Does the guidance mean you have to take price up more and you're more concerned about elasticity and hence, margin. Just curious if you can give us a little more detail of how it's progressed throughout the year.

Yes, sure. The most important piece of this is the innovation piece. And I don't think you can underestimate what a big factor that is in our guidance and in our results. And it's not about everything that everyone else is doing to us. It's about what we're making happen. We've talked a lot today on this call about product innovation, brand strength and channel excellence. And those initiatives in those categories are what's making us confident in our guidance in the back half.

And in terms of your question about vendor sharing, we have incredible partnerships with our vendors, and they're continuing to help us as much as they can navigate this situation. I want to thank them publicly for all that they've done, and the key to this long term is to keep them in business and strong and, at the same time, have everybody share in what we're doing.

And we're very mindful to keep our wipeout us about pricing because it matters to consumers. And so this price value relationship will be held throughout the back half of the year in the same way that we've done it carefully in the first half. So I don't see us doing anything dramatic. We don't have plans to do anything dramatic that would be unexpected that should put a damper on sales. Of course, as Jeff said, we're not also assuming in our guidance a Black Swan event. So if anything terrible happen, obviously, things would change.

But it's really about our initiatives and what we're doing. And there is one thing I mentioned today that we haven't had a question on, and I have Sameer here with us. And I'd love to have him talk about our channel experience and how we're moving forward our online experience through the back half and also how AI plays in that strategy.

Thanks, Laura. I appreciate it. So Laura mentioned earlier, the results that we're seeing from our investments in AI, which are really exciting and I think one thing that I'd love to highlight that's important to understand is how we're delivering those results when it's been pretty well publicized that most companies aren't seeing that type of ROI with their AI investments.

And that's because AI is an amplifier. And we're seeing it succeed for us because of the strength we already have. And there's a few lot to highlight. One is our vertical integration. We own design, sourcing, manufacturing, last-mile delivery, and we're in a position to be able to apply AI across that entire value chain that puts us in a unique position there.

When you think about our multichannel model, all the different ways that we connect with our customers. It's not just an online play. It's not just a digital play. We connect with our customers through our stores, through our in-home programs and AI, again, allow us to amplify this experience in really exciting ways. And then category authority, you take AI, you pair it with our design expertise in home, our expertise in culinary. And again, that just differentiates us in terms of the experiences we can create from competitors that are creating more generic chatbots.

And all this is built on our decades and decades proprietary data that we've been building. Our DTC model has allowed us to -- and we have invested heavily to make our rich customer product operational data clean and actionable. And while you can say AI is the engine that's driving all this growth, data is the fuel that makes it work and our CRM and business data is making that engine run. And it's really exciting to see the results we've already delivered, and we think that's the yet to come.

And ladies and gentlemen, that does conclude our question-and-answer session. And I will now turn the conference back over to Laura Alber for closing comments.

Yes. Thank you, everyone, for joining, and we apologize the technical glitch. Unfortunately, I understand the operator temporary loss -- temporarily lost power. And thank you for paying with us. And I would just say, I really appreciate your support, your good questions, your interest.

And pleased if there's ever a question, go to our stores and see what we're doing because I think that the beauty of what we're doing at retail really tells the story. And there's only better things to come through the holiday season. And when we talk to you next time, we'll be in the thick of it, and we can't wait. So thank you for joining us today.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.