Williams-Sonoma Inc (WSM) Q1 2019 Earnings Call Transcript

Our Design Crew Room Planner also continues to gain traction. Total rooms created increased more than 40% over the first quarter to 60,000, as we doubled our product coverage across the Pottery Barn, West Elm and Williams-Sonoma Home brands, and enhanced the user experience to more accurate and intuitive design features.

Upcoming Q2 and Q3, we’ll be launching the Room Planner in our Pottery Barn children’s (ph) businesses. We believe 3D visualization will completely redefine how our customers shop for the home and we’re excited to be at the forefront of this industry shift with these three — 3D powered tools, that are transforming the shopping experience for our customers.

I would now like to talk about our newest division Williams-Sonoma Inc. business to business. We are thrilled with the progress that our team has already made, including our new partnership with the Golden State Warriors. As we jointly announced earlier today with the Warriors we’ve been named the official furniture and home design partner of the Golden State Warriors 6 times and hopefully 7 times back to back NBA Champions. This is a marquee opportunity, an unparalleled launching pad for our business to business division in the United States as well as internationally. We’re even more encouraged that this is just one example of the strategic relationships we are currently pursuing across industry verticals as we expand our B2B business.

Company wide we’ve been putting in place the organizational infrastructure to support this growth in business to business. We’ve built across brand cross-functional support team and are now establishing standardized processes to facilitate large scale contracts projects. We’re also restructuring our customer support to a regionally focused project management model that’s tailored to the B2B client. To raise industry awareness for this nascent business, when the process of launching our WSI, business-to-business brand starting with a recent hospitality design expo which debuted our newest cross-brand contract grade product including West Elm’s Chroma restaurant table collection. In addition to trade show participation, we’re implementing a multifaceted marketing plan that includes collaboration with top tier industry publications and sponsorship of contract product design competition.

Another key highlight of the quarter was the ongoing improvements in customer experience. For example, we completed the launch of our machine learning search engine across all brands, powered by algorithms this new engine allows us to provide customers with more relevant and personalized search results, which will progressively improve with more data over time. So far, this new capability has already driven notable lifts in search conversion. To deliver a faster and more compelling mobile experience, we improved our mobile site speed within search, PIP (ph) and homepage through enhancements to our new progressive web app platform.

We’ve also expanded our integration of customer generated content from Instagram to our mobile product information pages to drive more inspiration and product discovery. Another milestone was the launch of our in-house technology test lab. This is a game changer for our innovation agenda, as it will enable us to experiment with new ideas and emerging technologies at scale and quickly determine our go-forward strategy. Technology innovation is a key accelerator of our growth and we believe that this is a foundational capability that will significantly transform our digital experience.

In the supply chain, order visibility and operational improvements remain two of our top priorities. This quarter we successfully completed the migration of our order management fulfillment capabilities to a new platform for all brands. This will enable faster and more efficient order processing and tracking as we continue to improve the customer experience. We’ve also fully redesigned our order tracking capability to give customers and our internal teams a more accurate and granular view of their orders. This capability allows us to offer order visibility up to 13 milestones compared to the industry standard of five, through the order placement, fulfillment shipment and delivery journey. Well it’s still early days in this, we’re already seeing this increase visibility resulting in a 30% reduction in order tracking related calls at our customer care center.

Another area of operational improvement was the productivity rates and our non furniture operations, which increased 10% as a result of improved processes leading to labor savings and lower returns replacement rates. In our furniture operations we are proud to see the accuracy of our delivery date estimates further improve and our in-home delivery service rating reached 4.86 out of 5, the highest we’ve seen since the inception of the measurement program two years ago. All these improvements to supply chain have enhanced customer satisfaction and delivered cost savings that contributed to our higher operating margins this quarter. As we said at the beginning of the year, we’ve identified significant cost savings across our business to help offset the financial impact of potential tariff.

But of course we are not done. We have more initiatives planned to further elevate our customer experience. One of the key upcoming opportunities is the opening of our West Elm West Coast DC in the second quarter. This new DC will help us further improve our delivery times and reduce our operating costs in the western region. The benefits of all these cross-brand technology and operational initiatives powered our brand performance this quarter.

West Elm our fastest growing brand continued to deliver on our aggressive roadmap of $3 billion with comp growth accelerating to 11.8%. This growth was driven by strong e-commerce and broad based strength across product categories, particularly in made to order and key customer acquisition categories of textiles and decorative accessory. Also our new West Elm stores are outperforming our expectations.

We also saw growth from Pottery Barn, where furniture continues to outperform and our outdoor business showed early momentum. At when we are heading into summer and now it is continuing to grow, as we are under way into the summer season.

Pottery Barn Kids and Teen delivered another quarter of growth with particular strength in the Baby business. An important entry point to the brand. Our emerging brands Rejuvenation and Mark and Graham continued to expand their product offer and the new stores and Rejuvenation are also performing above our expectations. Our global business is strong as our team works toward successful launch of our brands in India next year.

Regarding the Williams-Sonoma brand, although we knew we were up against a tough comp a 5.6% last year, we expected our performance to be better than what we delivered. Easter came late in the quarter and did not perform to our expectations. This negatively impacted both the top line and margin performance of the brand. We also continued to reduce our promotional activity, particularly in Williams-Sonoma Home. As we look forward to the rest of the year Williams-Sonoma will continue to undergo a transformation to balance the brand’s top line with improved profitability. We are focused on increasing exclusive product offerings and more effective content as well as reducing promotions and less productive inventory to drive incremental revenue growth and improved margins.

Before I conclude, I want to provide you also with an update on our sustainability commitments, which are becoming increasingly important to our customers and our key pillars of our growth. In Q1 we are proud to achieve the milestone of 100% GREENGUARD gold certification for nursery furniture and seating and Pottery Barn Kids. While Rejuvenation announced a landfill diversion partnership with Habitat for Humanity as well as its commitment to offering only textiles that are sustainably sourced and made from organic fibres.

It’s important to us that we are making a difference in the world through the products that we put in people’s homes. This is a key reason why customers choose us over our competitors. I encourage you to take a deeper look at the progress we are making in areas such as worker wellbeing and our supply chain. GREENGUARD certification of our furniture and sustainable sourcing of cotton an FSC certified wood and our upcoming Annual CSR report.

As we look to the balance of the year, we believe we are uniquely positioned to capture the significant opportunities we see in the home furnishings industry. We’ll continue to build on our strong momentum to achieve our goals maximizing growth and drive profitability across our portfolio of brands. Before I pass it over to Julie, I’d also like to thank all of our associates for the strong start to the year.

And with that, I will turn the call over to Julie for a financial review of the first quarter and an update to our fiscal year 2019 guidance.

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Thank you, Laura. And good afternoon everyone. Our strong first quarter results reflect the momentum we are seeing across our key business initiatives to drive long term growth and profitability. We were pleased to see solid top line growth combined with product margin expansion, occupancy and overall expense leverage, resulting in operating margin expansion and EPS growth in excess of 20%.

During the first quarter on the top line, we generated net revenues of $1.241 billion for a year-over-year growth of 3.2%, and comparable brand revenues sequentially accelerated to 3.5% on top of a strong comparison of 5.5% last year. The key drivers of this revenue growth include West Elm delivering accelerated comps of 11.8% on top of a 9% comp last year, the Pottery Barn brand returning to a positive comp at 1.5%, and our emerging brands combined delivering another quarter of double-digit growth.

From a profitability standpoint, we delivered operating income of $87.1 million, which grew 15.8% over last year and resulted in 70 basis points of operating margin expansion to 7% versus a 6.3% last year. The key components of this improvement in profitability were product margin expansion and occupancy leverage within gross margin as well as overall strong SG&A leverage.

Gross margin for the first quarter was 35.9% versus 36% last year. Higher shipping costs which is primarily driven by a larger mix of furniture sales was almost completely offset by the benefits we saw from product margin expansion and another quarter of strong occupancy leverage. Our product margin expansion reflects our emphasis on relevancy and inspiration rather than broad based promotions as well as the ongoing success we are seeing across our supply chain initiatives, which continue to drive efficiencies.

Occupancy costs remain flat to last year at approximately $173 million improving 40 basis points year-over-year to 14%. This was primarily a result of our ongoing retail optimization initiatives including the closure of unproductive stores and the corresponding benefits we see from reduced rent and other occupancy related costs.

SG&A for the first quarter was 28.9% this year versus 29.7% last year. This 80 basis point leverage across advertising, employment and general expenses reflect the benefits of the cost savings initiatives we implemented across the business and our overall expense discipline. The effective income tax rate during the first quarter was 24%, which was relatively in line with last year’s rate of 23.8%. This resulted in bottom line diluted earnings per share of $0.81 which was $0.14 or 21% higher than last year.

On the balance sheet, we ended the quarter with a cash balance of $108 million versus $290 million last year. In the first quarter, we invested $36 million in the business and returned over $70 million to stockholders through dividends and share repurchases, comprising $37 million in dividends and $34 million in share repurchases.

Moving down the balance sheet, merchandise inventories were $1.155 billion for an increase of 9.7% over last year. This was primarily driven by inventory in transit and not yet received at our distribution centers. Inventory on hand and available for sale increased 2.3%. The overall growth in inventory was primarily driven by West Elm and Pottery Barn and reflects the timing of shipments, a mix shift in customer demand for more dropship and custom made product compared to stocked inventory, as well as the cost increases associated with the previously identified list three 10% China tariffs already in place. And although total inventory growth this quarter was higher than revenue growth, it does help alleviate some pressure from the recent list three tariff increase from 10% to 25%.

Operationally, we are encouraged to see continued improvement from all of our inventory initiatives driving reduced back orders and back order create rates at all time lows. In the short term we expect inventory to remain at these levels as we appetite inventory to help offset the potential impact of the list four tariffs. However, we anticipate that inventory growth we back in line with sales growth by the end of the year.

Additionally, as a reminder, during the quarter we also implemented the new lease accounting standard which requires all leases with terms greater than 12 months to be capitalized on the balance sheet. This resulted in a net increase of approximately $1.2 billion to our assets and liabilities and no impact to our income statement.

Before we discuss our full year guidance, I wanted to make a couple of comments regarding the China tariffs in light of the most recent developments. As we gave full year 2019 guidance with the assumption that the list three 10% China tariffs would increase to 25%. And unfortunately our pessimism turned out to be true. But as we told you we have been executing on an aggressive plan to offset the financial impact of these tariffs since last year, we have moved a substantial amount of our production out of China and we are offsetting the remaining impact through cost renegotiations, selective price increases and cost reductions in other areas of our business. It’s not an easy thing to do, but given our vertically integrated multi country supply chain and our trusted long-standing relationships with our vendors, we believe we are better positioned to do so than most.

As a reminder what was not contemplated in the guidance given at the beginning of the year was the potential implementation of tariffs on the expanded list of all products imported from China or list four proposed by the USTR in mid-May. We are under way with our initiatives to mitigate the impact of these potential additional tariffs including expediting inventory in advance of the potential implementation.

Given our strong start to the year as well as to the second quarter, we are pleased to be raising our full year diluted EPS guidance by $0.05 from the range of $4.50 to $4.70 to $4.55 to $4.75. We are reiterating all other financial guidance given at the beginning of the year. For the fiscal year 2019 we expect net revenue this to be in the range of $5.670 billion to $5.840 billion with comparable brand revenue growth in the range of 2% to 5%. Our operating income is expected to grow relatively in line with our revenue growth resulting in an operating margin relatively in line with fiscal year 2018. We are also reiterating our commitment to maintaining a balanced capital allocation strategy in fiscal year 2019. We plan to utilize our strong operating cash flow to first invest $200 million to $220 million in the business in those areas that will fuel our growth and provide the highest returns. And we remain committed to returning excess cash to our stockholders in the form of share repurchases and dividend payments.

In summary, we are excited about our strong start to 2019 and the momentum we are seeing from the execution of our growth and operational initiatives. This gives us the confidence that with our clear roadmap for accelerated growth and improved profitability that we laid out at the beginning of the year, together with our competitive strengths including a portfolio of loved brands, a truly industry leading multi-channel shopping experience. A multi country vertically integrated supply chain that gives us flexibility on sourcing and control over quality, sustainability and cost. Our strong operating cash flow and balance sheet and our proven track record of strong financial discipline, we are well positioned to achieve our financial targets for 2019 and longer term.

I would now like to open up the call for questions. Thank you.

Questions and Answers:

Operator

(Operator Instructions) And we’ll go first to Jonathan Matuszewski with Jefferies.

Jonathan Matuszewski — Jefferies — Analyst

Great, thanks for taking my questions. First one just on West Elm, really impressive trend here ongoing strength in the concept and last quarter you alluded to the brand finding more traction in more suburban areas branching out beyond kind of urban cities. So would you consider this to be one of the notable kind of drivers of the comp trend lately and how does this kind of trend your scene make you think differently about the total addressable market for West Elm ahead. Thanks.

Laura J. Alber — Chief Executive Officer, President, Director

Thanks for the question. Yes, West Elm continues to outperform across channels and across geographies including internationally. And it really is a very powerful global design brand, and the product I think is very relevant right now in terms of diversity of looks and also small spaces. The quality and sustainability part of the equation I think are very important to our customers, and we have a lot of innovation, so we keep as much as people have tried to copy what we’re doing we’re continuing to be bold in our designs and moving forward and we’re seeing customer acquisition numbers grow and new categories of business grow and our new collaboration with Pottery Barn Kids, the Pottery Barn Kids West Elm, baby collaboration is been also very successful. So we’re well on our way to our aggressive roadmap to reach $3 billion and we’re starting the year off strong.

Jonathan Matuszewski — Jefferies — Analyst

Great. And then just a follow-up with regards to tariffs. It sounds like you’ve had a lot of success in terms of redirecting orders with vendors and cost negotiations. Could you just update us on your thoughts on pricing philosophy, any changes as you look to pursue a changed architecture in the face of elevated tariffs and how do you view the pricing elasticity across your product portfolio? Thank you.

Laura J. Alber — Chief Executive Officer, President, Director

Thank you. Tariffs are obviously disruptive over the short-term. But we are hopeful that the trade talks to the United States and China will continue productively and something positive will come out of the over the long-term. In the meantime as you said we are executing on an aggressive plan to help mitigate the impact of the tariffs already in effect. And we’ve also started working on this potential of even more products being tariffed in the future. We’ve already moved a substantial amount of our products out of China. And as Julie said we’re often the remaining impact of across renegotiations, selective price increases and as you can see in this quarter a lot of cost reductions across the company.

In terms of price increases the value to our customers its extremely important and they are looking to us for great products, quality that last sustainability and a very good price. So we’ve been working hard across our brands to introduce more opening price point with great quality so for example in Williams-Sonoma Open Kitchen and Pottery Barn the apartment products that we’ve introduced. And we’ve also just been looking at how do we sharpen up our prices in total. And we have enough innovation that we have new products, new best sellers coming in all the time. So at the same time that there are pricing pressure we’ve also done a — we’ve made a big effort to bring in lower priced products at the same time. So we don’t believe our value equation will be hurt by selective price increases.

Jonathan Matuszewski — Jefferies — Analyst

That’s really helpful. Thank you.

Laura J. Alber — Chief Executive Officer, President, Director

Thanks.

Operator

We’ll go next to Chuck Grom with Gordon Haskett.

Andrew Minora — Gordon Haskett Research Advisors — Analyst

Hi guys. Good afternoon. It’s Andrew on for Chuck. I had a quick question first on EBIT margin outlook for the year, you guys are keeping it at flat year-over-year for the full year, obviously you had a strong quarter this quarter, just with some leverage on that line. I’m just wondering if there’s any puts and takes you guys could help us think about the remainder of the year where there may be some give back or is this just staying a little bit conservative because it’s early in the year. Anything on that would be helpful.

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Sure. I mean, at this point — to your point it is early in the year. So we are being conservative obviously as Laura mentioned as well on list four tariffs are looming out there. But ex either one of those, the fundamental strength of our business and the strong start to the year is what allowed us to raise $0.05 on the year today. And if we didn’t have any of those other uncertainties out there, we would even be higher. So I would not be concerned about where we think the Op margin is going to be. Obviously it’s early in the year and we are confident in where our marginal land at least relatively in line with last year.

Andrew Minora — Gordon Haskett Research Advisors — Analyst

That makes — that makes a lot of sense. And then on the comp just kind of like a two part question, but actually where was that relative to your internal expectations like I know you mentioned that’s normal. It was a little bit worse than you guys would have hoped for in the quarter, but I guess overall and then if you could talk about if you could pass it out for us like some of the self-help drivers that maybe helped drive the strong comp year-over-year and then thanks for the time.

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Yes. So I mean obviously we are good in giving guidance on a quarterly basis, but we gave directional guidance and I’m assuming that’s what you’re alluding to at the time of our last call and really what happened is since the time we gave the directional guidance to the back half of the first quarter was really strong particularly in the home furnishings brands. And so we were really pleased to get to a solid 3.5 comp and as we said — we both said in our prepared remarks with West Elm accelerating to 11.8% on top of a 9% last year and Pottery Barn returning to positive growth at a 1.5% and our emerging brands combined growing double-digits along with global growing 9%, when all of that happens it really drives a solid comp and that combined with the product margin expansion that we had at the same time, and the fact that we had flat occupancy costs really allowed us to leverage the entire P&L and come through with a very strong solid Q1. But it really was back half weighted.

Andrew Minora — Gordon Haskett Research Advisors — Analyst

All right, great. Thank you very much and congrats on the quarter.

Laura J. Alber — Chief Executive Officer, President, Director

Thanks.

Operator

(Operator Instructions)We’ll go next to Steve Forbes with Guggenheim Securities.

Stephen Kovalsky — Guggenheim Securities — Analyst

Hey guys, how’s it going? This is Stephen Kovalsky on for Steve. So I wanted to start with the first quarter expense performance. Maybe just expand on where you’re seeing the greatest strength there. And then if you could maybe also expand on the employee related expenses via severance and reorganization charges. How we should think of those moving out through the rest of the year?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Sure, yeah. As far as the leverage we saw with an SG&A we are really pleased to see that as Laura mentioned this is everything to do with the fact that we are delivering our cost savings initiatives, and the 80 basis points of leverage is really honestly across the board, it was in advertising, it was employment, it was general expenses I mean just about every single line we’ve been aggressively pursuing these costings initiatives and we’re really pleased to see those come in so quickly.

Stephen Kovalsky — Guggenheim Securities — Analyst

Great. And then as a follow-up so the Design Room Planner, could you guys give us some insight maybe into the conversion rates and then also what percentage of those are being utilized across brands?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Yes. I’m going to pass it over to Yasir to talk about the Room Planner.

Yasir Anwar — Chief Technology Officer

Hi. Thanks for the question. So as Laura mentioned we’re seeing significant improvement in the engagement, as we continuously tune and tweak the experience to remove friction and helping the customers to design their rooms and actually entire home you can do it today. So that is happening and 40% increase since we launched and the number of rooms plans that have been created by our association of designers. We’re trying to create a bridge between our designers and the end customers so they can design whatever they can and they can pass it on to the experts, who can finish it off or give them even more better experience there.

In terms of conversion, I think there is an improvement in conversion. We’re also counting on return rate reduction, but I don’t think it can share it today. I think we want to give a little bit more runway, maybe perhaps next time we would have numbers for you to define actual conversion numbers.

Operator

We’ll take our next question from Christopher Horvers with JP Morgan.

Tami Zakaria — JP Morgan — Analyst

Hi this is Tami Zakaria on for Chris Horvers. Thanks for taking my questions. So we had a modeling question. Can you talk about how the week shift played out in 1Q? And in the fourth quarter you indicated you were going to compare weeks 1 to 13 this year to the weeks of 2 to 14 from last year. Is that right? And what was the revenue shift impact to reconcile the top line to comps? And similarly how does that shift affect sales for the rest of the year?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

We haven’t provided that much detail on it except to say that all year long there’s going to be a one week shift. The revenue growth has not been adjusted. Comps obviously have been adjusted. So the comps are adjusted back to the same week in the prior year. But the revenue growth has not, which is why you see the revenue growth is below the comp growth this quarter it’s at 3.2 versus 3.5. And that is predominately due to the shift from the 53rd week.

Operator

We’ll take our next question from Peter Benedict with Baird.

Justin Kleber — Robert W. Baird — Analyst

Hi guys, it’s Justin Kleber on for Pete. Just wanted to follow up on an earlier question, as it relates to those employment related expenses that you call out in your non-GAAP reconciliation. Where are you in terms of these reorganization efforts. Because it looks like these expenses have been recurring for over a year now. And what type of positions I guess are you eliminating.

Julie P. Whalen — Executive Vice President and Chief Financial Officer

So the reduction in force that you’re alluding to as far as the severance that you’re seeing come through in the non-GAAP was a pretty sizable reduction in force that we did obviously it’s a very sensitive subject. So we will be thoughtful about how we talk about. It’s not something that we like to do but sometimes it’s something that we have to do in order to have the cost savings necessary to run the business and mitigate things like the tariffs, where a lot of the reductions came out of was in management. In retail management and at corporate HQ’s. And they haven’t been that often, this is something it’s been every other year for different categories, but this one was pretty unique and that it was really centered around management.

Operator

(Operator Instructions) We’ll go next to Michael Lasser with UBS.

Michael Lasser — UBS — Analyst

Good evening. Thanks a lot for taking my question. It’s on the guidance. So you beat the at least the printed expectation by $0.12 you raised the guidance for the year by $0.05. And many of the components of the guidance were the same. Can you give us a little bit more detail on it and what’s changed? And then two, how have you factored in the tariff impact into the guide?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

As far as your first question has the different components of the guidance stay the same, I mean the reality is our Q1 came in at a 3.5 comp which is the exact center of our 2% to 5% comp on the full year. Our EPS came in at 21% growth rate with 70 basis points about margin expansion so obviously we saw more leverage from the P&L side of things. And so that’s why you’re seeing it flow through to the EPS side. As I said on a earlier question, we obviously are also being thoughtful of the fact that it’s early in the year and then there is some potential impact of list four tariff that was not contemplated in our original guidance and so we’re being thoughtful about that as far as raising any further on the year. But that’s how the guidance raise was thought through.

As far as the tariffs, we have list three and hopefully everybody knows the list three and list four, but the list three tariffs going from 10% to 25% was something we contemplated is something we told you on the last call that we did have covered within our guidance and that is still true. List four we do not, and so we are aggressively working on that like we have before with the prior list and are doing everything we can to help mitigate that now ahead of that even going in. For example, as I mentioned with inventory we are accelerating the shipping of inventory to get ahead of the potential of the increase to 25%.

Operator

Then we’ll take our next question from Oliver Wintermantel with Evercore ISI.

Oliver Wintermantel — Evercore ISI — Analyst

Yeah, hi good evening. I’m going back to the tariffs. Can you give us some more details on what percent of your COGS is on list three and if you would expand it to all Chinese imports how much percent of COGS would be on the list?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

We haven’t disclosed that, I mean obviously the numbers are constantly moving. We’re working very hard to resource a lot of the product out of China, and so in fact, we’re planning to resource almost half to bring down half of what we do today by next year. And so it’s considerably going down and then that combined with the cost renegotiations has really brought it down. But we haven’t disclosed the actual number.

Operator

We’ll go next to Brad Thomas with KeyBanc Capital Markets.

Bradley Thomas — KeyBanc Capital Markets — Analyst

Hi. Thanks for taking the question and good quarter here. I wanted to ask about the Pottery Barn brand. Has we’ve been following it during the last quarter, it appeared that you were less promotional during the brand. And so encouraging to see the sales where they were with what appeared to be less promotions. I guess for 1Q can you talk about the balance of promotions in that brand, the success you’re having. And then with West Elm now your second biggest brand. Can you talk a little bit about the interplay between West Elm and Pottery Barn and how you balance that? Thank you.

Laura J. Alber — Chief Executive Officer, President, Director

Sure, thanks. We were pleased to see the reacceleration in this quarter and also saw the net be similar demand which is important to us. And as Pottery Barn is a powerful highly profitable brand. And it’s been a proven platform by which to grow incremental businesses. And the latest to being Pottery Barn apartment and marketplace which is both — which are both scaling very quickly and they’re both contributing incremental revenues and attracting new customers. Demand was also strong for a special order upholstery.

The majority of which is made a proprietary manufacturing in Hickory, North Carolina. And we expect these trends to continue. Or as I said earlier we’re seeing nice response to our outdoor furniture. And we’ve also been working through our inventory optimization efforts to reduce the amount of clearance, which we’ve done successfully. And therefore running less promotions in those clearance buckets which helps margin.

Operator

We’ll go next to Brian Nagel with Oppenheimer.

Brian Nagel — Oppenheimer — Analyst

Hi. Good afternoon. and thank you for taking my questions. Nice quarter. So I wanted to — I want to focus on the top line. I’ll keep it to one question or maybe parts into (inaudible). First off, if you could discuss a bit maybe the trend in sales through the quarter. I think you had mentioned that Williams-Sonoma corp track weaker than your expectation, how did the overall business track through the quarter. Any further explanation on the underlying drivers of the pickup in the Pottery Barn brand. And then also there’s been chatter out there with some of your competitors regarding sales weakness in states where, I guess the SALT (ph) tax adjustment was a factor. Are you seeing that at all in your business?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

As far as the cadence of the sale, typically we don’t comment on that. I mean I think I’ll reiterate is what I said earlier is that obviously since we gave the the directional guidance, we saw more strength particularly in our home furnishings brands in the back half of the quarter. As far as the states where we have the SALT tax we haven’t seen any sort of disproportionate reaction to that at all.

Laura J. Alber — Chief Executive Officer, President, Director

Also I want to go back, I don’t think I fully answered the question about the West Elm and Pottery Barn interaction that was asked. It’s interesting because we’ve really study that over and over, we’ve actually found that the two help each other, and that we haven’t seen cannibalization either at retail or online. In fact they both refer and drive traffic to each other and this is a big advantage, I believe strongly because of our portfolio of brands and we’re using more and more the cross-brand power to drive business between brands and you’ll see us do even more of that, we do that with Key, we do that with the Room Planner where you can shop across brands. And you’re even if you’re looking very carefully you’ll notice when you search a category, we serve products from the other brands at the end of each category. So if you don’t find that you’re looking for in Pottery Barn, we will say not finding what you’re looking for and we’ll hotlink them to West Elm.

So we actually are saying the two be very symbiotic and additive and as you know it also really helps us with our cost to have the outbound furniture going together to zip codes.

Operator

(Operator Instructions) And we’ll go next to Scot Ciccarelli with RBC Capital Markets.

Beth Reed — RBC Capital Market — Analyst

Hi good evening, this is Beth Reed on for Scot. Just want to ask about shipping fees. Can you guys give us just an update on how you’re thinking about these fees perhaps some color on the number of promotional days versus last year how that’s trended? How you kind of plan for that to trend going forward. And then lastly if you could give any color on to what extent you’re able to cover your cost of shipping? Thank you.

Laura J. Alber — Chief Executive Officer, President, Director

There is no material change in shipping day promotions. Shipping is different for us than the lot of others, because we do like love and home versus door drop on our large scale furniture. And we do cover our costs there. And you see that we do charge money on shipping and we see shipping on the CMO products as another just part of the whole profitability in the customer looks at total price of product with both the retail plus the shipping together when they make a purchasing decision and our goal is to have the best product most sustainable product at the best price.

Beth Reed — RBC Capital Market — Analyst

Got it thank you.

Operator

And we’ll go next to Cristina Fernandez with Telsey Advisory Group.

Cristina Fernandez — Telsey Advisory Group — Analyst

Hi. Thank you. I wanted to go back to your comment around — about half of the exposure from China to other countries. Can you share where you’re moving that manufacturing too. I heard some of it is coming back to the US. And how does that impact your cost structure going forward?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Sure. Yes. As you’ve heard me say I’m so proud that we’ve opened our third Sutter Street facility in Tupelo and moving a lot of production there. We also have moved production to Vietnam, to Indonesia, to Thailand and to Cambodia.

Operator

We’ll take our next question from Curtis Nagle with Bank of America Merrill Lynch.

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Good evening. Thanks very much for taking the question. I just wanted to quickly focus again on I guess the expectations for some of the adjustments that have been going through. How should we think about the rest of the year on a dollar basis. Would they be kind of in line with this quarter? Or perhaps lower?

Julie P. Whalen — Executive Vice President and Chief Financial Officer

I’m assuming you’re talking about the non-GAAP adjustments and if that’s the case as I alluded to on our last call the outward impact would be continuing throughout the year. Obviously, there’ll be one off things that can happen that I’m not aware of at this moment, similar to or that haven’t been implemented, similar to the reduction in force. But from what I know of today that would be what would continue.

Operator

And we’ll go next to Sumit Sharma with Berenberg Capital Markets.

Sumit Sharma — Berenberg Capital Markets — Analyst

Hi. Thank you for taking my question. Related to your your gross margin, I think you mentioned that the occupancy leverage kind of offset higher shipping expenses. I was just wondering how much of room or leverage do you have in this line? And if you could add a little more color to the kind of discussions you’re having with your landlords. Is it just lower asking rents? Or are there other structures that reduce the net effect rent? Or term of the lease release — any kind of insight you could provide would be great.

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Okay. So from an occupancy perspective yes, we’re really pleased to see how much we’re able to leverage that. As I mentioned we are holding our occupancy costs in line with last year, which is pretty phenomenal and obviously drives a lot of that occupant leverage that you’re seeing the 40 basis points.

We also did have a product margin expansion in the combination of those two are what offset effectively the shipping costs. From an occupancy cost perspective going forward and what are the sorts of things that we’re seeing. It’s really — it’s the reduction in rents and all the rent related costs that are coming with it it’s also with the fact that we’re holding, our capital investments relatively flat. And so the depreciation that comes in with those that hits with an occupancy has not been expanding. And so that’s what’s enabled us to maintain that going forward. As far as the store closures I don’t know if Laura you want to take that.

Laura J. Alber — Chief Executive Officer, President, Director

Yes sure. I think, it’s a very interesting time for all of us, as we continue to see more and more store closures being announced with the potential of more tariffs putting even more pressure on retailers. But we see this as an opportunity for strong brands like ours to strengthen our partnership with landlords and great centers. And as retail is a very important part of our multi-channel model. Our stores, our experience centers for our customers, they drive brand awareness and customer acquisition.

And we’re going to continue to enhance our retail experience in existing stores and selectively invest in new stores for West Elm, which have been outperforming. And that said we’re also going to be closing under productive stores and stores that we don’t need in underperforming markets. We have 250 stores, that are coming up for lease renewal in the next three years. And that is a lot to look at. We’re looking for the best outcome. And we imagine this will continue to provide us with occupancy leverage.

Operator

And that concludes our question-and-answer session. I’d like to turn the call back over to management for any additional or closing remarks.

Laura J. Alber — Chief Executive Officer, President, Director

Well, thank you so much for joining us. I hope you’re all going to watch the game tonight. And I look forward to talking to you again next quarter.

Operator

And ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You may now disconnect.

Duration: 47 minutes

Call participants:

Elise Wang — Vice President, Investor Relations

Laura J. Alber — Chief Executive Officer, President, Director

Julie P. Whalen — Executive Vice President and Chief Financial Officer

Yasir Anwar — Chief Technology Officer

Jonathan Matuszewski — Jefferies — Analyst

Andrew Minora — Gordon Haskett Research Advisors — Analyst

Stephen Kovalsky — Guggenheim Securities — Analyst

Tami Zakaria — JP Morgan — Analyst

Justin Kleber — Robert W. Baird — Analyst

Michael Lasser — UBS — Analyst

Oliver Wintermantel — Evercore ISI — Analyst

Bradley Thomas — KeyBanc Capital Markets — Analyst

Brian Nagel — Oppenheimer — Analyst

Beth Reed — RBC Capital Market — Analyst

Cristina Fernandez — Telsey Advisory Group — Analyst

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Sumit Sharma — Berenberg Capital Markets — Analyst

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