false 2020 Q2 0000719955--02-02 0.01 0.01 0.01 0.01 0.01 0.01 WILLIAMS SONOMA INC California Amounts are shown net of shares withheld for employee taxes.Primarily relates to our adoption of ASU 2014-09, Revenue from Contracts with Customers, in fiscal 2018.Excludes 105,436 incremental shares released due to achievement of performance conditions above target.Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $87.7 million and $80.7 million for the thirteen weeks ended August 4, 2019 and July 29, 2018, respectively, and approximately $174.3 million and $160.1 million for the twenty-six weeks ended August 4, 2019 and July 29, 2018, respectively.Relates to our adoption of ASU 2016-02, Leases, in fiscal 2019. See Note A. 0000719955 2019-02-04 2019-08-04 0000719955 2018-01-29 2018-07-29 0000719955 2018-07-29 0000719955 2019-08-04 0000719955 2019-02-03 0000719955 2019-05-06 2019-08-04 0000719955 2018-04-30 2018-07-29 0000719955 2018-01-29 2018-04-29 0000719955 2019-02-04 2019-05-05 0000719955 2019-09-01 0000719955 2018-01-28 0000719955 2019-05-05 0000719955 2018-04-29 0000719955 us-gaap:RestrictedStockUnitsRSUMember wsm:AchievementMember 2019-02-04 2019-08-04 0000719955 us-gaap:RestrictedStockUnitsRSUMember 2019-02-04 2019-08-04 0000719955 wsm:UnsecuredRevolvingLineOfCreditMember 2019-02-04 2019-08-04 0000719955 wsm:OptionAwardsMember 2019-02-04 2019-08-04 0000719955 wsm:StockAwardsMember 2019-02-04 2019-08-04 0000719955 wsm:OptionAwardsMember srt:MinimumMember 2019-02-04 2019-08-04 0000719955 srt:MinimumMember wsm:NonEmployeeMember 2019-02-04 2019-08-04 0000719955 wsm:ServiceBasedOptionAwardsMember 2019-02-04 2019-08-04 0000719955 wsm:PerformanceBasedStockAwardsMember 2019-02-04 2019-08-04 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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 4, 2019.
or

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to
Commission File Number:
001-14077
WILLIAMS-SONOMA, INC.
(Exact name of registrant as specified in its charter)

Delaware |  | 94-2203880
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
3250 Van Ness Avenue, San Francisco, CA |  | 94109
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (415)
421-7900
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class: |  | Trading Symbol(s): |  | Name of each exchange on which registered:
Common Stock, par value $.01 per share |  | WSM |  | New York Stock Exchange, Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
☒
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.

Large accelerated filer |  | ☒ |  | Accelerated filer |  | ☐
Non-accelerated filer |  | ☐ |  | Smaller reporting company |  | ☐
Emerging growth company |  | ☐ |  |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes
☐
No
☒
As of September 1, 2019, 78,022,213 shares of the registrant’s Common Stock were outstanding.

Table of Contents
WILLIAMS-SONOMA, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED AUGUST 4, 2019
PART I. FINANCIAL INFORMATION

|  |  |  | PAGE |
Item 1. |  | Financial Statements |  |  | 1 |
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  |  | 17 |
Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk |  |  | 22 |
Item 4. |  | Controls and Procedures |  |  | 22 |
|  | PART II. OTHER INFORMATION |  |  |
Item 1. |  | Legal Proceedings |  |  | 23 |
Item 1A. |  | Risk Factors |  |  | 23 |
Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds |  |  | 23 |
Item 3. |  | Defaults Upon Senior Securities |  |  | 23 |
Item 4. |  | Mine Safety Disclosures |  |  | 23 |
Item 5. |  | Other Information |  |  | 23 |
Item 6. |  | Exhibits |  |  | 24 |

Table of Contents
ITEM 1. FINANCIAL STATEMENTS
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
In thousands, except per share amounts |  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
Net revenues |  | $ | 1,370,814 |  |  | $ | 1,275,174 |  |  | $ | 2,611,946 |  |  | $ | 2,478,174 |
Cost of goods sold |  |  | 886,953 |  |  |  | 811,232 |  |  |  | 1,683,754 |  |  |  | 1,582,068 |
Gross profit |  |  | 483,861 |  |  |  | 463,942 |  |  |  | 928,192 |  |  |  | 896,106 |
Selling, general and administrative expenses |  |  | 397,696 |  |  |  | 389,776 |  |  |  | 767,895 |  |  |  | 755,390 |
Operating income |  |  | 86,165 |  |  |  | 74,166 |  |  |  | 160,297 |  |  |  | 140,716 |
Interest (income) expense, net |  |  | 2,669 |  |  |  | 1,584 |  |  |  | 4,922 |  |  |  | 2,785 |
Earnings before income taxes |  |  | 83,496 |  |  |  | 72,582 |  |  |  | 155,375 |  |  |  | 137,931 |
Income taxes |  |  | 20,848 |  |  |  | 20,869 |  |  |  | 40,071 |  |  |  | 41,050 |
Net earnings |  | $ | 62,648 |  |  | $ | 51,713 |  |  | $ | 115,304 |  |  | $ | 96,881 |
Basic earnings per share |  | $ | 0.80 |  |  | $ | 0.63 |  |  | $ | 1.47 |  |  | $ | 1.17 |
Diluted earnings per share |  | $ | 0.79 |  |  | $ | 0.62 |  |  | $ | 1.45 |  |  | $ | 1.16 |
Shares used in calculation of earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 78,488 |  |  |  | 82,342 |  |  |  | 78,586 |  |  |  | 82,867 |
Diluted |  |  | 79,470 |  |  |  | 83,167 |  |  |  | 79,633 |  |  |  | 83,519 |

See Notes to Condensed Consolidated Financial Statements.
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
In thousands |  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
Net earnings |  | $ | 62,648 |  |  | $ | 51,713 |  |  | $ | 115,304 |  |  | $ | 96,881 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | (1,251 | ) |  |  | (2,993 | ) |  |  | (4,260 | ) |  |  | (4,138 | )
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $(8), $333, $66 and $401 |  |  | (132 | ) |  |  | 6 |  |  |  | 72 |  |  |  | 1,129 |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax (tax benefit) of $10, $(21), $34 and $(24) |  |  | (160 | ) |  |  | — |  |  |  | (227 | ) |  |  | 49 |
Comprehensive income |  | $ | 61,105 |  |  | $ | 48,726 |  |  | $ | 110,889 |  |  | $ | 93,921 |

See Notes to Condensed Consolidated Financial Statements.
1
Table of Contents
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

In thousands, except per share amounts |  | August 4, 2019 |  |  | February 3, 2019 |  |  | July 29, 2018 |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |
Current assets |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 120,467 |  |  | $ | 338,954 |  |  | $ | 174,580 |
Accounts receivable, net |  |  | 111,114 |  |  |  | 107,102 |  |  |  | 106,322 |
Merchandise inventories, net |  |  | 1,187,728 |  |  |  | 1,124,992 |  |  |  | 1,099,888 |
Prepaid expenses |  |  | 117,017 |  |  |  | 101,356 |  |  |  | 74,811 |
Other current assets |  |  | 21,693 |  |  |  | 21,939 |  |  |  | 21,891 |
Total current assets |  |  | 1,558,019 |  |  |  | 1,694,343 |  |  |  | 1,477,492 |
Property and equipment, net |  |  | 913,059 |  |  |  | 929,635 |  |  |  | 919,689 |
Operating lease right-of-use assets |  |  | 1,208,528 |  |  |  | — |  |  |  | — |
Deferred income taxes, net |  |  | 38,803 |  |  |  | 44,055 |  |  |  | 60,960 |
Goodwill |  |  | 85,348 |  |  |  | 85,382 |  |  |  | 85,673 |
Other long-term assets, net |  |  | 65,924 |  |  |  | 59,429 |  |  |  | 64,163 |
Total assets |  | $ | 3,869,681 |  |  | $ | 2,812,844 |  |  | $ | 2,607,977 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |
Current liabilities |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 404,337 |  |  | $ | 526,702 |  |  | $ | 466,903 |
Accrued expenses |  |  | 127,137 |  |  |  | 163,559 |  |  |  | 112,381 |
Gift card and other deferred revenue |  |  | 283,108 |  |  |  | 290,445 |  |  |  | 263,546 |
Borrowings under revolving line of credit |  |  | 60,000 |  |  |  | — |  |  |  | — |
Income taxes payable |  |  | 13,065 |  |  |  | 21,461 |  |  |  | 35,529 |
Operating lease liabilities |  |  | 222,978 |  |  |  | — |  |  |  | — |
Other current liabilities |  |  | 76,254 |  |  |  | 72,645 |  |  |  | 69,589 |
Total current liabilities |  |  | 1,186,879 |  |  |  | 1,074,812 |  |  |  | 947,948 |
Deferred rent and lease incentives |  |  | 28,618 |  |  |  | 201,374 |  |  |  | 207,190 |
Long-term debt |  |  | 299,719 |  |  |  | 299,620 |  |  |  | 299,521 |
Long-term operating lease liabilities |  |  | 1,148,031 |  |  |  | — |  |  |  | — |
Other long-term liabilities |  |  | 84,831 |  |  |  | 81,324 |  |  |  | 72,330 |
Total liabilities |  |  | 2,748,078 |  |  |  | 1,657,130 |  |  |  | 1,526,989 |
Commitments and contingencies – See Note F |  |  |  |  |  |  |  |  |  |  |  |
Stockholders’ equity |  |  |  |  |  |  |  |  |  |  |  |
Preferred stock: $ .01 par value; 7,500 shares authorized; none issued |  |  | — |  |  |  | — |  |  |  | — |
Common stock: $ .01 par value; 253,125 shares authorized; 78,203, 78,813 and 80,988 shares issued and outstanding at August 4, 2019, February 3, 2019 and July 29, 2018, respectively |  |  | 783 |  |  |  | 789 |  |  |  | 810 |
Additional paid-in capital |  |  | 584,828 |  |  |  | 581,900 |  |  |  | 561,810 |
Retained earnings |  |  | 552,454 |  |  |  | 584,333 |  |  |  | 528,368 |
Accumulated other comprehensive loss |  |  | (15,488 | ) |  |  | (11,073 | ) |  |  | (9,742 | )
Treasury stock, at cost: 14, 2 and 2 shares as of August 4, 2019, February 3, 2019 and July 29, 2018, respectively |  |  | (974 | ) |  |  | (235 | ) |  |  | (258 | )
Total stockholders’ equity |  |  | 1,121,603 |  |  |  | 1,155,714 |  |  |  | 1,080,988 |
Total liabilities and stockholders’ equity |  | $ | 3,869,681 |  |  | $ | 2,812,844 |  |  | $ | 2,607,977 |

See Notes to Condensed Consolidated Financial Statements.
2
Table of Contents
WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

|  | Common Stock |  |  | Additional Paid-in |  |  | Retained |  |  | Accumulated Other Comprehensive |  |  | Treasury |  |  | Total Stockholders’ |
In thousands |  | Shares |  |  |  | Amount |  |  | Capital |  |  | Earnings |  |  | Income (Loss) |  |  | Stock |  |  | Equity |
Balance at February 3, 2019 |  |  | 78,813 |  |  | $ | 789 |  |  | $ | 581,900 |  |  | $ | 584,333 |  |  | $ | (11,073 | ) |  | $ | (235 | ) |  | $ | 1,155,714 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 52,656 |  |  |  | — |  |  |  | — |  |  |  | 52,656 |
Foreign currency translation adjustments |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,009 | ) |  |  | — |  |  |  | (3,009 | )
Change in fair value of derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 204 |  |  |  | — |  |  |  | 204 |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (67 | ) |  |  | — |  |  |  | (67 | )
Conversion/release of stock-based awards 1 |  |  | 571 |  |  |  | 5 |  |  |  | (25,298 | ) |  |  | — |  |  |  | — |  |  |  | (113 | ) |  |  | (25,406 | )
Repurchases of common stock |  |  | (576 | ) |  |  | (6 | ) |  |  | (2,874 | ) |  |  | (30,010 | ) |  |  | — |  |  |  | (958 | ) |  |  | (33,848 | )
Reissuance of treasury stock under stock-based compensation plans 1 |  |  | — |  |  |  | — |  |  |  | (332 | ) |  |  | — |  |  |  | — |  |  |  | 332 |  |  |  | — |
Stock-based compensation expense |  |  | — |  |  |  | — |  |  |  | 18,376 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 18,376 |
Dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (39,549 | ) |  |  | — |  |  |  | — |  |  |  | (39,549 | )
Adoption of accounting pronouncements 2 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,303 | ) |  |  | — |  |  |  | — |  |  |  | (3,303 | )
Balance at May 5, 2019 |  |  | 78,808 |  |  | $ | 788 |  |  | $ | 571,772 |  |  | $ | 564,127 |  |  | $ | (13,945 | ) |  | $ | (974 | ) |  | $ | 1,121,768 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 62,648 |  |  |  | — |  |  |  | — |  |  |  | 62,648 |
Foreign currency translation adjustments |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,251 | ) |  |  | — |  |  |  | (1,251 | )
Change in fair value of derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (132 | ) |  |  | — |  |  |  | (132 | )
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (160 | ) |  |  | — |  |  |  | (160 | )
Conversion/release of stock-based awards 1 |  |  | 31 |  |  |  | 1 |  |  |  | (482 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (481 | )
Repurchases of common stock |  |  | (636 | ) |  |  | (6 | ) |  |  | (3,170 | ) |  |  | (35,107 | ) |  |  | — |  |  |  | — |  |  |  | (38,283 | )
Stock-based compensation expense |  |  | — |  |  |  | — |  |  |  | 16,708 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 16,708 |
Dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (39,214 | ) |  |  | — |  |  |  | — |  |  |  | (39,214 | )
Balance at August 4, 2019 |  |  | 78,203 |  |  | $ | 783 |  |  | $ | 584,828 |  |  | $ | 552,454 |  |  | $ | (15,488 | ) |  | $ | (974 | ) |  | $ | 1,121,603 |

1
Amounts are shown net of shares withheld for employee taxes.
2
Relates to our adoption of ASU 2016-02, Leases, in fiscal 2019. See Note A.
See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

|  |  | Common Stock |  |  |  | Additional Paid-in |  |  |  | Retained |  |  |  | Accumulated Other Comprehensive |  |  |  | Treasury |  |  |  | Total Stockholders’ |
In thousands |  |  | Shares |  |  |  | Amount |  |  |  | Capital |  |  |  | Earnings |  |  |  | Income (Loss) |  |  |  | Stock |  |  |  | Equity |
Balance at January 28, 2018 |  |  | 83,726 |  |  | $ | 837 |  |  | $ | 562,814 |  |  | $ | 647,422 |  |  | $ | (6,782 | ) |  | $ | (725 | ) |  | $ | 1,203,566 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 45,168 |  |  |  | — |  |  |  | — |  |  |  | 45,168 |
Foreign currency translation adjustments |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,145 | ) |  |  | — |  |  |  | (1,145 | )
Change in fair value of derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,123 |  |  |  | — |  |  |  | 1,123 |
Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 49 |  |  |  | — |  |  |  | 49 |
Conversion/release of stock-based awards 1 |  |  | 228 |  |  |  | 3 |  |  |  | (7,213 | ) |  |  | — |  |  |  | — |  |  |  | (226 | ) |  |  | (7,436 | )
Repurchases of common stock |  |  | (732 | ) |  |  | (7 | ) |  |  | (3,437 | ) |  |  | (34,269 | ) |  |  | — |  |  |  | — |  |  |  | (37,713 | )
Reissuance of treasury stock under stock-based compensation plans 1 |  |  | — |  |  |  | — |  |  |  | (290 | ) |  |  | (358 | ) |  |  | — |  |  |  | 648 |  |  |  | — |
Stock-based compensation expense |  |  | — |  |  |  | — |  |  |  | 12,811 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,811 |
Dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (36,877 | ) |  |  | — |  |  |  | — |  |  |  | (36,877 | )
Adoption of accounting pronouncements 2 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 17,688 |  |  |  | — |  |  |  | — |  |  |  | 17,688 |
Balance at April 29, 2018 |  |  | 83,222 |  |  | $ | 833 |  |  | $ | 564,685 |  |  | $ | 638,774 |  |  | $ | (6,755 | ) |  | $ | (303 | ) |  | $ | 1,197,234 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 51,713 |  |  |  | — |  |  |  | — |  |  |  | 51,713 |
Foreign currency translation adjustments |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,993 | ) |  |  | — |  |  |  | (2,993 | )
Change in fair value of derivative financial instruments, net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 6 |  |  |  | — |  |  |  | 6 |
Conversion/release of stock-based awards 1 |  |  | 175 |  |  |  | 2 |  |  |  | (4,869 | ) |  |  | — |  |  |  | — |  |  |  | (32 | ) |  |  | (4,899 | )
Repurchases of common stock |  |  | (2,409 | ) |  |  | (25 | ) |  |  | (11,431 | ) |  |  | (125,649 | ) |  |  | — |  |  |  | — |  |  |  | (137,105 | )
Reissuance of treasury stock under stock-based compensation plans 1 |  |  | — |  |  |  | — |  |  |  | (72 | ) |  |  | (5 | ) |  |  | — |  |  |  | 77 |  |  |  | — |
Stock-based compensation expense |  |  | — |  |  |  | — |  |  |  | 13,497 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 13,497 |
Dividends declared |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (36,465 | ) |  |  | — |  |  |  | — |  |  |  | (36,465 | )
Balance at July 29, 2018 |  |  | 80,988 |  |  | $ | 810 |  |  | $ | 561,810 |  |  | $ | 528,368 |  |  | $ | (9,742 | ) |  | $ | (258 | ) |  | $ | 1,080,988 |

1
Amounts are shown net of shares withheld for employee taxes.
2
Primarily relates to our adoption of ASU 2014-09, Revenue from Contracts with Customers, in fiscal 2018.
See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|  | Twenty-six Weeks Ended |
In thousands |  | August 4, 2019 |  |  | July 29, 20 18 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net earnings |  | $ | 115,304 |  |  | $ | 96,881 |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 93,744 |  |  |  | 93,809 |
(Gain) loss on disposal/impairment of assets |  |  | (6 | ) |  |  | 4,466 |
Amortization of deferred lease incentives |  |  | (4,228 | ) |  |  | (13,210 | )
Non-cash lease expense |  |  | 105,437 |  |  |  | — |
Deferred income taxes |  |  | (8,428 | ) |  |  | (4,415 | )
Tax benefit related to stock-based awards |  |  | 14,110 |  |  |  | 9,711 |
Stock-based compensation expense |  |  | 35,401 |  |  |  | 26,526 |
Other |  |  | 92 |  |  |  | 166 |
Changes in: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (4,430 | ) |  |  | (13,567 | )
Merchandise inventories |  |  | (63,576 | ) |  |  | (45,159 | )
Prepaid expenses and other assets |  |  | (24,506 | ) |  |  | (29,217 | )
Accounts payable |  |  | (127,511 | ) |  |  | (1,735 | )
Accrued expenses and other liabilities |  |  | (30,677 | ) |  |  | (12,209 | )
Gift card and other deferred revenue |  |  | (7,173 | ) |  |  | 11,927 |
Deferred rent and lease incentives |  |  | — |  |  |  | 18,861 |
Operating lease liabilities |  |  | (111,782 | ) |  |  | — |
Income taxes payable |  |  | (8,407 | ) |  |  | (22,712 | )
Net cash (used in) provided by operating activities |  |  | (26,636 | ) |  |  | 120,123 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchases of property and equipment |  |  | (77,189 | ) |  |  | (80,021 | )
Other |  |  | 470 |  |  |  | 513 |
Net cash used in investing activities |  |  | (76,719 | ) |  |  | (79,508 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Payment of dividends |  |  | (75,453 | ) |  |  | (70,331 | )
Repurchases of common stock |  |  | (72,131 | ) |  |  | (174,818 | )
Borrowings under revolving line of credit |  |  | 60,000 |  |  |  | — |
Tax withholdings related to stock-based awards |  |  | (25,887 | ) |  |  | (12,335 | )
Net cash used in financing activities |  |  | (113,471 | ) |  |  | (257,484 | )
Effect of exchange rates on cash and cash equivalents |  |  | (1,661 | ) |  |  | 1,313 |
Net decrease in cash and cash equivalents |  |  | (218,487 | ) |  |  | (215,556 | )
Cash and cash equivalents at beginning of period |  |  | 338,954 |  |  |  | 390,136 |
Cash and cash equivalents at end of period |  | $ | 120,467 |  |  | $ | 174,580 |

See Notes to Condensed Consolidated Financial Statements.
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WILLIAMS-SONOMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION
These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The Condensed Consolidated Balance Sheets as of August 4, 2019 and July 29, 2018, the Condensed Consolidated Statements of Earnings, the Condensed Consolidated Statements of Comprehensive Income, and the Condensed Consolidated Statements of Stockholders’ Equity for the thirteen weeks and
twenty-six
weeks then ended and the Condensed Consolidated Statements of Cash Flows for the
twenty-six
weeks then ended, have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and twenty-six weeks then ended. Intercompany transactions and accounts have been eliminated. The balance sheet as of February 3, 2019, presented herein, has been derived from our audited Consolidated Balance Sheet included in our Annual Report on Form
10-K
for the fiscal year ended February 3, 2019.
The results of operations for the thirteen and
twenty-six
weeks ended August 4, 2019 are not necessarily indicative of the operating results of the full year.
Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. These financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form
10-K
for the fiscal year ended February 3, 2019.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02,
Leases
, which requires lessees to recognize a
right-of-use
asset and an operating lease liability for virtually all leases. This ASU, as amended, was effective for us beginning in the first quarter of fiscal 2019. The adoption of this ASU resulted in an increase in total long-term assets and total liabilities of approximately $1.2 billion, which includes an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and deferred lease incentives of approximately $0.2 billion, and an increase in
right-of-use
assets of approximately $1.2 billion on the first day of fiscal 2019. We also recorded an approximate $3.3 million, net of tax, reduction to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of this ASU. We have elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the financial statements. We have elected the package of practical expedients upon adoption, which permits us not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We have also elected not to separate lease and
non-lease
components for all of our leases and not to recognize a
right-of-use
asset and a lease liability for short-term leases. The adoption of this ASU did not materially impact our Condensed Consolidated Statement of Earnings.
In August 2017, the FASB issued ASU
2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
(Topic 815),
which expands and refines hedge accounting for both
non-financial
and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. Entities should apply the guidance to existing cash flow and net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings on the date of adoption. The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges where the hedge documentation needs to be modified. This ASU was effective for us in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows.
In August 2018, the FASB issued ASU
2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That Is a Service Contract.
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic
350-40
to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us in the first quarter of fiscal 2020. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows.
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NOTE B. BORROWING ARRANGEMENTS
Credit Facility
We have a credit facility, which provides for a $500,000,000 unsecured revolving line of credit (the “revolver”) and a $300,000,000 unsecured term loan facility (the “term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to January 8, 2020, elect to extend the maturity date for an additional year, subject to lender approval.
During the second quarter and for year-to-date fiscal 2019, we had borrowings of $
60,000,000
under the revolver (at a year-to-date weighted average interest rate of 3.42%), all of which was outstanding as of August 4, 2019. During the second quarter and for year-to-date fiscal 2018, we had no borrowings under the revolver. Additionally, as of August 4, 2019, $12,400,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.
As of August 4, 2019, we had $300,000,000
outstanding under our term loan (at a year-to-date weighted average interest rate of
3.57
%). The term loan matures on January 8, 2021, at which time all outstanding principal and any accrued interest must be repaid.
The interest rates under the credit facility are variable, and may be elected by us as: (i) the London Interbank Offer Rate plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1.0% for the term loan.
As of August 4, 2019, we were in compliance with our financial covenants under the credit facility and, based on current projections, we expect to remain in compliance throughout the next 12 months.
Letter of Credit Facilities
We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000. The letter of credit facilities contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility plus an applicable margin based on our leverage ratio. As of August 4, 2019, an aggregate of $7,356,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we have not taken legal title.
On August 23, 2019, we renewed all three of our letter of credit facilities for an aggregate of $70,000,000 and extended each of these facilities’ maturity dates until
August 23, 2020.
The latest expiration possible for any future letters of credit issued under the facilities is January 20, 2021.
NOTE C. STOCK-BASED COMPENSATION
Equity Award Programs
Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of 36,570,000 shares. As of August 4, 2019, there were approximately 5,345,000 shares available for future grant. Awards may be granted under the Plan to our officers, employees and
non-employee
members of the board of directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares.
Option Awards
Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years.
The exercise price of these option awards must not be less
than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain
option awards contain vesting acceleration clauses which are triggered upon certain events including, but not limited to, retirement, or a merger or similar corporate
event.
Stock Awards
Annual grants of stock awards are limited to 1,000,000 shares on a per person basis. Stock awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses which are triggered upon certain events including, but not limited to, retirement, or a merger or similar corporate event. Stock awards granted to
non-employee
Board members generally vest in one year.
Non-employee
Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a
non-employee
Board member).
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Table of Contents
Stock-Based Compensation Expense
During the thirteen and
twenty-six
weeks ended August 4, 2019, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $16,872,000 and $35,401,000, respectively. During the thirteen and
twenty-six
weeks ended July 29, 2018, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $
13,637,000
and $
26,526,000
, respectively.
Restricted Stock Units
The following table summarizes our restricted stock unit activity during the
twenty-six
weeks ended August 4, 2019:

|  | Shares |
Balance at February 3, 2019 |  |  | 3,012,923 |
Granted |  |  | 1,000,469 |
Granted, with vesting subject to performance conditions |  |  | 238,786 |
Released 1 |  |  | (954,327 | )
Cancelled |  |  | (299,687 | )
Balance at August 4, 2019 |  |  | 2,998,164 |
Vested plus expected to vest at August 4, 2019 |  |  | 3,158,678 |

1
Excludes 105,436 incremental shares released due to achievement of performance conditions above target.
NOTE D. EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive.
The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:

In thousands, except per share amounts |  | Net Earnings |  |  | Weighted Average Shares |  |  | Earnings Per Share |
Thirteen weeks ended August 4, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 62,648 |  |  |  | 78,488 |  |  | $ | 0.80 |
Effect of dilutive stock-based awards |  |  |  |  |  |  | 982 |  |  |  |  |
Diluted |  | $ | 62,648 |  |  |  | 79,470 |  |  | $ | 0.79 |
Thirteen weeks ended July 29, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 51,713 |  |  |  | 82,342 |  |  | $ | 0.63 |
Effect of dilutive stock-based awards |  |  |  |  |  |  | 825 |  |  |  |  |
Diluted |  | $ | 51,713 |  |  |  | 83,167 |  |  | $ | 0.62 |
Twenty-six weeks ended August 4, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 115,304 |  |  |  | 78,586 |  |  | $ | 1.47 |
Effect of dilutive stock-based awards |  |  |  |  |  |  | 1,047 |  |  |  |  |
Diluted |  | $ | 115,304 |  |  |  | 79,633 |  |  | $ | 1.45 |
Twenty-six weeks ended July 29, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 96,881 |  |  |  | 82,867 |  |  | $ | 1.17 |
Effect of dilutive stock-based awards |  |  |  |  |  |  | 652 |  |  |  |  |
Diluted |  | $ | 96,881 |  |  |  | 83,519 |  |  | $ | 1.16 |

Stock-based awards of 5,259 and 16,813 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended August 4, 2019, respectively, as their inclusion would be anti-dilutive. Stock-based awards of 17,179 and 15,986 were excluded from the computation of diluted earnings per share for the thirteen and
twenty-six
weeks ended July 29, 2018, respectively, as their inclusion would be anti-dilutive.
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Table of Contents
NOTE E. SEGMENT REPORTING
We identify our operating segments according to how our business activities are managed and evaluated.
Prior to fiscal 2019, we managed
e-commerce
merchandise strategies, which included the results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, separately from our retail business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the
e-commerce
reportable segment. Also, prior to fiscal 2019, we managed retail merchandise strategies, which included the results of our retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, separately from our
e-commerce
business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the retail reportable segment.
Beginning in fiscal 2019, due to the convergence of our
e-commerce
and retail businesses and to better align with how we manage our omni-channel business, we have combined the results of our
e-commerce
and retail merchandise strategies at the overall brand level. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment.
The following table summarizes our net revenues by brand for the thirteen and
twenty-six
weeks ended August 4, 2019 and July 29, 2018. We have updated fiscal 2018 results to conform with the current year presentation.

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
In thousands |  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
Pottery Barn |  | $ | 524,847 |  |  | $ | 506,460 |  |  | $ | 1,016,973 |  |  | $ | 996,831 |
West Elm |  |  | 357,574 |  |  |  | 301,213 |  |  |  | 667,057 |  |  |  | 574,562 |
Williams Sonoma |  |  | 191,374 |  |  |  | 195,178 |  |  |  | 386,267 |  |  |  | 396,156 |
Pottery Barn Kids and Teen |  |  | 227,853 |  |  |  | 213,807 |  |  |  | 404,899 |  |  |  | 394,203 |
Other 1 |  |  | 69,166 |  |  |  | 58,516 |  |  |  | 136,750 |  |  |  | 116,422 |
Total 2 |  | $ | 1,370,814 |  |  | $ | 1,275,174 |  |  | $ | 2,611,946 |  |  | $ | 2,478,174 |

1
Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham.

| 2 | Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $87.7 million and $80.7 million for the thirteen weeks ended August 4, 2019 and July 29, 2018, respectively, and approximately $ 174.3 million and $160.1million for the twenty-six weeks ended August 4,2019 and July 29, 2018, respectively.

Long-lived assets by geographic location are as follows:

In thousands |  | August 4, 2019 |  |  | July 29, 2018 |
U.S. |  | $ | 2,146,995 |  |  | $ | 1,077,547 |
International |  |  | 164,667 |  |  |  | 52,938 |
Total |  | $ | 2,311,662 |  |  | $ | 1,130,485 |

NOTE F. COMMITMENTS AND CONTINGENCIES
We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Condensed Consolidated Financial Statements taken as a whole.
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NOTE G. STOCK REPURCHASE PROGRAM AND DIVIDENDS
Stock Repurchase Program
During the thirteen weeks ended August 4, 2019, we repurchased 635,526 shares of our common stock at an average cost of $60.24 per share for a total cost of approximately $
38,283
,000. During the
twenty-six
weeks ended August 4, 2019, we repurchased 1,228,622 shares of our common stock at an average cost of $58.71 per share for a total cost of approximately $
72,131
,000
. As of August 4, 2019, there was $651,685,000 remaining under our current stock repurchase program. As of August 4, 2019, we held treasury stock of $
974
,000 that represents the cost of shares available for issuance that is intended to satisfy future stock-based award settlements in certain foreign jurisdictions.
During the thirteen weeks ended July 29, 2018, we repurchased
2,409,437
shares of our common stock at an average cost of $
56.90
per share for a total cost of approximately $
137,105,000
. During the
twenty-six
weeks ended July 29, 2018, we repurchased
3,141,367
shares of our common stock at an average cost of $
55.65
per share for a total cost of approximately $
174,818,000
. In addition, as of July 29, 2018, we held treasury stock of $
258
,000
that represents the cost of shares available for issuance that is intended to satisfy future stock-based award settlements in certain foreign jurisdictions.
Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions.
Dividends
We declared cash dividends of $
0.48
and $0.43 per common share during the thirteen weeks ended August 4, 2019 and July 29, 2018, respectively. We declared cash dividends of $0.96 and $0.86 per common share during the
twenty-six
weeks ended August 4, 2019 and July 29, 2018, respectively. Our quarterly cash dividend may be limited or terminated at any time.
NOTE H. DERIVATIVE FINANCIAL INSTRUMENTS
We have businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with these derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with Accounting Standards Codification (“ASC”) 815,
Derivatives and Hedging
.
Cash Flow Hedges
We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of August 4, 2019, we expect to reclassify a net
pre-tax
gain of approximately $130,000 from OCI to cost of goods sold over the next 12 months.
We also enter into
non-designated
foreign currency forward contracts (to sell Australian dollars and British pounds and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses.
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As of August 4, 2019 and July 29, 2018, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows:

In thousands |  | August 4, 2019 |  |  | July 29, 2018 |
Contracts designated as cash flow hedges |  | $ | 6,000 |  |  | $ | 20,800 |
Contracts not designated as cash flow hedges |  | $ | — |  |  | $ | 6,600 |

Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for the thirteen and
twenty-six
weeks ended August 4, 2019 and July 29, 2018.
The effect of derivative instruments in our Condensed Consolidated Financial Statements during the thirteen and
twenty-six
weeks ended August 4, 2019 and July 29, 2018,
pre-tax,
was as follows:

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
|  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
In thousands |  | Cost of goods sold |  |  | Selling, general and administrative expenses |  |  | Cost of goods sold |  |  | Selling, general and administrative expenses |  |  | Cost of goods sold |  |  | Selling, general and administrative expenses |  |  | Cost of goods sold |  |  | Selling, general and administrative expenses |
Line items presented in the Condensed Consolidated Statement of Earnings in which the effects of derivatives are recorded |  | $ | 886,953 |  |  | $ | 397,696 |  |  | $ | 811,232 |  |  | $ | 389,776 |  |  | $ | 1,683,754 |  |  | $ | 767,895 |  |  | $ | 1,582,068 |  |  | $ | 755,390 |
Gain (loss) recognized in income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as cash flow hedges |  | $ | 187 |  |  | $ | — |  |  | $ | (21 | ) |  | $ | 50 |  |  | $ | 295 |  |  | $ | — |  |  | $ | (73 | ) |  | $ | 33 |
Derivatives not designated as hedging instruments |  | $ | — |  |  | $ | 24 |  |  | $ | — |  |  | $ | 1,183 |  |  | $ | — |  |  | $ | 18 |  |  | $ | — |  |  | $ | 3,943 |

The fair values of our derivative financial instruments are presented below according to their classification in our Condensed Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note I.

In thousands |  | August 4, 2019 |  |  | July 29, 2018 |
Derivatives designated as cash flow hedges: |  |  |  |  |  |  |  |
Other current assets |  | $ | 142 |  |  | $ | 690 |
Other long-term assets |  | $ | — |  |  | $ | 57 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Other current assets |  | $ | — |  |  | $ | 5 |

We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210,
Balance Sheet
, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement.
NOTE I. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We determine the fair value of financial and
non-financial
assets and liabilities using the fair value hierarchy established by ASC 820,
Fair Value Measurement
, which defines three levels of inputs that may be used to measure fair value, as follows:

| • | Level 1: inputs which include quoted prices in active markets for identical assets or liabilities;

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| • | Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and

| • | Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability.

The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets.
Long-term Debt
As of August 4, 2019, the fair value of our long-term debt approximates its carrying value and is based on observable Level 2 inputs, primarily market interest rates for instruments with similar maturities.
Foreign Currency Derivatives and Hedging Instruments
We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use
mid-market
pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates.
The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and
non-performance
to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements.
Long-lived Assets
We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We measure
right-of-use
assets on a nonrecurring basis using Level 2 unobservable inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk.
There were no transfers between Level 1, 2 or 3 categories during the thirteen and
twenty-six
weeks ended August 4, 2019 or July 29, 2018.
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NOTE J. ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows:

In thousands |  | Foreign Currency Translation |  |  | Cash Flow Hedges |  |  | Accumulated Other Comprehensive Income (Loss) |
Balance at February 3, 2019 |  | $ | (11,259 | ) |  | $ | 186 |  |  | $ | (11,073 | )
Foreign currency translation adjustments |  |  | (3,009 | ) |  |  |  |  |  |  | (3,009 | )
Change in fair value of derivative financial instruments |  |  | — |  |  |  | 204 |  |  |  | 204 |
Reclassification adjustment for realized (gain) loss on derivative financial instruments |  |  | — |  |  |  | (67 | ) |  |  | (67 | )
Other comprehensive income (loss) |  |  | (3,009 | ) |  |  | 137 |  |  |  | (2,872 | )
Balance at May 5, 2019 |  |  | (14,268 | ) |  |  | 323 |  |  |  | (13,945 | )
Foreign currency translation adjustments |  |  | (1,251 | ) |  |  | — |  |  |  | (1,251 | )
Change in fair value of derivative financial instruments |  |  | — |  |  |  | (132 | ) |  |  | (132 | )
Reclassification adjustment for realized (gain) loss on derivative financial instruments |  |  | — |  |  |  | (160 | ) |  |  | (160 | )
Other comprehensive income (loss) |  |  | (1,251 | ) |  |  | (292 | ) |  |  | (1,543 | )
Balance at August 4, 2019 |  | $ | (15,519 | ) |  | $ | 31 |  |  | $ | (15,488 | )
Balance at January 28, 2018 |  | $ | (6,227 | ) |  | $ | (555 | ) |  | $ | (6,782 | )
Foreign currency translation adjustments |  |  | (1,145 | ) |  |  | — |  |  |  | (1,145 | )
Change in fair value of derivative financial instruments |  |  | — |  |  |  | 1,123 |  |  |  | 1,123 |
Reclassification adjustment for realized (gain) loss on derivative financial instruments |  |  | — |  |  |  | 49 |  |  |  | 49 |
Other comprehensive income (loss) |  |  | (1,145 | ) |  |  | 1,172 |  |  |  | 27 |
Balance at April 29, 2018 |  |  | (7,372 | ) |  |  | 617 |  |  |  | (6,755 | )
Foreign currency translation adjustments |  |  | (2,993 | ) |  |  | — |  |  |  | (2,993 | )
Change in fair value of derivative financial instruments |  |  | — |  |  |  | 6 |  |  |  | 6 |
Other comprehensive income (loss) |  |  | (2,993 | ) |  |  | 6 |  |  |  | (2,987 | )
Balance at July 29, 2018 |  | $ | (10,365 | ) |  | $ | 623 |  |  | $ | (9,742 | )

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NOTE K. ACQUISITION OF OUTWARD, INC.
On December 1, 2017, we acquired Outward, Inc., a
3-D
imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,812,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of
four years
from the acquisition date, contingent upon their continued service during that time, and $4,498,000 primarily represents settlement of
pre-existing
obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post-combination compensation expense as they are earned.
The purchase consideration has been allocated based on estimates of the fair value of identifiable assets acquired and liabilities assumed, as set forth in the table below.

Working capital and other assets |  | $ | 718,000 |
Property and equipment, net |  |  | 2,049,000 |
Intangible assets |  |  | 18,300,000 |
Liabilities |  |  | (6,886,000 | )
Total identifiable net assets acquired |  | $ | 14,181,000 |
Goodwill |  |  | 66,631,000 |
Total purchase consideration |  | $ | 80,812,000 |

Intangible assets acquired primarily represent
3-D
imaging data and core intellectual property, which are being amortized over a useful life of
four years
. Goodwill is primarily attributable to expected synergies as a result of the acquisition, which include the leverage of acquired technology and talent to drive improved conversion, cost savings and operating efficiencies. None of the goodwill will be deductible for income tax purposes.
Outward, Inc. is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Condensed Consolidated Financial Statements from the acquisition date.
NOTE L. REVENUE
The majority of our revenues are generated from sales of merchandise to our customers through our
e-commerce
websites, our direct mail catalogs, or at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. The remainder of our revenues are primarily generated from sales to our franchisees and other wholesale transactions, breakage income related to stored-value cards, and incentives received from credit card issuers in connection with our private label and
co-branded
credit cards.
We recognize revenue as control of promised goods or services are transferred to our customers. We record a liability at each period end where we have an obligation to transfer goods or services for which we have received consideration or have a right to consideration. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services.
See Note E for a discussion of our net revenues by operating segment.
Merchandise Sales
Revenues from the sale of our merchandise through our
e-commerce
websites, at our retail stores, as well as to our franchisees and wholesale customers are, in each case, recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the end customer. For merchandise delivered to the customer, control is transferred when either delivery has been completed, or we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation.
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Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of August 4, 2019 and July 29,2018, we recorded a liability for expected sales returns of approximately $28,778,000 and $
30,432,000
within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $10,685,000 and $
11,036,000
within other current assets in our Condensed Consolidated Balance Sheet.
Stored-value Cards
We issue stored-value cards that may be redeemed on future merchandise purchases. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards
(“breakage
”
) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately
four years
, the majority of which is recognized within one year of the card issuance. Breakage revenue is not material to our Condensed Consolidated Financial Statements.
Credit Card Incentives
We enter into agreements with credit card issuers in connection with our private label and
co-branded
credit cards whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to end customers. Services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term.
Customer Loyalty Programs
We have customer loyalty programs which allow members to earn points for each qualifying purchase. Points earned enable members to receive certificates that may be redeemed on future merchandise purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Condensed Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Condensed Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within 6 months from issuance.
Deferred Revenue
We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, and incentives received from credit card issuers. As of August 4, 2019, we held $288,564,000 in gift card and other deferred revenue on our Condensed Consolidated Balance Sheet, substantially all of which will be recognized as revenue within the next 12 months.
NOTE M. LEASES
We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations with initial terms generally ranging from 2 to 22 years. We determine whether an arrangement is or contains a lease at inception by evaluating whether an identified asset exists that we control over the term of the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset.
The rental payments for our store leases are typically structured as either: minimum rent; minimum rate with stated increases or increases based on a future index; rent based on a percentage of store sales; or rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include: rent payments that are based on a percentage of sales; contingent payments until the resolution of the contingency is reasonably certain; and rent increases based on a future index.
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Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and
non-lease
components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a
right-of-use
asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and
right-of-use
asset when a change to our future minimum lease payments occurs. Key assumptions and judgements included in the determination of the lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal and termination options.
Many of our leases contain renewal options and early termination options. The option periods are generally not included in the lease term used to measure our lease liabilities and
right-of-use
assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and
right-of-use
asset when we are reasonably certain to exercise a renewal or early termination option.
Discount Rate
Our leases do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.
The components of lease costs for the thirteen and
twenty-six
weeks ended August 4, 2019 are as follows:

In thousands |  | Thirteen weeks ended August 4, 2019 |  |  | Twenty-six weeks ended August 4, 2019 |
Operating lease costs |  | $ | 66,143 |  |  | $ | 131,111 |
Variable lease costs |  |  | 5,129 |  |  |  | 9,763 |
Total lease costs |  | $ | 71,272 |  |  | $ | 140,874 |

Sublease income and short-term lease costs were not material to us for the thirteen and
twenty-six
weeks ended August 4, 2019.
Supplemental cash flow information related to our leases for the thirteen and
twenty-six
weeks ended August 4, 2019 are as follows:

In thousands |  | Thirteen weeks ended August 4, 2019 |  |  | Twenty-six weeks ended August 4, 2019 |
Cash paid for amounts included in the measurement of operating lease liabilities |  | $ | 71,580 |  |  | $ | 141,394 |
Net additions to right-of-use assets |  |  | 63,871 |  |  |  | 82,393 |

Weighted average remaining operating lease term and incremental borrowing rate as of August 4, 2019 are as follows:

Weighted average remaining lease term (years) |  |  | 7.55 |
Weighted average incremental borrowing rate |  |  | 3.86 | %

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As of August 4, 2019, the future minimum lease payments under our operating lease liabilities are as follows:

In thousands |  |  |
Remaining fiscal 2019 |  | $ | 143,927 |
Fiscal 2020 |  |  | 265,375 |
Fiscal 2021 |  |  | 233,052 |
Fiscal 2022 |  |  | 201,593 |
Fiscal 2023 |  |  | 170,283 |
Fiscal 2024 |  |  | 146,808 |
Fiscal 2025 and thereafter |  |  | 441,650 |
Total lease payments |  |  | 1,602,688 |
Less interest |  |  | (231,679 | )
Total operating lease liability |  |  | 1,371,009 |
Less current operating lease liability |  |  | (222,978 | )
Total non-current operating lease liability |  | $ | 1,148,031 |

As previously disclosed in our 2018 Annual Report on Form
10-K
and under the previous lease accounting standard, future minimum lease payments under
non-cancellable
operating leases as of February 3, 2019 were as follows:

In thousands |  |  |
Fiscal 2019 |  | $ | 292,387 |
Fiscal 2020 |  |  | 262,429 |
Fiscal 2021 |  |  | 225,755 |
Fiscal 2022 |  |  | 190,263 |
Fiscal 2023 |  |  | 160,308 |
Thereafter |  |  | 559,802 |
Total |  | $ | 1,690,944 |

Memphis-Based Distribution Facility
In fiscal 2015, we entered into an agreement with a partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties to lease a distribution facility in Memphis, Tennessee through July 2017. In fiscal 2017, we exercised the first of two
one-year
extensions available under the lease to extend the term through July 2018. Subsequently, in fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additional
one-year
renewal options. Rental payments under this agreement including applicable taxes, insurance and maintenance expenses were not material to us for the thirteen or
twenty-six
weeks ended August 4, 2019 or July 29, 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or are proven incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include statements related to: our strategic initiatives; our merchandise strategies; our growth strategies for our brands; our beliefs regarding the resolution of current lawsuits, claims and proceedings; our stock repurchase program; our expectations regarding our cash flow hedges and foreign currency risks; our planned use of cash; our future compliance with the financial covenants contained in our credit facilities; our belief that our cash on-hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months; our beliefs regarding our exposure to foreign currency exchange rate fluctuations; and our beliefs regarding seasonal patterns associated with our business, as well as statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in this document and our Annual Report on Form 10-K for the year ended February 3, 2019, and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.
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OVERVIEW
Williams-Sonoma, Inc. is a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies – Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham – are marketed through e-commerce websites, direct-mail catalogs and 623 stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In December 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry.
The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources for the thirteen weeks ended August 4, 2019 (“second quarter of fiscal 2019”), as compared to the thirteen weeks ended July 29, 2018 (“second quarter of fiscal 2018”) and the twenty-six weeks ended August 4, 2019 (“year-to-date fiscal 2019”), as compared to the twenty-six weeks ended July 29, 2018 (“year-to-date fiscal 2018”), should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto. All explanations of changes in operational results are discussed in order of magnitude.
Second Quarter of Fiscal 2019 Financial Results
Net revenues in the second quarter of fiscal 2019 increased by $95,640,000, or 7.5%, compared to the second quarter of fiscal 2018, with comparable brand revenue growth of 6.5%. This growth was primarily driven by West Elm, Pottery Barn and Pottery Barn Kids and Teen. Net revenue growth included an 8.7% increase in international revenue primarily related to our franchise operations.
West Elm had a strong quarter with comparable revenue growth accelerating to 17.5%, on top of 9.5% in the second quarter of fiscal 2018. These results were driven by strong execution across all our key growth strategies. In Pottery Barn, comparable revenue growth accelerated to 4.2% and continued to be led by furniture, with strength in our proprietary upholstery business. In Pottery Barn Kids and Teen, comparable revenue growth was 3.7%. Our baby business continues to be an important growth initiative, and during the quarter, we saw significant growth across our back-to-school offerings and foundational furniture categories. Our emerging brands, Rejuvenation and Mark & Graham drove another quarter of solid growth. In the Williams Sonoma brand, while we are disappointed with the 1.1% comparable revenue decline this quarter, we did have comparable revenue growth in our full-price business and new introductions were solid. However, they weren’t strong enough to overcome the clearance volume, misses in tabletop and the very successful launch of Instant Pot last year. In the second quarter of fiscal 2019, diluted earnings per share was $0.79 (which included a $0.07 impact related to Outward, Inc., and a $0.01 impact from employment-related expenses) versus $0.62 in the second quarter of fiscal 2018 (which included a $0.05 impact related to Outward, Inc., a $0.05 impact related to impairment and early lease termination charges, a $0.03 impact associated with tax expense from U.S. Tax Reform, and a $0.02 impact from employment-related expenses). We also returned $76,868,000 to our stockholders through dividends and stock repurchases.
Operationally during the second quarter of fiscal 2019, we also made progress across our strategic initiatives of driving growth through cross-brand initiatives and improving the customer experience through technology innovation and operational improvements.
A key driver of our accelerated growth this quarter was the focus on our portfolio of brands. The Key continues to be an impactful driver of customer engagement and revenue growth as total membership continued to grow during the quarter. Our cross-brand Business-to-Business division also delivered strong growth this quarter and we are aggressively working to put in place the cross-brand, cross-functional infrastructure to support our growth, as well as expanding our large-scale project pipeline with more strategic partnerships across industry verticals.
Also, during the quarter, we made substantial progress on our ongoing efforts to improve the customer experience. In technology innovation, we have significantly expanded our technology experimentation agenda with the launch of many new capabilities over the last six months, across each of our brands, to deliver more engaging, content-rich customer experiences. In our supply chain this quarter, we launched furniture delivery scheduling capability which gives customers the option to schedule their delivery on their mobile devices. We added further enhancements such as email and mobile notifications to our order tracking capability launched in the first quarter. And, in the second quarter, we successfully opened our West Elm West Coast distribution center in Fontana, California, which we expect to be fully operational in September. And finally, our in-house manufacturing operation continues to be a strategic advantage for us, where shipments are up 30% year-over-year as we continue to drive operational improvements to enable more domestic production, which helps to mitigate the impact of the China tariffs.
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For the remainder of fiscal 2019 we plan to drive cross-brand initiatives that leverage our platform, and we plan to bring technology innovation and continued improvement in customer experience. We have a strong foundation to support the execution of our initiatives throughout the remainder of fiscal 2019 and beyond, as well as to deliver long-term shareholder value.
NET REVENUES
Net revenues primarily consist of sales of merchandise to our customers through our e-commerce websites, direct mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our stored-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards.
Net revenues in the second quarter of fiscal 2019 increased by $95,640,000, or 7.5%, compared to the second quarter of fiscal 2018, with comparable brand revenue growth of 6.5%. This growth was primarily driven by West Elm, Pottery Barn and Pottery Barn Kids and Teen. Net revenue growth included an 8.7% increase in international revenue primarily related to our franchise operations.
Net revenues for year-to-date fiscal 2019 increased by $133,772,000, or 5.4%, compared to year-to-date fiscal 2018, with comparable brand revenue growth of 5.1%. This growth was primarily driven by West Elm, Pottery Barn and our franchise operations. Net revenue growth included an 8.8% increase in international revenue primarily related to our franchise operations.
Comparable Brand Revenue
Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct mail catalogs, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand.

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
Comparable brand revenue growth (decline) |  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
Pottery Barn |  |  | 4.2 | % |  |  | 2.0 | % |  |  | 2.9 | % |  |  | 2.3 | %
West Elm |  |  | 17.5 | % |  |  | 9.5 | % |  |  | 14.8 | % |  |  | 9.2 | %
Williams Sonoma |  |  | (1.1 | %) |  |  | 1.6 | % |  |  | (1.3 | %) |  |  | 3.6 | %
Pottery Barn Kids and Teen |  |  | 3.7 | % |  |  | 5.7 | % |  |  | 2.6 | % |  |  | 5.5 | %
Total 1 |  |  | 6.5 | % |  |  | 4.6 | % |  |  | 5.1 | % |  |  | 5.1 | %

1 | Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham.

STORE DATA

|  | Store Count |  |  | Average Leased Square Footage Per Store |
|  | May 5, 2019 |  |  | Openings |  |  | Closings |  |  | August 4, 2019 |  |  | July 29, 2018 |  |  | August 4, 2019 |  |  | July 29, 2018 |
Williams Sonoma |  |  | 219 |  |  |  | — |  |  |  | (1 | ) |  |  | 218 |  |  |  | 226 |  |  |  | 6,800 |  |  |  | 6,800 |
Pottery Barn |  |  | 205 |  |  |  | 2 |  |  |  | (2 | ) |  |  | 205 |  |  |  | 205 |  |  |  | 14,400 |  |  |  | 13,900 |
West Elm |  |  | 113 |  |  |  | — |  |  |  | (1 | ) |  |  | 112 |  |  |  | 109 |  |  |  | 13,100 |  |  |  | 13,100 |
Pottery Barn Kids |  |  | 78 |  |  |  | — |  |  |  | — |  |  |  | 78 |  |  |  | 84 |  |  |  | 7,500 |  |  |  | 7,400 |
Rejuvenation |  |  | 10 |  |  |  | — |  |  |  | — |  |  |  | 10 |  |  |  | 8 |  |  |  | 8,500 |  |  |  | 8,800 |
Total |  |  | 625 |  |  |  | 2 |  |  |  | (4 | ) |  |  | 623 |  |  |  | 632 |  |  |  | 10,600 |  |  |  | 10,300 |
Store selling square footage at period-end |  |  |  |  |  |  |  |  |  |  | 4,124,000 |  |  |  | 4,058,000 |
Store leased square footage at period-end |  |  |  |  |  |  |  |  |  |  | 6,587,000 |  |  |  | 6,504,000 |

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COST OF GOODS SOLD

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
In thousands |  | August 4, 2019 |  |  | % Net Revenues |  |  | July 29, 2018 |  |  | % Net Revenues |  |  | August 4, 2019 |  |  | % Net Revenues |  |  | July 29, 2018 |  |  | % Net Revenues |
Cost of goods sold 1 |  | $ | 886,953 |  |  |  | 64.7 | % |  | $ | 811,232 |  |  |  | 63.6 | % |  | $ | 1,683,754 |  |  |  | 64.5 | % |  | $ | 1,582,068 |  |  |  | 63.8 | %

1 | Includes total occupancy expenses of $176,814,000 and $170,798,000 for the second quarter of fiscal 2019 and the second quarter of fiscal 2018, respectively, and $350,667,000 and $344,283,000 for year-to-date fiscal 2019 and year-to-date fiscal 2018, respectively.

Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials.
Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution related administrative expenses, are recorded in selling, general and administrative expenses.
Second Quarter of Fiscal 2019 vs. Second Quarter of Fiscal 2018
Cost of goods sold increased by $75,721,000, or 9.3%, in the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Cost of goods sold as a percentage of net revenues increased to 64.7% in the second quarter of fiscal 2019 from 63.6% in the second quarter of fiscal 2018. This increase was primarily driven by increased shipping costs due to a larger mix of furniture sales, the incremental impact of the implementation of the List 3 China tariffs, as well as a growing share of our business coming from franchise and trade, partially offset by the leverage of occupancy costs.
Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018
Cost of goods sold increased by $101,686,000, or 6.4%, for year-to-date fiscal 2019 compared to year-to-date fiscal 2018. Cost of goods sold as a percentage of net revenues increased to 64.5% for year-to-date fiscal 2019 from 63.8% for year-to-date fiscal 2018. This increase was primarily driven by increased shipping costs due to a larger mix of furniture sales, the incremental impact of the implementation of the List 3 China tariffs, as well as a growing share of our business coming from franchise and trade, partially offset by the leverage of occupancy costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

|  | Thirteen Weeks Ended |  |  | Twenty-six Weeks Ended |
In thousands |  | August 4, 2019 |  |  | % Net Revenues |  |  | July 29, 2018 |  |  | % Net Revenues |  |  | August 4, 2019 |  |  | % Net Revenues |  |  | July 29, 2018 |  |  | % Net Revenues |
Selling, general and administrative expenses |  | $ | 397,696 |  |  |  | 29.0 | % |  | $ | 389,776 |  |  |  | 30.6 | % |  | $ | 767,895 |  |  |  | 29.4 | % |  | $ | 755,390 |  |  |  | 30.5 | %

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third party credit card processing and other general expenses.
Second Quarter of Fiscal 2019 vs. Second Quarter of Fiscal 2018
Selling, general and administrative expenses increased by $7,920,000, or 2.0%, in the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.0% in the second quarter of fiscal 2019 from 30.6% in the second quarter of fiscal 2018. This decrease as a percentage of net revenues was driven by the leverage of employment, advertising and general expenses driven by higher sales and the continued benefits of our cost savings initiatives across the business, as well as our overall expense discipline.
Year-to-Date Fiscal 2019 vs. Year-to-Date Fiscal 2018
Selling, general and administrative expenses increased by $12,505,000, or 1.7%, for year-to-date fiscal 2019 compared to year-to-date fiscal 2018. Selling, general and administrative expenses as a percentage of net revenues decreased to 29.4% for year-to-date fiscal 2019 from 30.5% for year-to-date fiscal 2018. This decrease as a percentage of net revenues was driven by the leverage of advertising, employment and general expenses driven by higher sales and the continued benefits of our cost savings initiatives across the business, as well as our overall expense discipline.
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INCOME TAXES
The effective tax rate was 25.8% for year-to-date fiscal 2019, and 29.8% for year-to-date of fiscal 2018. Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017 provided us with up to one year to finalize our measurement of the income tax effects of the 2017 Tax Cuts and Jobs Act (“the Tax Act”) on our fiscal year ended January 28, 2018. The year-over-year decrease in the effective tax rate was primarily due to the adjustment of the provisional transition tax and the adjustment to the re-measurement of our deferred tax liabilities under SAB 118 in the first two quarters of fiscal 2018.
LIQUIDITY AND CAPITAL RESOURCES
As of August 4, 2019, we held $120,467,000 in cash and cash equivalents, the majority of which was held in interest bearing demand deposit accounts and money market funds, of which $98,512,000 was held by our international subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods.
In fiscal 2019, we plan to use our cash resources to fund our inventory and inventory related purchases, advertising and marketing initiatives, property and equipment purchases, stock repurchases and dividend payments. In addition to our cash balances on hand, we have a $500,000,000 unsecured revolving line of credit (“the revolver”) and a $300,000,000 unsecured term loan facility (“the term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. For year-to-date fiscal 2019, we had borrowings of $60,000,000 under the revolver. For year-to-date fiscal 2018, we had no borrowings under the revolver. As of August 4, 2019, we had $300,000,000 outstanding under our term loan. The term loan matures on January 8, 2021, at which point all outstanding principal and any accrued interest must be repaid. Additionally, as of August 4, 2019, a total of $12,400,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs.
As of August 4, 2019, we had three unsecured letter of credit reimbursement facilities for a total of $70,000,000, of which $7,356,000 was outstanding. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we have not taken legal title. On August 23, 2019, we renewed all three of our letter of credit facilities for substantially similar terms.
We are currently in compliance with all of our financial covenants under the credit facility and, based on our current projections, we expect to remain in compliance throughout the next 12 months. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months.
Cash Flows from Operating Activities
For year-to-date fiscal 2019, net cash used in operating activities was $26,636,000 compared to net cash provided by operating activities of $120,123,000 for year-to-date fiscal 2018. For year-to-date fiscal 2019, net cash used in operating activities was primarily attributable to a decrease in accounts payable and an increase in merchandise inventories, partially offset by net earnings adjusted for non-cash items. Net cash used in operating activities for year-to-date fiscal 2019 compared to net cash provided by operating activities for year-to-date fiscal 2018 was primarily due to a year-over-year reduction in accounts payable due to the timing of payments.
Cash Flows from Investing Activities
For year-to-date fiscal 2019, net cash used in investing activities was $76,719,000 compared to $79,508,000 for year-to-date fiscal 2018, and was primarily attributable to purchases of property and equipment.
Cash Flows from Financing Activities
For year-to-date fiscal 2019, net cash used in financing activities was $113,471,000 compared to $257,484,000 for year-to-date fiscal 2018. For year-to-date fiscal 2019, net cash used in financing activities was primarily attributable to the payment of dividends, repurchases of common stock and tax withholdings related to stock-based awards, partially offset by borrowings under our revolver. The decrease in cash used in financing activities for year-to-date fiscal 2019 compared to year-to-date fiscal 2018 was primarily attributable to a decrease in repurchases of common stock, as well as an increase in borrowings under our revolver.
Stock Repurchase Program and Dividends
See Note G to our Condensed Consolidated Financial Statements,
Stock Repurchase Program and Dividends,
within Item 1 of this Quarterly Report on Form 10-Q for further information.
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Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates. During the second quarter of fiscal 2019, other than those discussed in Notes H, I and M to our Condensed Consolidated Financial Statements, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended February 3, 2019.
Seasonality
Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, customer care centers and distribution facilities, and incur significant fixed catalog production and mailing costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations, and the effects of economic uncertainty which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
Our revolver and our term loan each have a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. During the second quarter of fiscal 2019, we had borrowings of $60,000,000 under the revolver. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instruments would not materially affect our results of operations or cash flows.
In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of August 4, 2019, our investments, made primarily in interest bearing demand deposit accounts and money market funds, are stated at cost and approximate their fair values.
Foreign Currency Risks
We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars. Approximately 1% of our international purchase transactions are in currencies other than the U.S. dollar, primarily the euro. Any foreign currency impact related to these international purchase transactions was not significant to us during the second quarter of fiscal 2019 or the second quarter of fiscal 2018. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies could subject us to the risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations.
In addition, our businesses in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in the second quarter or year-to-date fiscal 2019 or the second quarter or year-to-date fiscal 2018, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note H to our Condensed Consolidated Financial Statements).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of August 4, 2019, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and
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communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required by this Item is contained in Note F to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.
ITEM 1A. RISK FACTORS
See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 3, 2019 for a description of the risks and uncertainties associated with our business. There were no material changes to such risk factors in the current quarterly reporting period.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information as of August 4, 2019 with respect to shares of common stock we repurchased during the second quarter of fiscal 2019. For additional information, please see Note G to our Condensed Consolidated Financial Statements within Part I of this Form 10-Q.

Fiscal period |  | Total Number of Shares Purchased 1 |  |  | Average Price Paid Per Share |  |  | Total Number of Shares Purchased as Part of a Publicly Announced Program 1 |  |  | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program |
May 6, 2019 – June 2, 2019 |  |  | 223,925 |  |  | $ | 53.61 |  |  |  | 223,925 |  |  | $ | 677,963,000 |
June 3, 2019 – June 30, 2019 |  |  | 188,106 |  |  | $ | 60.55 |  |  |  | 188,106 |  |  | $ | 666,573,000 |
July 1, 2019 – August 4, 2019 |  |  | 223,495 |  |  | $ | 66.62 |  |  |  | 223,495 |  |  | $ | 651,685,000 |
Total |  |  | 635,526 |  |  | $ | 60.24 |  |  |  | 635,526 |  |  | $ | 651,685,000 |

1 | Excludes shares withheld for employee taxes upon vesting of stock-based awards.

Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits

Exhibit Number |  |  | Exhibit Description
| 10.1+* |  |  | Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants to Employees (for grants made after June 10, 2019)
| 31.1* |  |  | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
| 31.2* |  |  | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
| 32.1* |  |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| 32.2* |  |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| 101.INS* |  |  | eXtensible Business Reporting Language (XBRL) Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
| 101.SCH* |  |  | Inline XBRL Taxonomy Extension Schema Document
| 101.CAL* |  |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document
| 101.DEF* |  |  | Inline XBRL Taxonomy Extension Definition Linkbase Document
| 101.LAB* |  |  | Inline XBRL Taxonomy Extension Label Linkbase Document
| 101.PRE* |  |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document
| 104* |  |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted under Exhibit 101).

+ | Indicates a management contract or compensatory plan or arrangement.

* | Filed herewith.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WILLIAMS-SONOMA, INC.
By: |  | /s/ Julie Whalen
|  | Julie Whalen
|  | Duly Authorized Officer and Chief Financial Officer

Date: September 12, 2019
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