Williams-Sonoma Q3 Earnings Call Transcript

123jump.com Staff
22 Dec, 2008
New York City

The the home furnisher reported third quarter earnings of $752 million or a loss of $0.10 a share compared to 25 cents a share. The company expects fourth quarter revenue to be between $940 million and $1 billion and earnings per share between $0.10 and $0.30 a share.

Williams-Sonoma, Inc. ((WSM))
Q3 2008 Earnings Call Transcript
December 4, 2008 10:00 a.m. ET

Executives

Stephen C. Nelson - Director, Investor Relations
W. Howard Lester - Chairman of the Board, Chief Executive Officer
Sharon L. McCollam - Chief Financial Officer, Chief Operating Officer
David DeMattei - Group President, Williams-Sonoma, Williams-Sonoma Home, West Elm
Laura J. Alber - President

Analysts

Budd Bugatch - Raymond James
Matthew Fassler - Goldman Sachs
Alan Rifkin - Merrill Lynch
Joe Feldman – Telsey Advisory Group
Michael Lasser – Barclays Capital
Neely Tamminga – Piper Jaffery
Bradley Thomas – Keybanc Capital Markets
Brian Nagel – UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Williams-Sonoma Incorporated third quarter 2008 earnings call. (Operator Instructions) At this time, all participants are in a listen-only mode. We’ll be conducting a question-and-answer session after the presentation. This conference is being recorded. I would now like to turn the call over to Mr. Steve Nelson, Director of Investor Relations at Williams-Sonoma Incorporated, to discuss forward-looking statements. Please go ahead sir.

Stephen C. Nelson – Director of Investor Relations

Good morning. This morning’s conference call should be considered in conjunction with the press release we issued earlier today. The forward-looking statements included in this mornings call constitute forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, guidance and prospects of the company in 2008 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company’s current press release and SEC filings including reports on Forms 10K, 10Q and 8K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. As a reminder the fourth quarter of 2008 is a 13 week quarter versus 14 weeks in fiscal year 2007 and the fiscal year 2008 is a 52 week year versus fiscal year 2007 which was a 53 week year. The extra week in 2007 added approximately $70 million or 5% to our fourth quarter 2007 revenue growth and 4% or $0.05 to our diluted earnings per share. I’ll now turn the conference call over to Howard Lester, our Chairman and Chief Executive Officer.

W. Howard Lester – Chariman and Chief Executive Officer

Good morning and thanks for joining us. With me today is Laura Alber, our President; Pat Connolly, our Chief Marketing Officer; Sharon McCollam, our Chief Operating and Chief Financial Officer; and David DeMattei, our Group President for the Williams-Sonoma, Williams-Sonoma Home, and West Elm brands. Let me begin today with an overview of our third quarter 2008 results and then discuss how we are approaching the current economic environment going forward. I’ll then turn the call over to Sharon, Dave, and Laura. During the third quarter, the unprecedented downturn in the U.S financial market had a significant impact on our business. To put that in perspective, year-over-year net revenues declined 16% resulting in third quarter loss of $0.10 per diluted share. During the quarter, comparable store sales declined from -14% in August to –20.1 in September to a -27.6 in October. This compares to a 10.4% decline in the first half of the year. In our core brands, net revenues decreased 17.9%. This decline was driven by 23.8% decrease in the Pottery Barn brand, 15% decrease in the Pottery Barn Kids brand, and a 5.7% decrease in the Williams-Sonoma brand.

In our emerging brands, which includes West Elm, PBteen and Williams-Sonoma Home, net revenues decreased 4.4% and while the top line continued to be a challenge throughout the quarter, we did continue to make significant progress on several of our key initiatives. In direct marketing we continued to move forward with our catalog circulation optimization strategy, which greatly contributed to 14.5% reduction in advertising expense during the quarter. Due to the success of this initiative, we are looking at new ways to expand this strategy over the next several quarters. In supply chain we once again delivered meaningful customer service and financial benefits from our returns, replacements, and damages initiatives that we’ve been working on, including a 140 basis points reduction in our total company sales return rate and a 30 basis points reduction in replacement of damages expense. This has been a key initiative for us and we believe there is still significant opportunity to reduce further as we continue it at the same rate of control over our Asian furniture operations and in-home furniture delivery in key markets. In both these areas, we are progressing ahead of schedule.

We also made significant progress on our inventory reduction initiative. At the end of the third quarter, year-over-year inventory was down by better than expected $75 million or 9.8%. As we look forward to the balance of the year, it’s extremely difficult to project whether the recent deterioration of the U.S economy is going to affect peak holiday spending. But what we can project consistent with our October 29th guidance is what the fourth quarter would look like, is the trend we found in October and November will continue. As such, we are reiterating our fourth quarter revenue guidance in the range of $940 million to a $1 billion and our EPS in the range of $0.10 to $0.30 per share. This represents a year-over-year revenue decline of 27% to 32% and diluted earnings per share decline of 74% to 91%. As all these results are reflective of current economic conditions, we are not growing of what we can’t control. With revenues and earnings decline of this magnitude and a potential for additional 10% to 12% revenue decline in 2009, if these trends continue, we are taking dramatic action to protect the bottom line of our balance sheet. These actions include the following changes in 2009 versus 2008.

A targeted 10% reduction in 2009 inventory receipts, a targeted 50 to 100 basis points improvement in cost of merchandise-sold, a targeted $75 million reduction in 2009 SG&A expense, a targeted $10 million to $15 million reduction in 2009 returns, replacements and damages etc. We targeted $100 million or nearly 50% reduction in 2009 capital spending and a plan to close underperforming stores where possible and the implementation of a strategic pricing and promotion plan to enhance the value proposition across all of our brands. All of these actions will allow us to protect our bottom line in our balance sheet and position our brands to emerge stronger when the economy improves. Cash is king in this environment and all of our decisions are and will be made with that in mind, including the recent termination of our $150 million share repurchase-authorization. Additionally with 100% participation from our bank group we have successfully amended our $300 million unsecured revolving line of credit facility in addition to our $165 million unsecured letter of credit facility as a proactive response to the significant changes in the macro environment and the associated impact on our businesses. I’ll let Sharon discuss the details of these amendments later in today’s call.

Now we recognize that our business today is being significantly impacted by the country’s serious economic problems. We know that over time these problems will be solved. We also know that in this type of recent declines in housing values people homes is still their most material asset and they are going to invest in them and when they do, we’ll be there to capitalize on it. But now I’d like to turn the call over to Sharon.

Sharon L. McCollam - Chief Financial Officer

Thank you, Howard. Good morning. I’d like to now talk about third quarter results. In the third quarter of 2008, net revenue decreased 16% to $752 million. This decrease was driven by a 21.4% reduction in comparable store sales and 14.6% and 26.1% decrease in catalog and paid circulation respectively. This decrease was partially offset by an 8.3% increase in retail rate square footage. Diluted earnings per share in the third quarter of 2008 decreased $0.35 to a loss of $0.10 per share versus a $0.25 per share profit in the third quarter of 2007. Gross margin expressed as a percentage of net revenues was 32% in the third quarter of 2008 versus 38.2% in the third quarter last year. The 620 basis points decrease was driven by the deleverage of fixed occupancy expenses primarily due to declining sales and increase in cost of merchandize including the impact of increased markdowns and an increase in inventory-related reserves.

These increases were partially offset however, by a 30 basis points reduction in replacement and damages expense. SG&A expense was $260 million or 34.6% of net revenues in the third quarter of 2008 versus $297 million or 33.2% of net revenues in the third quarter of 2007. This 140 basis points increase was primarily driven by an approximate 12.3 million or $0.07 per diluted share after impairment charge associated with four underperforming nature stores and the deleverage of advertising and employment costs primarily due to declining sales. These increases were partially offset however by reduction in other general expenses.

This year’s employment expense included an approximate $11 million or $0.06 per diluted share benefit associated with the reversal of performance based stock compensation expense as discussed in the company’s Form 8K filed with the SEC on October 29. I’d now like to discuss significant year-over-year working capital balance sheet variances at the end of third quarter of 2008. Cash and cash equivalents were $23 million with no borrowings under our $300 million revolving line of credit. This represents a year-over-year increase of $7 million after returning $98 million to our shareholders through share repurchases and dividends over the past 12 months. Merchandize inventory decreased $75 million or 9.8% to $695 million which was significantly better than our expectations. The primary driver of this decrease was a reduction in units across all brands including a $66 million reduction in the Pottery Barn Core brands, a $22 million reduction in the emerging brands and a $10 million reduction in the William Sonoma brand including costs and makeshift impact. These reductions were partially offset by a $23 million increase in new and remodeled stores for all brands.

Prepaid catalog expenses decreased $22 million or 28.8% to $54 million. This decrease was primarily driven by our catalog circulation optimization strategy partially offset by cost increases in paper and postage. Additionally, as Howard said earlier despite having no borrowings under our revolving line of credit at the end of the quarter, and no breach in financial covenants, we proactively amended both our $300 million unsecured revolving line of credit and our $165 million letter of credit facility to provide us with the financial flexibility and liquidity that we believe maybe necessary during these difficult economic times. The highlights of the covenant amendments are as follows, a reset leverage ratio with significantly reduced threshold, the addition of a fixed charge coverage ratio, certain limitations on the company’s ability to increase dividends, certain limitations on fiduciary purchases, and an increase in the estimated annual cost of the facility of approximately $1.5 million.

We are very appreciative of the unanimous support that we received from our 10 member bank group on these amendments in light of these extremely tight credit markets. The expiration dates of both agreements remain unchanged with revolving line of credit agreement expiring in October 2011, and the letter of credit agreement expiring in September of 2009. Further details regarding these amendments are available in the company’s Form 8K that was filed this morning.

I’d now like to discuss our fourth quarter guidance. As Howard mentioned out guidance for the fourth quarter has not changed. It is predicated on the assumption that the revenue trends we have seen in October and November continue and that our selling gross margins would decline up to 200 basis points on a year-over-year basis as we competitively increase our promotional levels and reduce our inventory. As these are the same assumptions which supported our October 29th guidance, we are reiterating our fourth quarter revenue and diluted earnings per share guidance in the range of $940 million to a $1 billion and $0.10 to $0.30 per diluted share respectively. We would say that the most likely outcome based on the economic outlook is that we will be at the lower end of these ranges particularly as we work aggressively through these inventories. In response to the volatile trends we are however continuing to reduce our infrastructure overhead costs and will be taking even significantly greater actions once we get to peak season. We are also aggressively developing overhead and infrastructure reduction plans for 2009 that are reflective of the current economic environment which we believe could continue to the foreseeable future. Accordingly as Howard said earlier from a balance sheet and cash book perspective we are reducing our 2009 year-over-year retail rate for finished growth to 3%, our capital spending in the range of 95 to 105 million and our year end merchandize inventory in the range of 7% to 10%, though we are also looking at all current and overhead infrastructure costs in relation to 2004 level when our sales were similar and developing a roadmap to get back to those levels where possible. Such dramatic change cannot be implemented overnight but this is the key objective to the balance of 2008 and 2009. While we recognize that many of the cost increases are fixed we also know that there is significant opportunity here and are aggressively pursuing it.

Beyond these initiatives we are continuing to identify new business opportunities that can further benefit us as we move forward to the balance of the year and into 2009. As we have said, we are leaving no stone unturned and are continuing to strategically invest in both initiatives that would enhance our competitive position and allow us to emerge stronger than before when the economy begins to revamp.

I’ll now turn the call over to Dave DeMattei to discuss the William-Sonoma, William-Sonoma Home and West Elm brands.

Dave DeMattei

Thank you, Sharon and good morning. I’d like to begin with William-Sonoma. While the William-Sonoma brand continued to be more resilient than other home furnishings brand, it was too negatively impacted by the progressive declines in mall traffic and the weakening retail environment in the third quarter. During the quarter, net revenues declined 5.7%, with similar decreases in both channels. The performance in the retail channel was primarily driven by 11.4% decrease in comparable store sales partially offset by incremental revenues from new and expanded stores. Comparable store sales like all other brands declined progressively throughout the quarter with the month of October ending at a negative 17.4%. From a merchandizing perspective we saw growth in seasonal food and electrics which we believe is a positive indicator for holiday sale. However, these categories were substantially offset by tabletop, cook stores, house wares and (inaudible). As we look forward to the balance of the fourth quarter we believe that the William-Sonoma brand with its seasonal relevance and gift giving focus will continue to be more resilient than our other home furnishing brands. But despite this belief our fourth quarter guidance is being projected based on our October and November trends and assumes total brand sales will decline in the range of negative mid-to high teens on a 13 to 13 week adjusted basis. We are however aggressively responding to the macro headwinds that we are facing by implementing several new marketing strategies to try to increase sales including a Black Friday weekend, buy now and receive a gift coupon for the future purchase program and make standard set pricing program to promote unit sell up at a great value for our customer. With the holiday compression of 5 less shopping days between Thanksgiving and Christmas, our execution will be critical and we’ve focused on the following initiatives to capitalize on the brand facility, promoting our gift assortment to highlight the broad range of price points and auctions only offering, strengthening our marketing messages to draw attention to new and exclusive offering, leveraging the functionality of our new e-commerce platform, and providing a superior shopping experience to our customers while balancing the cost pressure of a softer top line.

We believe that despite the macro environment, the William-Sonoma brand will continue to be the premier destination for high-end cooking and entertaining essentials and with strong execution can outperform the industry in the holiday season. The Williams-Sonoma Home brand due to substantial downturn in the US economy in the high end retail sector has had a significant impact on the performance of this brand in both channels. As such, for the fourth quarter we are aggressively implementing a strategy to drive increased traffic to the brand and enhance the value to our highest end consumer, including leveraging the promotional ad initiative we just discussed in the William-Sonoma brand. We are also hosting for the first time a friendly family event which we are starting today and will extend through the weekend. But despite these initiatives we are cognizant of the challenges faced in this difficult economic time. At a minimum, we know that our revised sales projections are going to put pressure on gross margins as we reduce inventory levels and that our retail performance is going to fall well below expectations due to the current sales decline. Based on these results it is difficult to evaluate the overall market potential for the William-Sonoma Home in this economic environment.

In the West Elm brand, the impact of the macro environment in the third quarter was much less pronounced than in many other home furnishing brands. Although our revenues did decline due to lower traffic in our existing retail stores and a weaker consumer response to the direct to customer channel, these declines were partially offset by incremental sales from new stores. During the quarter we opened 4 new stores and ended the quarter with 36 stores versus 27 last year. From a merchandizing perspective we did see positive year-over-year growth in textiles, lighting and table top. But these increases were more than offset by declines in furniture and decorative crockery and while we are disappointed in our overall decline in sales which we believe is macro-driven, we remain confident in our design-driven merchandize offering and its competitive positioning in the marketplace. As we look forward to the fourth quarter we are doing several aggressive marketing and promotional plans and a key focus on sales strategy initiative that we can execute against. We are continuing to focus on reducing cost of goods sold through strategic sourcing, enhanced quality assurance programs and improved inventory management as we strive to increase the operating contribution in the West Elm brand, long-term.

I’ll now turn the call over to Laura to discuss the Pottery Barn Brand.

Laura J. Alber – President

Thank you, Dave. Good morning. Let us talk about Pottery Bran brand. Third quarter year-over-year net revenues decreased 23.8% with declining trends throughout the quarter in all channels. Of this revenue decrease, approximately 215 basis points were driven by the catalog circulation optimization strategy. Merchandize margins were also lower during the quarter as we increased markdowns to react to weak retail traffic in the direct to consumer conversion rate and the more promotional environment. Recall was particularly challenging with third quarter comparable store sales decreasing 27.6%. The month of October however at a -34.5% comp was notably weaker than the rest of the quarter. From a merchandizing perspective, we saw relatively similar year-over-year sales declines across all key categories including furniture. Highlights were in pillows and select furniture collection. Authentic design, casual style, great value and superior quality, is what the consumer is responding to. From an operational perspective during the quarter, we continued to make significant progress in, both our catalog circulation optimization and our returns, replacements, and damages initiative. We also significantly reduced our inventory level in both units and dollars despite a significant sales decline we saw in October. As we look forward to enter the fourth quarter we are assuming that the negative trends that we saw in October and November will continue and as such on a 13 week to 13 week adjusted basis, we are projecting that total brand sales in the fourth quarter will decline in the range of 30% to 35%.

Our focus is on maximizing and investing in the initiatives that we believe will drive increased traffic and higher sales including reinforcing our value proposition including the roll out of the more lucrative private label credit card loyalty program and a one year savings cash financing offer to our customers, enhancing our merchandize presentation in all channels through reckoning with the consumer’s changing mindset, increased Internet marketing, including an increase in promotional offer and focus on conversion and expanding in-store service levels to include decorating classes, increased clienteling and customer outreach programs. We are also intensely focused on reducing inventory through managing people, transfers between channels and the utilization of our outlook stores and e commerce website. To support these initiatives, we expect to be significantly more promotional between now and the end of the year.

Now I’d like to talk about Pottery Barn Kids. Third quarter net revenue in Pottery Barn Kids decreased 16%. Of this decrease, approximately 200 basis points were driven by reduction in catalog circulation as expected. Merchandize margins were also significantly lower than last year due to increased markdowns and promotions to drive increased traffic. We continue to believe that the macro environment is having a significant impact on both the top and bottom lines of the Pottery Barn Kids brand due a dominant mix of high margin discretionary category both textiles and decorative accessories. Both core furniture and like sales category were also impacted this quarter. Retail was particularly impacted with comp stores sales declining 20%. Like our other brands, the decline was most progressive throughout the quarter with October ending at -25.6%. As this trend has continued into November, our fourth quarter guidance on a 13 week to 13 week adjusted basis assumes that total brand sales will decline at a similar level in the fourth quarter.

From an operational perspective during the quarter, we continued to see, better than expected savings from both catalog circulation optimization and returns, replacement and damages initiative. Like Pottery Barn, Pottery Bran Kids, was able to substantially reduce inventory levels despite the significant unexpected decline in sales. At the end of the third quarter, the Pottery Barn and Pottery Barn Kids inventories combined were down 66 million versus last year. As we look beyond the fourth quarter for both the Pottery Barn and Pottery Barn Kids brand, we do not believe that the home furnishing categories is going to rebound quickly. But we do believe that there are things we can do now that are strategic for longer growth potential of the brands. Therefore, what we are focused on today, is aggressively addressing the customer’s perception of the value proposition in both brands, continuing to update our core assortment to reflect the mix that is reflective of today’s economic environment and managing the aspect of the business that we can control while at the same time protecting our brand’s image. By focusing on all these initiatives, we believe that Pottery Barn and Pottery Barn Kids brand will emerge from these challenging times with even stronger competitive presence.

Let me now talk about Pottery Barn Teen. After delivering positive year-over-year net revenues growth in both August and September, net revenues in the Pottery Barn Teen brand declined so dramatically in October that the brand ended the quarter with negative revenue growth for the first time in its history. Net revenues in the PBteen brands declined 2.4% in the third quarter of 2008. From a merchandizing perspective, like our other home furnishing brands, furniture did slow during the quarter, and while this decline was extremely disappointing, it is clear that the issues facing the brand are very macro in nature and not brand-specific. But that does not change our need to react. Therefore as we look forward down to the fourth quarter, we will do so with a more cautious economic outlook but an optimistic brand outlook. We are also continuing to drive merchandizing and marketing initiatives to improve the teen customer experience and extend the reach of the brand. These initiatives include leveraging the August launch of an updated e-commerce website, testing Pottery Barn Teen merchandize for the first time at retail in one Pottery Barn Kid store which opened in November, and expanding our merchandizing assortments across a wide range of price points to serve a broader range of teen interest. We continue to be excited about the long-term growth potential of PBteen as it solidifies its positioning in the Pottery Barn portfolio brand.

I’d now like to open the call for questions. Thank you.

Operator

Thank you Ms. Alber. (Operator Instructions) The question-and-answer will be conducted electronically. If you’d like to ask a question please do so by pressing the * key followed by the digit 1 on your touchtone telephone. If you are using a speaker phone please make sure your mute function is turned off, to allow your signal to reach our equipment. We will proceed, taking one question from each participant. Again that is “*1’ if you have a question and we’ll go first to Budd Bugatch with Raymond James & Associates.

Budd Bugatch -- Raymond James & Associates

Good morning.

Sharon L. McCollam

Hi Budd.

Budd Bugatch -- Raymond James & Associates

Sharon, maybe you could kind of give us a feel as you look out a little bit longer term as trying to fix the variable nature now of the businesses as you try to deal with this new real economy that we seem to be in and give us a feel of when leverage starts to come back to SG&A and what maybe the gross margin aspect looks like going forward if we have to stay more competitive for a longer period of time?

Sharon L. McCollam

I think that’s a great question and when we release our Q4 earnings we will give you more specific guidance for 2009 but I think there are some advantages that we have in this company that are not shared by other retailers and the largest of those is the fact that 40% of our business comes form the direct-to-customer channel. In the catalog circulation we have more flexibility than a retailer who is sitting with bricks and mortar. So, one of the things that we of course are continuing to look at, is the expansion of our catalog circulation optimization strategy and you’ve noticed that in Howard’s commitments for 2009 that he referred in his prepared remarks that he said, we expect SG&A next year to be down $75 million and a piece of that of course is coming from headcount, it is also coming from employment and other areas and that’s where we are getting started. On the store side I don’t know how it speaks to the fixed cost but we do have some opportunities from a real estate point of view that will be coming up. We have a distribution center that has got a lease expiring in the next 24 months, that’s a large one, and we are working on getting out of that. We also have an office building in San Francisco in 2010 that is expiring. So, we’ve got some good fixed things that were possible at the time that we actually gave guidance for next year but I would like to turn it over to Howard to talk about the real estate strategy and what they are doing now with our landlords.

W. Howard Lester

I think Sharon covered it very well. Probably because of a large portion of direct business much more is available in other controlled change from a cost standpoint in other companies but I think the most difficult obviously are really office expense where we on the properties that we have long-term lease commitments. Sharon mentioned some of the overhead things that we are doing there. We are looking out and trying to do everywhere we can, where it is feasible. In the store side where we have leases becoming due, we will look at each of those individually and putting a pretty conservative point of view out whether we want to renew these leases and go forward with them. We are fortunate that these brands were so good from a four wall contribution all within our stores that even though we have had this big reduction, our stores are still, most of the vast majority of them are performing at a very profitable level for us. So, it’s not like that we have a large number of stores that we have a desire to close if we have the option. All I say when we have these kinds of declines, a handful of stores where we would like to close if we could, and we will continue that debate. We will debate, discuss with our landlords, kind of how we deal with this going forward. I think all retailers are going through this, with their real estate portfolio and probably over the next year March it’s going to be required that the landlords get some feeling again I guess and we have those discussions as people start to look at their real estate portfolios more critically. So, we’ll see what comes from that but we have got a lot of room with the available portions as Sharon mentioned to continue to cut costs whether that’s corporate payrolls or store payrolls, whether that’s functions we are doing that we don’t need to do, things we didn’t do in 2005. We have a lot of opportunity and we are aggressively looking at every single one of them.

Sharon L. McCollam

And when we are looking at this we are looking when Howard talked about the four walls, of course with depreciation in stores are taking a tremendous effect when we are returning to our stores at the end of the third quarter just to put it in perspective, we only have 19 stores with negative cash flow and so when you look at a portfolio of over 600 stores, you can see what Howard is referring to as to the strength that we had previously in our stores from a cash flow perspective.

Operator

And our next question comes from Matthew Fassler with Goldman Sachs.

Matthew Fassler - Goldman Sachs

Thanks a lot and good morning. I want to focus on real estate and capital program as well I guess to understand where your merchant brands fit into the CapEx program. Were they getting more or less of their share of CapEx reductions and given the challenging environment and the potential that will last for a little while with implications for capital? Is this really needed to be considered your plans for rolling these out and still continue to develop this array of businesses?

Sharon L. McCollam

Okay I know Howard will take that question and I’ll talk about overall CapEx and how it affects the real estate question about where the investments are next year.

W. Howard Lester

Matt this is Howard. From the vast majority of…we are surely going through this state but the vast majority of our CapEx plans for next year and beyond, 2010 and 2011 are new stores or there is some in there that we have to do for remodels for stores. We don’t want to let our stores run down. So, we do have some CapEx in there just on remodel programs on existing stores base. But with respect to the new stores, we had quite a few, not quite a few, but we have a number in 2009, that are frankly higher than we would like those to be. About half of them Sharon tells me is West Elm I think and these are stores that we had already contracted for and signed leases on. By and large if we don’t have a lease, we are not doing it, unless we have some legal obligation to do it. We are stopping all new store development whether it is emerging brands or any of our brands for that matter. We are stopping those because we work 18 to 24 months out where we have already committed to in 2009 and 2010. But there might be one or two small exceptions to what I just said, where we relocated some stores from one place to another and the landlord is planning for the building or the stores, we might be doing that but that would have almost if no impact on CapEx. So, ’09 is going to be higher than we would like, again because the bulk of that is pre-contracted for the lease already. Some of those are under construction like first center at New York City, new building it is under construction it is not there, a new West Elm in Columbus Circle. In today’s environment we probably wouldn’t have done that. I’m sure we wouldn’t have done that, but we signed the lease sometime ago and started construction last year. So, you’ll see some of those things happening. But by and large you will see here come to a halt. There is no preference for emerging brands or anything. We just don’t want to be opening any of these stores unless we have to in this environment.

Sharon L. McCollam

And then Matt just keep this in mind that we are reducing the capital spending by almost a $100 million. So when Howard says we still have more than we would like, we were hopeful and are still hoping and Howard is still working on taking that $100 million reduction to a higher number. The majority of that reduction is coming in stores, and in IT and when we talk about IT we still have a significant investment in the Internet next year. But the reason that our IT spending is coming down is because as you know we have recently implemented several major systems and their spending cycle is over. It is not that we have had to change a way or the direction that we were going or renewed plans from an IT perspective. We are just finished with those projects and the spending is behind us, so it’s very opportunistic. The other thing that we’ve been mentioning is that from a store capital perspective this year we had some significant investments including replacing all the IT technology and followed by registers at all of our stores, and so that is behind us this year. So, if we look forward to 09, 10 or 11, we have very little, of course maintenance capital from an IT perspective within the stores and related stores. So, we have got a lot of things that happened in 08 that have really set us up perfectly to weather this in 2009 and the next couple of years if that’s required.

Operator

With Merrill Lynch we’ll go next to Alan Rifkin.

Alan Rifkin – Merrill Lynch

Guys, thank you. I just wanted to, as a point of clarification, have a couple of questions, if you don’t mind. You are banking your fourth quarter across the board essentially with respect to sales, comps and earnings and that’s pretty much in line with what you articulated in October. Can we be led to believe that November relative to October was actually stable?

Sharon L. McCollam

It was and actually it was very similar to October. It started out slightly worse. I mean in October we saw the same thing and then we actually did see some resilience in the customer as we got closer to Thanksgiving but remember our William-Sonoma was relevant at that time, but across all of our brands it was the including the Black Friday in that weekend, we did see some improvement. The other thing that we did is Dave and Moore articulated the promotion program that they put into place and they have been very successful. We have been looking all year for promotion programs that are working with the consumer and we think that we actually identified some things that are very important and I would like to ask Howard to add a few things.

W. Howard Lester

I would just like to add, I think in October we would have said, by the end of October we would have said this thing is so powerful that we can feel the delivery thing to move the needle and that was the frustrating part. We couldn’t tell it was just overwhelming, from the customers, the way they were acting. The encouraging thing in that aspect was marketing in stores and the encouraging thing in that is now some of the program that we thought through, our people thought through, particularly in Pottery Barn although it is also true in West Elm and in Sonoma. So, it is not just only the Pottery Barn are starting to work. We see improvements. I just came from one district where we had tested some things and we were running 500 basis points better than the trend, the brand trend as a result of those programs and they were up. They were making a 100% difference. So, that’s the most encouraging news I can give you is that we are starting to see some things move the consumer, albeit a little bit where before we just didn’t feel like we could do anything to do that. So, if there is a bright light, that’s it.

Operator

(Operator instructions) Once again, if you do have a question press “*1’” on your touchtone telephone, and we’ll go next to Joe Feldman with Telsey Advisory group.

Joe Feldman – Telsey Advisory Group

Thanks guys, a question about Pottery Barn a couple actually. As you think about the issues along the pipeline it sounds like maybe it is too much a good aspect. How much of it really is macro versus micro? In a way is the product still resonating with the customer? Are there things that can do the trick with the product, are they pricing issues? I know that you tried to bring in some entry point prices a year ago and that seemed to be working better but it seems like prices have kind of moved upwards a little bit. Are we just addressing those issues?

W. Howard Lester

Well Laura and I will do it together but let me take the first shot at it because we have both been out in stores pretty much there last month as I said and I talked to a lot of our kids and looked at a lot of stores and tried to understand at that level what is really going on with the customer. I will tell you that two years ago, three years ago, we had some brand issues within Pottery Barn, I think we talked about that and we had opportunities with improving our field organization, improving our merchandize. We thought we got a little tired, improving our value proposition and I think now I’ve never seen the field organization in Pottery Barn look better than it does today in the stores that I’ve been in and I’ve been all through the Southeast, Southwest and Chicago, West Coast, Portland, they are looking, I mean the quality of the people, their attitude, their morale, the things they are doing with their outreach program is as good as I’ve ever seen. I will say that the stores look terrific. Are there opportunities within the merchandize? You know they always are. I think we are trying to get back to very strong core assortments. We have done a good job there. We’ll probably do a better job with maybe some more editing and a few things and there are always opportunities to improve but I would say by and large this state is more macro now. But we are…that’s the progress that I was talking about earlier in response to Matt Fassler’s question but when we talk to customers and we do our job right, we know we will get our sale. So, and we are seeing some real results from that. So I don’t think Pottery Barn is perfect but I don’t think we have a lot of apologies to make today. If there are categories and merchandize we missed out, then we know we can do better for next season in. There is always opportunity but it’s not primarily about the merchandize today I’d imagine.

Laura J. Alber

Well to answer your specific question about pricing, from the period back when we mentioned typically about our price is getting too high, we did reduce our pricing and went strategically through every category and reduced them. However, now if the consumer has cut back more we have to do an even better job of being more competitive and what we’ve been very successful in doing, is to drive operational improvement and to cut our costs and we are able to give that back, the savings to the consumer and typically next year as we cut inventory. So, I am excited about the opportunity to improve our value proposition because of our operational improvement and that’s really what the customer is…it is being pointed out and I think so many of us are saying right now we don’t want to buy things at regular price, we want to make sure we get the best value, and we are in a better position to offer the customer great value that we have ever been. We have really improved our quality and we’ve stabilized where we are with our design aesthetic and are clear about where the customer is resonating with the brand and where they aren’t. So we are excited about those opportunities as we go into next year, even though the customer is much more picky and much more thoughtful about what they are buying.

Operator

We’ll go next to Michael Lasser with Barclays Capital.

Michael Lasser – Barclays Capital

Good morning, thanks for taking my question. But I have two out there so I don’t get cut off. Number 1, can you talk about the relative performance particularly in Pottery Barn, the on mall and off mall locations and the reason why I am asking is perhaps the nature, not only mall traffic is declining, but perhaps the nature, the traffic is changing such that the profile of the customer who is shopping in our mall today is not consistent with what your typical customer profile is and that might change the relevancy of those stores in long-term. Number 2, could you break down the inventory a little bit more in terms of how much was the performance due to reduction in purchases and how much was due to returning some of the goods back to the vendors? Thanks and best of luck.

Sharon L. McCollam

I’ll take the inventory question just in a broad perspective. In that $75 million there is substantially very little of it at all if any that was returned to the vendors. This has been a strategic initiative for us. We have reduced purchase orders, we have reduced our prior quantities and then the other part of that is in the effective utilization of our outlook stores and our website to clear merchandize. If you look at the sales numbers then you know they are in the range that both our housee are getting there. The number I mentioned earlier this year that we made a strategic decision at the beginning of the year with our outlook stores that they would not have an open to buy for our product direct to the outlet. So basically what we have said is, on a few exceptions we are allowing it, but basically their only vendor is the brand and that has been very effective for us in clearing merchandize.

W. Howard Lester

On our store location question, I don’t think there is any material difference between street stores or lifestyle centers or shopping malls. It is pretty much across the board. The differences that we see is because we have got a better, some outstanding manager in one store, a better team and they can make 20% difference and that’s quite true in good times and it is still true in bad times. I mean we have got stores that are comping up in this environment when all the other stores and the sister stores in the district are down. Thereafter we say why is that? And it’s because they have got a manager and a team that just somehow gets it done, and other than that I think it is location specific. I think I could say it is just outstanding but for all these details it varies a bit by region but pretty much it is not discriminatory by type of…whether it is a downtown location, or whether it is shopping mall. It is pretty much the way it was before it started.

Operator

And from Piper Jeffery we will go next to Neely Tamminga.

Neely Tamminga – Piper Jaffery

Hi I’ll keep my housekeeping and my real question up there, first the housekeeping, if I go back and look at what you guys did in 99, 2000 historically, you were having theory on the account your average resales about 80 plus stores coming up in additional malls in the next two years and I’m just wondering how many, just by way of example, how many of those 80 stores have you already worked with negotiable leases or all ED kind of up for renewal, that gives just the housekeeping question and then the secondly for the two different brand precedent if you can give us a sense of where did you guys have some really good promotions that are working, resonating and particularly in the William-Sonoma side and we have got some focus here on post Christmas which is a lot of gift giving. How are you morphing these assortments to pick up that business post Christmas with gift card sales could have been coming down this year, it is going to be more sort of self focused instead of gift focused and clearance focused, just can you give a sense of what is going to happen there?

Sharon L. McCollam

Yeah I am going to let Howard take the real estate question and then Laura will take the Pottery Barn and Dave will take Sonoma, so Howard.

W. Howard Lester

Well first of all, the vast majority are 12 year leases, not 10. So, when we look at these leases we look at then year-by-year. We are out in front in a lot of them and we have trended historically to remodel our stores about 7 to 9 years, it is kind of when the store starts to gets bad or it has gone into the pond. So, many of those have already been dealt with along the way when they were 7 years old, 8 years old. If the volume is good it is probably good we enlarged the store to enlarge the footprints and trying to get these things done. So, I can’t give you the number year-by-year but it is actually earlier the vast majority of our stores that are coming up are still stores that you would covet to have. So, but I can’t give you the number of opportunities. So, to generally tell you we are two years out in front of them, and Laura and Dave can talk about the promotion side. I don’t want to see this going to a lot of detail on those. I mean we have worked hard to develop the strategic kind of things what we are doing and so we kind of generally talk about them but not specifically.

Laura J. Alber

Right if you don’t mind we are in such a competitive environment right now and as I said in my prepared remarks, we are doing promotions, we are taking markdowns based on sales and we have contingency plans based on sales going up and sales going down and we are going to be all over it. So, that’s as much as I really want to share, given the competitive nature.

David DeMattei

I would just talk about merits just where we are having the successes during our web-driven promotions that drive people into the circle and make them have a reason to come in. Now with the decrease in traffic the world is experiencing some of our stores just taking markdowns doesn’t work at all and I think Howard talked about that. When we venture in ideas and then marketing those through e-mails we have been driving those to our stores. As you noticed in February and summer here we wanted to get people back to stores in January and so they were basically the purpose of the promotion there.

Operator

And our next question comes from Brad Thomas with Keybanc.

Bradley Thomas – Keybanc Capital Markets

Hi thanks. Actually I just wanted to follow up on something you just mentioned Howard. You were talking about expanding your existing stores though I know it has been a long-term strategy of yours. Can you talk a little bit about how some of your bigger stores are doing versus the smaller stores from a return standpoint? Do you still plan to do some of these expansions over the next couple of years and is that still really a viable opportunity for you as we look out longer term? I was just thinking that perhaps had been an opportunity down some very good retail years.

W. Howard Lester

It is a great strategy when sales are going up. It’s not a great strategy when sales are going down. So for all these years our sales have increased and we opted to enlarge our footprints and have put more footprints in the market area because we felt that we could improve the brand with the consumer, we can have a much larger and better and more enjoyable shopping experience for the customer, we could do more in the store, add more channel in the store etc, etc and it has worked for us. The latter years, the next couple of years until the economy gets a lot better, we are not going to do anything more than likely. I mean I start to say that some opportunity may come up that’s too good and it will not do. But by and large our rally around here is we are not interested. We are spending time on strategically rearranging our real estate portfolio, and so more effort is going into, almost all the effort is going into trying to close those stores that are really handful. As Sharon mentioned they maybe some 20 some stores out of 620. So, we are focused on that but I would say we have got an eye to the future. I mean we are doing all of that in the context of looking at each market that we are in and where we have got to be five years from now. We don’t want to cut costs to the point that we really hurt the brand and we put our self in bad. We are not at that point. But we want to rearrange that portfolio given this economic environment that we are in, one day let us say we may come back again but right now we are having to deal with sales that are going the other way.

Operator

And our final question comes from Brian Nagel from UBS.

Brian Nagel – UBS

Hi good morning. I’ve got a few questions and the first couple for Sharon. The first is a follow up to a prior question. You have taken the CapEx for 2009 down to $100 million. When we get that down can you be more specific? How much of that $100 million is still discretionary? Usually thinking about how much you guys can call it back if you guys so choose? Second question also finance related given that your company is generating quite a bit of cash now, we saw you pull back from your share repurchase program. Where is the dividend remaining as far as your capital allocation priorities? And then the final question on the Pottery Barn side, what extent do you think that the clearance activity depends on the past, last few months or particularly the past few weeks that had impacted the sales at Pottery Barn? Thanks.

Sharon L. McCollam

Okay, let Laura take the broader question and then I’ll follow up on the other two.

Laura J. Alber

Thank you. I believe that, all of the promotional environment, is affecting our consumer and I have had an opportunity of watching a lot of promotions that are shopping center driven and something really close. So, when we were closing I have watched customers going back and forth between the two stores and I would have probably said if you had seen it that it would have no effect as I was watching it with my own eyes but any better way I would tell you that. I will be glad when it is over, and we are watching very carefully all of our competition that’s in the home business and very mindful of the discounting that they are doing in their stores, very different type of concept but of course all these things do impact the customer.

Sharon L. McCollam

And then on the question on CapEx about 70% of the CapEx next year is related to stores and therefore the stores that we have on the list right now are stores that we would have to say we are virtually committed. We have the lease signed etc, however I’d say that we have great relationship with our landlords and where it is convenient for both parties, where there is a desire, Howard is aggressively talking to them and working on plans to defer or move out if that’s possible. But, right now we have to say that’s pretty well committed. The balance is coming in the area of IT and distribution in the other areas and the remaining is representative. There is probably some flexibility there but Internet is still proving to be our best performing channel and a big opportunity. So absent of that a major change, further change to the economic environment I’d say that we are pretty committed to at least the low end of that range, most likely the low end of that range and we will evaluate going forward. However things could change. Of course we have got some basic ideas having about that we could ground a little bit. On the dividend questions, our Board gives dividend and all pieces of cash are used carefully. They do a full review of this say at least once, twice a year at a minimum and we will continue to assess our cash flow and operating performance and as I said as we move forward it’s a strategic priority point of view, our strategic priority as Howard said is that cash is king in this environment and every decision that we make needs to be looked at in reference to that but how much cash do you need? With all these adjustments we are making we feel very good about our 2009 cash flow. We expect that we can move this around after another major change in the economy and therefore hopefully will be able to not consume any cash next year and if we can do that, including that I mean including paying the dividend, so that’s what we are looking at.

Operator

Thank you. That is all the time we have for questions today. I will now turn the call over to Howard Lester for closing comments.

W. Howard Lester

Well thanks all of you for joining us today. We appreciate your time and we will keep dealing with this environment the best way we can and we will talk to you soon. Thank you so much.