Williams-Sonoma (WSM) Q3 2024 Earnings Call Transcript

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Williams-Sonoma (NYSE: WSM)
Q3 2024 Earnings Call
Nov 20, 2024, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Williams-Sonoma Inc. third-quarter fiscal 2024 earnings conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the conclusion of the prepared remarks.

I would now like to turn the call over to Jeremy Brooks, chief accounting officer and head of investor relations. Please go ahead.

Jeremy Brooks -- Chief Accounting Officer and Head of Investor Relations

Good morning, and thank you for joining our third-quarter earnings call. I'm here this morning with Laura Alber, our President and Chief Executive Officer; Jeff Howie, our Chief Financial Officer; and Sameer Hassan, our Chief Digital and Technology Officer. Before we get started, I'd like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our raised guidance for fiscal '24 and our long-term outlook. We believe these statements reflect our best estimates.

However, we cannot make any assurances these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results.

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A detailed reconciliation of non-GAAP measures to the most directly comparable GAAP measures, it appears in Exhibit 1 to the press release we issued earlier this morning. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. Now, I'd like to turn the call over to Laura.

Laura J. Alber -- President and Chief Executive Officer

Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. At Williams-Sonoma Inc., we continue to have strong performance, exceeding both top- and bottom-line expectations. The third quarter was driven by continued improvement in our sales trends, market share gains, and strong profit.

Our comp came in at down 2.9% with an operating margin of 17.8%, delivering a 7% increase in earnings per share to $1.96. Also, we bought back 533 million of our stock this quarter, and have purchased 4% of our shares outstanding so far this year. Our operating results reflect the operational improvements that we've been focused on all year and the strength of our margin profile. Even in a difficult environment, our initiatives continue to gain momentum, and we are optimistic and confident about our business.

As a result, we are raising our full-year guidance. We now expect full-year revenues to come in at a range of down 3% to down 1.5%, and we are raising our guidance on operating margin 40 basis points to be in the range of 17.8% to 18.2%. And due to our confidence in our business model and our ability to perform in almost any environment, our board has approved an additional $1 billion stock repurchase authorization. We continue to be focused on our three key priorities: first, returning to growth; second, elevating our world-class customer service; and third, driving earnings.

Let's start first with returning to growth. Our top-line trend improved over Q2, and even though we ran negative in Q3, we outperformed the industry decline of 7% this quarter. Our better-than-industry performance is a result of our focus on innovation from our products to our design services. We set ourselves apart from the competition with our unique in-house design capabilities and vertically integrated sourcing organization, which gives us the ability to offer high-quality products at compelling price points.

It is this price value balance that allows us to continue to significantly reduce our promotional activity. On the design front, we have been innovating and preparing for the next generation of design services. The new tools that we have launched assist our customers with developing design plans for any size or style of home. In October, we also launched our Shop by Style and design boards in Pottery Barn, allowing customers to create and share and mood boards online.

The next key component of our return to growth strategy is our commitment to improving our channel experiences. We are continuously investing in our proprietary e-commerce technology. We are actively incorporating AI into our capabilities in areas like personalized emails and homepages and supply chain decision-making. From product discovery and selection to personalization, content, customer care, and the final mile, our team is constantly thinking about how to elevate and evolve our best-in-class e-commerce experience.

And we are pleased with the strong performance in our retail stores. We have continued to improve our in-store experience with inspiring new products, improved in-stock inventory levels, and next-level design services and events. Our retail optimization strategy is working. Our new store locations and designs are driving good ROI and we see continued opportunity to transform our store fleet to be positioned in the most profitable and inspiring locations.

Now, let's talk through progress on our second and third key priorities. We continue to make progress improving our world-class customer service, which, in turn, drives earnings and contributes to our strong operating results. Our customer service metrics have improved since Q2 and our all-time record levels. Our supply chain team continues to reduce cost by limiting out-of-market and multiple shipments, reducing customer combinations, lowering returns and damages, and reducing replacements.

And despite the progress we have already made, we see more margin opportunity ahead as we continue to drill down on areas for additional optimization and efficiency. Now, I'd like to update you on the performance of our brands. Pottery Barn ran a negative 7.5% comp in Q3. In the brand, we saw improved furniture performance during the quarter.

Also, fall new launches were up to last year, driven by the strength of our new furniture offerings and skew additions to core. Also, the brand continues to see strength in proprietary seasonal offerings. In Q3, we launched Thanksgiving and Holiday, representing the biggest offer of seasonal products this year, and we are pleased with early reads. The customer is responding to innovation and newness in key collections and our easy decorating updates for the home.

We believe there are no lifestyle brands in the market that have seasonal decorating and entertaining offerings like ours. This is a competitive advantage for Pottery Barn that is highly relevant and uniquely positions us for the industry, especially in the fourth quarter. The Pottery Barn children's business ran a 3.8% comp in Q3, marking its third consecutive quarter of positive comps. We saw widespread comp improvement in the quarter with all divisions of the business delivering positive comps with particular strength in the areas of textiles and decor.

Innovation across our product offering has been key to delivering growth in our kids business. In the quarter, compelling new product introductions in our fall and holiday assortments drove a significant portion of our comp growth. We are seeing success with new furniture, fresh bedding, and kid-friendly products to celebrate the holidays. One particular highlight was our success with product collaboration, which has been a strategic focus.

We have grown our collections with key partners and are delighted to expand our successful Chris Loves Julia line to span all of the Pottery Barn brands. We also see continued strength in our trending LoveShackFancy partnership. As we look to holiday in the quarters ahead, we have a robust pipeline of new products, exciting partnerships, and channel innovation to fuel continued growth. Now, let's review West Elm.

West Elm ran a negative 3.5% comp in Q3, a significant improvement from Q2. While macroeconomic factors continue to impact overall consumer demand for furniture, West Elm is proving that good innovative products will always resonate. Fall newness drove double-digit positive comp and furniture newness, in particular, was strong. Holiday, which is West Elm's biggest season of new product intros this year is also off to a strong start with double-digit positive comp in seasonal textiles, kids, and furniture.

Additionally, West Elm launched a very exciting kids collaboration with Fashion Tastemaker and Children's Book author Eva Chen in September. The collection, bright, fashion colors, multifunctional furniture, and novelty pieces, are driving sales. This collab has secured articles and publications like Vogue.com, Architectural Digest, Forbes, and New York Magazine. The brand also launched a Halloween Cat Full collection with Christina Ricci who is popular with press, our customers, and the actress' large social following.

We are thrilled with the momentum we're seeing in the West Elm business, especially the positive trends in newness and exciting collaborations. Now, let's talk about Williams-Sonoma. The Williams-Sonoma brand was essentially flat in Q3. The brand continues to focus on new, exclusive, and innovative product offerings.

Strength continues in high-ticket items in electric, especially espresso machines and stand mixers. Also, tabletop is strong. At the Williams-Sonoma brand, we celebrate great design and quality. We are thrilled to see the consumer and media response to the launch of the new Evergreen KitchenAid mixer.

Our customers were quick to embrace the new green-based and wood full design evolution of the KitchenAid mixer, an item iconic to the Williams-Sonoma brand. The business also benefited from several key collaboration launches in Q3, including the launch of new cookware additions to the popular Stanley Tucci for GreenPan collection, a food collaboration with a world famous chef Jean-George and the launch of our Thanksgiving partnership with Ina Garten. Ina is on the cover of this year's Thanksgiving catalog which features an exclusive look at our Thanksgiving menus, recipes, and hosting tips. Our team is also proud to be supporting Ina as the exclusive bookseller on a five-city book tour.

In addition to her tour, Williams-Sonoma held more than 50 cookbook signings and events in Q3, hosting top chefs, influencers and popular celebrities like Bobby Flay, Al Roker, and Eva Longoria in our stores. As I said, the tabletop business was also strong in Q3 as people were gearing up for the holiday season and prioritizing eating at home. Williams-Sonoma has launched a robust art of entertainment content marketing campaign designed to drive growth by keeping our customers at a set table, stock a bar, and host a party. We are also encouraged by the improvement of the Williams-Sonoma home business with expanded products across categories.

We recently launched a collaboration with artists and designer Josh Young whose beautiful collection for Williams-Sonoma Home features products inspired by popular provisional art. Now, I'd like to update you on our other initiatives. Business-to-business continued its momentum, delivering its largest quarter history to date. The business grew 9% in Q3 with contract growing 17% while trade grew 4%.

The contract business represented 36% of the B2B business in the quarter. Project and partner wins this quarter include JW Marriott, Las Vegas, Ritz-Carlton Papagayo, office projects for Google and Sony, along with our continued work with Sunrise Senior Living-related companies, Hanover and Spring Hill Suites. As we move into Q4, we are excited to be ramping up our corporate gifting program, along with focusing on our strategic growth opportunities and pipeline development to support our continued growth moving into FY '25 and beyond. Now, I'd like to talk about our global business.

We're pleased to report strong results across key markets, including Canada, Mexico, and India. In Canada, our strong performance across all brands was driven in our design business, B2B, and successful Thanksgiving season. In Mexico, our brands continue to gain market share due to our unique product and service offerings, and we are well positioned for a strong holiday season. We're excited to expand our presence with four new store openings in Mexico for West Elm, Pottery Barn, and Pottery Barn Kids in early 2025.

Our business in India is also growing, demonstrating strength in our design services and an increase in decorating during the festive season. We'll be opening two additional West Elm stores in India during the first quarter of 2025. In the U.K., we have renewed our partnership with John Lewis for the West Elm and Pottery Barn Kids brand, and we're also proud to be selling Williams-Sonoma products inside Fortnum & Mason this holiday season. Initial sales are promising, and we look forward to the opportunities these partnerships present for enhancing our marketing and brand awareness in this market and around the globe.

Lastly, I'd like to update you on our emerging brands. Rejuvenation continued to have strong performance with another quarter of double-digit growth. We are seeing success with both consumer and trade customers. The brand offers high-quality, exclusively designed products for your home remodel or refresh, and the trend of home updates, particularly in kitchen and bathroom, continues.

And we have increased our assortments and in-store presence of these categories. We're also seeing success in furniture and textile at Rejuvenation. At Mark and Graham, we launched two new incremental businesses in the fall season, Mark and Graham Kids and Mark and Graham wedding shop both of which our customers responded well to. Also, the brand just launched their holiday gifting collection with many new in-house designed gifts, and we are thrilled to roll out our new collection Bark & Graham for all of our pet lovers.

Please go online and check it out. And finally, GreenRow, our newest brand, continues to show strong growth with its unique collection of thoughtfully sourced vintage-inspired furnishings. In October, GreenRow launched its first holiday collection with handcrafted and upcycled gifts and decor. The brand continues to inspire with its innovative use of material in bright, optimistic colors.

We're excited to continue to grow GreenRow and look forward to new products and partnerships in the coming months. In summary, we're proud of our continued strong results and outperformance at Williams-Sonoma Inc. Our strategy of focusing on returning to growth, enhancing our world-class customer service, and driving earnings is working. As we head into the last quarter of the year, we are optimistic and confident.

Our stores are set. The music is on. The lights are twinkling, and you can smell the aroma of the holidays. This is the time of the year when we shine, and we welcome you to come visit up to any location and we sincerely wish you and your family a very happy Thanksgiving next week.

Before I hand it over to Jeff, I also want to take a minute to say thank you to our team, our vendors, and all of our partners for their continued dedication and contributions to our company's performance. We are grateful for all of you. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.

Jeff Howie -- Chief Financial Officer

Thank you, Laura, and good morning, everyone. We're proud to report results that surpass expectations on both the top and the bottom line, marked by sequential improvement in top-line trends, ongoing market share gains, and robust earnings performance. Our results this quarter reinforced the five key drivers underpinning our profitability. First, our e-commerce sales mix with its higher operating margin sustained at 66% of total revenues.

Second, our retail optimization strategy delivering 3% less occupancy expense than last year, inclusive of additional technology and supply chain investments. Third, our emphasis on full-price selling contributing to our 130-basis-point improvement to last year in merchandise margin even as we gain market share. Fourth, our ongoing opportunity to achieve cost savings from supply chain efficiency, producing a 100-basis-point improvement to last year in selling margin. And fifth, our ability to control costs to manage our bottom-line profitability.

Our results this quarter demonstrate the flexibility, strength, and durability of our operating model to drive market share gains and deliver highly profitable earnings in almost any environment. Now, let's dive into the numbers. I'll start with our Q3 results and then provide an update on guidance for '24. Net revenue finished above expectations, coming in at 1.8 billion with a comp of negative 2.9%.

We gained market share as we outperformed the industry, which declined by approximately 7%, even as we continued to reduce our overall level of promotions in the quarter. Our Q3 comps improved in Q2, reflective of better performance in furniture and continued growth in our nonfurniture category. From a cadence perspective, our trends across the quarter were choppy, reflecting the uncertain macroeconomic backdrop. Moving down to the income statement.

Gross margin exceeded expectations coming in at 46.7%, 230 basis points higher than last year. There were three drivers behind this improvement: merchandise margins, supply chain efficiencies, and occupancy costs. Let's start with merchandise margins, which improved 130 basis points to last year. This improvement was driven by lower input costs and our commitment to full-price selling.

Next, supply chain efficiencies, contributed 100 basis points to the year-over-year improvement in gross margin. We continue to realize cost savings across the supply chain, driven by more consistent operations from less promotional at selling. These savings are reflected in improved efficiencies in manufacturing, warehousing, and delivery expense. More importantly, these operational gains are enhancing our customer service.

Key metrics, including returns, accommodation, damages, replacements, out-of-market shipping, and multiple deliveries per order are all better than pre-pandemic level. And finally, occupancy costs, which were down 3% from last year and flat as a percent of revenue. We continue to see our retail optimization strategy deliver leverage in retail occupancy offset by our investments in our world-class technology and our supply chain. Overall, our higher gross margin this quarter exceeded our expectations.

Turning now to SG&A, which came in at 28.9% of revenue or 150 basis points higher than last year from higher employment expense and advertising spend, partially offset by lower general expenses. Employment expense was 160 basis points higher year over year, mostly from higher performance-based incentive compensation due to our strong EPS performance and from higher employee benefit costs during the quarter. Advertising expense deleveraged 20 basis points as we continue to invest in the higher levels of ad spend. Our advertising model is a powerful competitive advantage.

Our multi-brand portfolio allows us to test the ROAS of our incremental spending, while our hands-on approach maximizes the effectiveness of our investments and keep valuable insights in-house. General expenses leveraged 30 basis points from timing of administrative expenses. On the bottom line, our earnings exceeded expectations. Operating income came in at 321 million, up 2% to last year.

Operating margin finished at 17.8%, which was 80 basis points above last year. Diluted earnings per share was $1.96, up $0.13 or 7% better than last year. On the balance sheet, we ended the quarter with a cash balance of 827 million with no debt outstanding. This was after we both invested 83 million in capital expenditures supporting our long-term growth, and we returned 606 million to our shareholders through share repurchases and quarterly dividends.

Speaking of share repurchases, year to date, we have repurchased $707 million or 4% of our outstanding shares. Merchandise inventory ended the quarter at 1.45 billion, up 3.8% to last year. Our inventory levels are well positioned to support the upcoming holiday season, and our inventory levels are up only 15% compared to 2019, with revenues up 25% over that time period. Summing up our Q3 results.

We're proud to have delivered another quarter of results that exceeded expectations. I'd like to thank our talented, dedicated team at Williams-Sonoma Inc. for their exceptional work in achieving these results. Now, let's turn to our '24 outlook.

First, a reminder. The fiscal year '24 is a 53-week year for Williams-Sonoma Inc., so the fourth quarter will consist of 14 weeks. We will report comp on a 53-week versus 53-week comparable basis. All other year-over-year comparisons will be 53 weeks versus 52 weeks.

We anticipate this additional week will contribute 150 basis points to revenue on the year and 10 basis points to annual operating margin, both of which are embedded in our guidance. Now, let's talk through our updated guidance. We are raising our full-year guidance to reflect our strong Q3 results and our optimism about Q4 with our improving furniture trends and the strong performance of seasonal products all year. However, considering the holiday calendar shift, economic uncertainty, and slow housing market, our guidance contemplates a range of possible outcomes.

On the top line, we are raising our full year '24 net revenue guidance to be in the range of down 3% to down 1.5% with comps between down 4.5% to down 3%. The midpoint of our guide reflects the continuation of Q3 trends into Q4. We believe the high end of our guide implies a strong holiday season, and the low end of our guide reflects the potential for a greater impact from the macroeconomic environment on our Q4 results. On the bottom line, we are raising our full-year operating margin guidance 40 basis points based upon our Q3 performance.

With a 40-basis-point increase, our full year '24 operating margin will now be in the range of 18.4% to 18.8%, which includes a 60-basis-point benefit from the full-year impact from the Q1 '24 out-of-period adjustment. Without the Q1 out-of-period adjustment, our full-year operating margin will now be in the range of 17.8% to 18.2%. We continue to anticipate our Q4 operating margin will be materially in line with 2023 results without the benefit of the 53rd week on the quarter. Additionally, we expect our full-year interest income to be approximately $50 million and our full-year effective tax rate to be approximately 25%.

Turning to our 2024 capital allocation plan. We anticipate investing 250 million in capital expenditures to support the long-term growth of our business. Of this amount, 75% will be focused on strengthening our e-commerce leadership and enhancing our supply chain efficiency. As we've communicated quarterly, we're committed to returning excess cash to our shareholders through dividends and share repurchases.

We will continue to pay our quarterly dividend of $0.57 per share. In conjunction with our earnings release today, we announced that our board of directors has approved an additional $1 billion share repurchase authorization. Combined with our existing authorization, we now have nearly 1.3 billion in share repurchase authorization available to opportunistically repurchase our stock to deliver returns for our shareholders. Wrapping up Laura's and my comments on Q3, we're proud to deliver results exceeding expectations on both the top and the bottom line.

For the remainder of '24 we're focused on our three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. We're confident the flexibility, strength, and durability of our business model will drive market share gains and deliver highly profitable earnings in almost any environment. As we look beyond '24, we will provide guidance for fiscal year '25 in March as per our standard practice. Looking further into the future, we are reiterating our long-term guide of mid- to high-single-digit revenue growth, with operating margins in the mid to high teens.

We're confident we'll continue to outperform our peers and deliver shareholder growth for these five reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry, the strength of our in-house proprietary design, the competitive advantage of our digital first but not digital omnichannel strategy, the ongoing strength of our growth initiatives, and the resiliency of our fortress balance sheet. With that, I'll open the call for questions.

Questions & Answers:

Operator

[Operator instructions] We ask that you please limit your questions to one and one follow-up then return to the queue for any additional questions you may have. Our first question will come from the line of Cristina Fernandez with Telsey Advisory Group. Please go ahead.

Cristina Fernandez -- Analyst

Hi, good morning. I wanted to ask about the trends you saw in the quarter, particularly in furniture. It seemed like seasonal and small ticket is working really well. Furniture, Laura, you commented that it was slightly better.

So, can you talk about what you're seeing there and any signs that the consumer is starting to want to spend a bit more on big-ticket furniture items?

Laura J. Alber -- President and Chief Executive Officer

Sure. Thanks, Cristina. It's really hard to know exactly what's going on with the consumer. But our opinion is that probably a little bit better off than everybody thinks, especially our consumer.

And we are a lot more than just the furniture brand. As we've talked about, we're a life-stage brand, we're a lifestyle brand. And we've seen the best results in those businesses like our kids business. Look at those comps, and that's less related to housing, of course, we also have seen really good results all year on our seasonal assortments, which is exciting going into the holidays and partially why we're so optimistic about this quarter for us.

We did see furniture improve slightly in West Elm and Pottery Barn across the board. And we're seeing also our newness really work, which is great news for us because when you bring in a new furniture collection and it works, generally only bring it in in maybe one item. So, you might just bring in a coffee table. And when you see that look sell, you can expand that out into a whole franchise of a collection that will yield really good noncomp newness for years to come.

Cristina Fernandez -- Analyst

Thanks. And then my follow-up is for Jeff. On the operating margin, this quarter, you guided to flat. It came in a lot better.

Where was the upside? And why would that not continue in the fourth quarter with the better sales outlook?

Jeff Howie -- Chief Financial Officer

Good morning, Cristina, and thanks for asking that question. I know it's probably on top of everybody's mind. But look, Q3 operating margin exceeded expectations for three reasons. First, merchandise margins were stronger than we anticipated, really driven by lower input costs and our focus on full-price selling.

And I think Laura touched on this, we continue to see a positive customer response to our consistent pricing and our focus on sign and service and the newness and the breadth of product assortment that we offer. And second, the supply chain efficiencies, which I've been talking about all year, also came in better attributable to our commitment to full-price selling, really smoothing out the peaks and troughs driven by promotional activity. This is delivering significant cost savings for more consistent operations across manufacturing, warehousing, and delivery expenses. And I have to really complement our entire supply chain organization for their diligence and really the way they've attacked the supply chain and really gone after these cost savings.

And the third thing on why we beat the op margin in the quarter is we deleveraged advertising expense less in Q2 than in Q1. We continue to evaluate that spend and adjust weekly as we see the effectiveness. I think it's -- the Q3 results is really a testimony to how we continue to deliver strong profitability despite the tough environment for home furnishings. As far as the second part of your question is, why wouldn't that continue into Q2, our guidance --

Laura J. Alber -- President and Chief Executive Officer

Q4, Q4. Yes.

Jeff Howie -- Chief Financial Officer

Thank you. Q4. Our guidance is based upon the facts and trends we know today. And there's a few factors in Q4 that make it very unusual.

The first one is the holiday calendar shift and you hear us talk about that today, with the late Thanksgiving and the shorter holiday shopping period that makes reading the business really difficult. And then the second piece is we started lapping the reduction in promos, so there's less upside than it was in prior quarters. And finally, our guide reflects the potential for greater impact on the economic environment in the slow housing market. But here's the thing.

We guide top-line revenues and bottom-line operating margin because it gives us the flexibility to respond to any changes in the business to the extent there might be an upside in one line, we'll take a look and see where we might offset that in others. But it gives us the flexibility to pull leverage as the business ebbs and flows. And as you've seen in Q3 and other quarters this year, we know the levers to pull to deliver results.

Cristina Fernandez -- Analyst

Thank you. And best of luck this holiday season.

Laura J. Alber -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from the line of Peter Benedict with Baird. Please go ahead.

Peter Benedict -- Analyst

Hi, guys. Thanks -- thanks for taking the question. First, just a maybe a little bit more on your approach to marketing and from this holiday. Consumers have been responding, at least we're hearing from a lot of folks, that they're responding more to promotions and events.

And that's been going on for some time, but maybe that's getting a little more pronounced of late. I know you guys are very tactical and strategic with how you use promotions. I'm just curious how you guys have planned this holiday relative to maybe last year and what you're kind of seeing from competitors in the space when it comes to promotions in this holiday season. That's my first question.

Laura J. Alber -- President and Chief Executive Officer

OK, great. Thanks, Peter. I don't know if you've been in our stores or in the malls, but there is no one who has the holiday headquarters that we have. From Thanksgiving to Christmas, Hanukkah, New Year, entertaining, decorating, gift giving, there's nobody who does that.

And that is a huge competitive advantage when you go to the malls and you go online, that we have not just one category, but we have a fully integrated holiday assortment on top of incredible foundation of core and furniture and all the things that already exist in your house. And we show the customer how to put those things together. That is a big deal, and it's very relevant, particularly this year, as people are very excited about the holidays. And we saw it in the beginning of the year from Easter to Halloween, now Thanksgiving and Christmas.

And it's still early, but that is something that we said earlier in the year we're going to continue to flex as we knew that likely the furniture part of the business wasn't going to recover as soon as we thought. As it relates to pricing, let's just call out pricing versus promotions. We have an incredible sourcing platform. We have worked with vendors for decades.

We design our own goods. We source them ourselves with our people overseas. And as a result, we get better prices. We have lots of loyalty.

We have approachable prices with great quality. And we know that. We've learned that from many times in good business and in bad business, and we made the decision, as you know, to stop this up-down pricing and this constant promotion. Once you're in that loop, you can't stop it; you have to comp it.

And over the last several years, we have been reducing and reducing and reducing the level of promotions, and it has been working. So, the customer doesn't have to wait to see if they're going to have a better price on that sofa in two weeks. They know the price is the price. But it's also incumbent on retailers like us to make sure that we give that great value the first time for the customers.

So, we think we are very, very competitively priced all in versus anyone with the same level of design and quality, which allows us to be less promotional. And as Jeff said, we still have been reducing it every quarter. We have less of it to reduce as we lap these quarters, but there's still opportunity to do a better job also in buying the winners and maximizing selling because we're seeing great newness results. And so, buying back into those things and when we buy back in, getting better margins is another key part of our strategy.

Peter Benedict -- Analyst

That's helpful. Thanks, Laura. It kind of leads me to my next question maybe for Jeff. I mean, you're talking about smoothing out demand and how that helps on the supply chain.

Jeff, you mentioned some additional or further opportunities for efficiency and optimization as you look out going forward. If we maybe put the smoothing of demand aside, what are the other buckets that you see the most -- where you see the most opportunity? You've done such a great job so far on all that? Just curious kind of where the next leg of savings might lie. Thank you.

Laura J. Alber -- President and Chief Executive Officer

So, just to talk about that, we have been delivering record customer service. And this customer service has built tremendous brand loyalty. But we still have room to go in specific areas where we need to be even more efficient. So, we are drilling down in the supply chain in every hub, in every furniture area.

And remember, we just did a full conversion out of one facility to another. And that is -- we're at the beginning of that cycle. We did that this year into our new Arizona DC out of our CMO building, Sonoma Cove. That's a big deal.

So, there's a lot of efficiency in some of those areas. And we don't believe that we are done with supply chain efficiency. We have some also continued opportunity in occupancy, where we are continuing to close less profitable stores that are in old centers and move them to better lifestyle centers and also reduce, in some cases, some brands and increase others. And we've seen really good results from our remodels.

Retail is back, and we have been really honing our retail execution and our retail footprint. And our new stores are doing quite well. So, that's another example of in the same size box, can we do more sellers per square foot? We believe we can, and that is also going to help us with our occupancy leverage. In terms of ad costs, this is an area that is a strength of ours.

And we use it competitively to gain share both in the short term and gain customers for the long term. The work that we're doing with influencers and collaborators is driving brand heat and bringing new customers into brands and driving traffic to our stores. So, you're going to continue to see us drive collaborations higher, which is really good to drive at cost actually and also sales. Those are the big buckets.

Payroll, obviously, another very large bucket. And there's opportunity to both continue to be more efficient in areas in our company but then also to fund other areas that we believe are sales-driving, and we're in the early innings of testing there.

Peter Benedict -- Analyst

Thank you so much.

Laura J. Alber -- President and Chief Executive Officer

You're welcome.

Operator

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

Kate McShane -- Analyst

Hi, good morning. Thanks for taking our questions. I wanted to follow up on Cristina's earlier question with regards to furniture sales and just ask if you have a view on when furniture sales could stabilize? And can furniture sales grow just given some of the success that, again, you've seen with innovation and new product introduction, if housing turnover were to remain muted in 2025?

Laura J. Alber -- President and Chief Executive Officer

We're assuming housing turnover remains muted, which is why we've been working so hard to improve our business despite it, OK? And you've seen us have consecutively improved our comps, and we have improved our furniture comps, too. There's no doubt, based on what we're seeing, that there's opportunity to continue to improve them in my mind. We believe that the newness -- the percent of newness to total will continue to yield better results for us in furniture even if housing doesn't improve. Now, if housing really collapses, obviously, that's not in our -- that's not something that it's contemplated a huge collapse or a black swan event or something.

But we think if it's a normalized environment. Our operational execution and the things we can control will help us improve our furniture business. On the flip side you get big housing rebound, we'll see very good results in furniture. So, I'm sorry that I don't have a date for you.

I wish I did. But your guess is as good as mine of when housing turns around.

Kate McShane -- Analyst

OK. Thank you. And then our second question was just around inventory. It looks like inventory grew about 3.8% in the quarter.

We wondered if there was any pull forward that you did in anticipation of some of the noise that was going on with regards to the port strike. And I know there's still a lot of uncertainty around tariffs, but now that we are through the election, could you remind us how you're thinking about operating in a higher tariff environment and how much you can mitigate?

Jeff Howie -- Chief Financial Officer

Yes. Thanks, Kate. Good morning. Yes, our inventory at the end of the quarter was up 4% to last year.

And notably, our inventory levels are only up 15% versus 2019 compared with revenue growth of over 25% of that time. And in terms of your question about did we pull forward some regarding the port strike activity, that wasn't really a big factor for us. This is really about getting well positioned for holiday and being in stock. And if you've been in any of our stores, even on the website, you can see that we're in stock, and we're well positioned for holiday, and that's reflected in the guidance ranges that we've provided.

In terms of China tariffs and our outlook on that, but first, there's a lot of uncertainty in terms of what's happening there. And just want to remind everyone that it's not our first time at this. We've always been a leader and proactively responding to changes in the trade environment. And a lot has changed with the last time this came up.

First, we've significantly reduced our China-sourced goods from 50% to 25% over the last few years. So, our exposure is significantly less than the last time in 2018 that we saw this activity. Second, and I think this is something that we don't talk enough about, the U.S. is already a major manufacturing hub for Williams-Sonoma Inc.

Much of our upholstery is manufactured domestically in our facilities in North Carolina and Mississippi. Our lighting from Rejuvenation is manufactured in Oregon and a large portion of the Williams-Sonoma assortment is produced domestically. In our Peppermint Bark, everyone's favorite SKU this time of the year is made here in the San Francisco Bay Area. Third, we're prepared to reduce our exposure to China further if tariffs increase.

We've mapped out a category-by-category plan to reduce China sourcing if conditions warrant, and we're currently evaluating and quantifying the impact from additional tariffs. We have a wide range of mitigation options. In fact, everything is on the table. We'll probably move some things to other countries.

We may at some point in '25 front-load some goods. I'm sure the vendors will pay some, and there may be some that the consumers would absorb as well. But that is really a lot of uncertainty right now. We're working through that.

And as the landscape changes, we have the scale and strategy to pivot. But here's a really big strategic thing that I want you to take away. And that is our vertically integrated supply chain as a competitive advantage. Ninety percent of the products we sell are proprietary, designed and exclusively made for our brands.

We operate our own in-house best-in-class global sourcing operation with 12 overseas offices. It's our own boots on the ground managing sourcing decisions, production, and shipping. We are the 11th largest container importer in the United States, so we have scale and relationships others do not. Punchline being, as the tariff landscape changes, we have the scale and strategy to pivot.

Kate McShane -- Analyst

Thank you.

Operator

Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please go ahead.

Jonathan Matuszewski -- Analyst

Good morning. Thanks for taking my questions. The first one was on newness. I hear that it's contributing to the sales [Inaudible] frame the magnitude of [Inaudible] this year maybe relative to last? And any aspirations for kind of the magnitude of new collections you bring forward [Inaudible] them in '25? That's my first question.

Thanks.

Laura J. Alber -- President and Chief Executive Officer

Great, Jonathan. Thank you. Yes, newness and innovation are key parts of our strategy to return to growth in 2024, and we've seen a strong response to newness. I should say 2024 and beyond.

And West Elm has been really benefiting from the increase in newness across all categories, particularly in furniture, and they've seen double-digit positive comps in their new furniture introductions. And they've also really increased substantially the amount of product in the holiday assortments, which is also an important opportunity for them. I've mentioned before that when you look at the scale of West Elm and then you compare the department to Pottery Barn's percent to total, you see some clear areas of opportunity. And the non-furniture business is a big area of opportunity in West Elm.

So, we've been really pushing newness there. Pottery Barn is also seeing good response in newness, especially in furniture and seasonal decorating, kids and teen really seeing the big pop in baby and dorm. And the collaborations that we brought and the new collaborations and building on LoveShackFancy have been seeing tremendous consumer response. And in Williams-Sonoma, they have premium electrics, cookware newness, and seasonal that's only found there, and we've seen great results in Sonoma from our exciting holiday lineup and the newness that we brought in.

So, in terms of quantifying this, it's double-digit increases. It's across categories. It's a very competitive area. And the numbers, although they may be indicative of how important it is to us, it's more on the quality of the newness.

So, making sure that it's truly incremental newness and that we have reason to believe that it's going to work and not just getting over assorted. And I think we're really balancing that well, and it's going to be a key part of staying ahead and giving us pricing power to continually design our own products and bring them to market.

Jonathan Matuszewski -- Analyst

That's really helpful. Thanks so much. And just a question on trade. Maybe you could update us on your approach there and how your business is continuing to make inroads.

Looks like you're up mid single digits this quarter, category down 7%. And so, are you doing anything lately in terms of working with your designers to get their business and plan for the future? Thanks.

Jeff Howie -- Chief Financial Officer

Yeah. Thanks, Jonathan. You know, our trade business did grow 4% in the quarter, and it's been up all year. And it's really a function of the outstanding performance that our retail teams have done engaging with the trade community.

A lot of trade is the local interior designer that works with the designers within our stores. And we set out a goal early this year to really ask our store retail teams to reengage with that interior designer community. And to their credit, our retail teams have taken that on, and they're doing a really good job. And that really explains the 4% increase in this quarter and why we're seeing that trade business pop a little bit.

You know, I think it's important to note that while trade is a component of the B2B business, it's really the contract side of the business that we are really excited about. And that had another outstanding quarter, growing 17% in Q3. And this accounts for about 36% of our overall volume in the quarter. And it's where we really have a competitive advantage and bringing the scale of our brand, the variety of assortment, our supply chain and really becoming a disruptor in that $80 billion business-to-business market, where we think we compete favorably and have a lot of opportunity to gain market share.

Jonathan Matuszewski -- Analyst

Thanks.

Operator

And, ladies and gentlemen, in order to take questions from as many individuals as possible, we ask that you please limit your questions to one. We'll take our next question from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Simeon Gutman -- Analyst

Hi. Good morning, everyone. I'm going to ask about full-price selling. I don't know if this is quantifiable, if we should be asking what -- I don't think you'll tell us what the mix is, but is that run rate accelerating? And does it ever reach a ceiling, the business will have a certain amount of product that gets sold on some type of clearance, I suppose? And is that run rate accelerating? And how much more ceiling do we have to go? Thank you.

Laura J. Alber -- President and Chief Executive Officer

I'll just start by saying we're absolutely committed to the stance of running the business without promotional pricing. And we have continued to reduce the amount from last year. We have always said we'll take markdowns. We do take markdowns.

And so, of course, in a better sales environment, you'd have markdowns. You might actually have scarcity. So, you could see that happen over time where we're actually chasing goods and there are less clearance goods. We are definitely seeing improvements in our regular priced comps, which is great and our clearance inventory is in great shape, too.

As Jeff said, inventory is pretty clean. And we like that. That does mean that there's less clearance sales. And I will just point out that in Q3, there are some brands that had more promotional comp roll-off than others like Pottery Barn had more to cut than we would have liked.

And we made the decision, as we've said before, and we've said we're going to always choose to go after the operating earnings and to not go to up-down pricing. And so, I do expect that because we've reduced this kind of behavior, substantially, the go forward is going to be a lot cleaner and easier to understand for all of us.

Operator

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

Max Rakhlenko -- TD Cowen -- Analyst

Great. Thanks a lot. Laura, in the past, I think that you've noted that your regular price business was outcomping your discounted or promoted business. Curious, did that occur this quarter once again? And why do you think this phenomenon is occurring and just the key learnings from that? Thanks a lot.

Laura J. Alber -- President and Chief Executive Officer

Yes, sure. Yes, that's true. Regular price is outperforming because we're reducing the promotional substantially. And as much as reduced the last year to the year before, we have continued to reduce it.

And so, as I said, it's good for margins, it's actually good for the customer because we don't have them having to wait. They can trust us on the pricing integrity.

Operator

Our next question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom -- Analyst

Hey, thanks very much. You know, if we double click here on your cost of goods sold line in the third quarter, you're roughly 42%, which is about 1,000 basis points better than where you were in the third quarter of 2019. I'm curious if it's possible to sort of unpack how much of that you see as structural. In other words, as we start to see the top line improve, which I think you all hope next year, how much of that can be sticky? Thanks.

Jeff Howie -- Chief Financial Officer

Chuck, we think a lot of it can be sticky. We're pretty confident in our operating margin. And I think it goes back to the five drivers I talk about and what's really happening within gross margin. E-commerce sales mix really at 66% is sustaining.

I think everyone knows that we have a substantially higher operating margin and less occupancy expense in our e-commerce business. The retail optimization strategy, our second big driver is also kicking in. Again, elevating that the profitability of our retail chain and also comes with less occupancy. A big part of the improvement since 2019 has been our pricing power.

That accounts for about 390 of the basis points of that about a 1,000. And that comes from our merchandise margin team, the benefit of our focus on full-price selling and the strength of our in-house design proprietary products. That obviously, given our results compared to the competition, are resonating with consumers. And the last is the supply chain efficiencies.

You've heard Laura and I talk about how all of our metrics, our KPIs that we look at are performing better than pre-pandemic levels. And here, this is our own internal version of the four-minute mile. If you're not familiar with that story, for years, it was thought that human beings couldn't run a four-minute mile. It was even said there's no way that can happen.

And as soon as one person was able to break it, everyone was able to run a four-minute mile. Well, that's the same thing for us. For years, we thought that these KPIs had to run at a certain level and that's just the way our business ran. And post-pandemic, as we try to get back to those, we ask a simple question of why are those metrics at those levels.

And to our supply chain team's credit, they said, well, we think we can do better. Laura and I said, Yes, let's see you do that. And not only do they achieve those levels, but as soon as they go through those levels, they said, You know what, there's actually even more here. So, this is an ongoing opportunity for us.

And we think -- we're excited about what that can bring. I think the key point here is since 2019, we've transformed our profitability and can sustain these operating margins at a higher level.

Operator

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

Brian Nagel -- Analyst

Hi, good morning. Thanks for taking my question. So, I want to go back to a couple of the prior questions just with regard to sales. So, look, I mean, you've done a phenomenal job managing the business through what has been a difficult demand environment now for several quarters.

So, the comments they suggest you're starting to see some wins here, some better sales in certain categories. But if I'm looking at the data in aggregate, your comps were down 2.9% in Q3 this versus down 3.3% in Q2. So, I mean slightly better there. But on any stack basis, it seems like the business is actually decelerated.

So, I guess my question will be twofold. One, am I looking at the data correctly? But then second, what's the offset to those sort of -- what's keeping -- you're starting to see these better sales trends as you articulate, what's the offset keeping sales weak?

Laura J. Alber -- President and Chief Executive Officer

Well, I'd just say that we're not comping the promos is the first answer. And that definitely gave us some sales that you could pull forward, call them what you will, but lower quality sales. And then secondly, furniture is still relatively weak, right? So, as much as we're talking about improvements in furniture, and we have some categories that are positive, furniture has been weak. And so, this is the opportunity.

We've been focused on the areas we knew would be stronger, which are life-stage pieces of our business and holiday decorating. But can you imagine what happens when the furniture picks up. And we've used the word coil spring about our platform. We have said that when this picks up, we've been doing -- we've been focused on operating margin with a down sales environment.

So, can you imagine the kind of operating margin improvements we could have if sales pick up, even if there are some negatives next year, even if tariffs cost us something, even if there's other cost increases. There should be sales leverage on that operating margin.

Operator

Our final question will come from the line of Oliver Wintermantel with Evercore. Please go ahead.

Oliver Wintermantel -- Evercore ISI -- Analyst

Thanks very much. Maybe just to that point, Laura, your sales leverage, what kind of comp do you need to see to get some sales leverage on SG&A? And with your cost taken out over the last few years, how would that compare to pre-pandemic? Thank you.

Laura J. Alber -- President and Chief Executive Officer

Yeah. I mean, it's not a linear relationship. There's not like a box that one number goes in and the other number comes out because there's a lot of choices, you know? And you can't predict all the variables, you've seen it's like a game of life for a next thing you know you've got something new you have to deal with that you didn't expect and that you have to invest in. And with growth, there's always different opportunities.

You can be more competitive on ad costs. So, we have a lot of brands here in different stages. Not all brands have the same operating margin. We may decide that push a few of our smaller brands heavier.

And the most important thing of all I'd say is being competitive for our consumers. We want to give them the best quality, the best designs at the best value. And we think we fit the sweet spot of the industry with what we're doing, which is why I think we have better results. Because they love our product.

I mean, there's all these things that we talk about on these calls that end of the day, the customer votes, right? And they vote based on what they see and what the price is. And we've built this loyalty over years that makes them come back. They trust us to shop online on big ticket. A lot of people can't get them to do that.

But because they see our stores in their mind's eye and they can sit on the sofa, they will pull the trigger and buy it online. And that is something that not a lot of people can say. Because of our channel excellence and our customer service, we have built up so much goodwill with our customers that's been so important to driving our results even in a tough environment.

Operator

I will now turn the call back over to Laura Alber for closing remarks.

Laura J. Alber -- President and Chief Executive Officer

OK. Well, thank you. Thank you, all, again for joining our call this morning. And all of us here at Williams-Sonoma wish you a very enjoyable holiday season.

And, of course, as I like to say, please go into our stores, and happy shopping. We'll talk again in March. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Jeremy Brooks -- Chief Accounting Officer and Head of Investor Relations

Laura J. Alber -- President and Chief Executive Officer

Jeff Howie -- Chief Financial Officer

Cristina Fernandez -- Analyst

Laura Alber -- President and Chief Executive Officer

Peter Benedict -- Analyst

Kate McShane -- Analyst

Jonathan Matuszewski -- Analyst

Simeon Gutman -- Analyst

Max Rakhlenko -- TD Cowen -- Analyst

Chuck Grom -- Analyst

Brian Nagel -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

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