FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Williams-Sonoma, Inc.
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3250 Van Ness Avenue
San Francisco, CA 94109
(415) 421-7900

UNION CITY, CA (April 6, 1997)/FOOLWIRE/ --- Williams-Sonoma released fourth quarter and record fiscal year 1996 results in mid-March. On January 10th they did a preliminary release for the quarter giving a range from $0.83 to $0.88 per share for the quarter and $0.75 to $0.80 per share for the year on a fully diluted basis. Those numbers were subject to January's results, the year-end inventory, and any year-end audit issues. Their final results were earnings of $0.92 per share for the quarter and $0.86 per share for the year. The difference really is due to favorable physical inventory results against their accrual for the year.

FISCAL YEAR RESULTS. Net sales for the fiscal year grew 25.9%, from $644,653,000 for 1995 to $811,758,000 for 1996. Retail sales for the year increased 30.3% to $513,592,000, and accounted for 63.3% of the Company's total net sales for the 53-week period. During the year, they opened 30 new stores and closed 14 stores, resulting in a 24% net increase in retail leased square footage. Comparable store sales grew 4.6% for the year. Catalog sales were $298,166,000 for the 53 weeks ended February 2, 1997, as compared to $250,372,000 for the 52 weeks ended January 28, 1996, an increase of 19.1%.

FOURTH QUARTER SALES. For the 14 weeks ended February 2, 1997, total net sales were $327,708,000, compared to $260,397,000 for the 13 weeks ended January 28, 1996. Same store sales for the 13 weeks ended January 26, 1997 increased 4.7% over the comparable period of the prior year, and catalog sales grew 25.1% as measured over the same periods. Retail sales for the 1996 fourth quarter (14 weeks) were $215,096,000, a $42,180,000 or 24.4% increase over the fourth quarter of 1995 (14 weeks). Mail order sales for the quarter grew 28.7%, from $87,481,000 in the fourth quarter of 1995 to $112,612,000 in the fourth quarter of 1996.

GROSS MARGINS. A year ago at this time they indicated their disappointing fourth quarter results were due in part to higher than planned shortage. Given that they still had a number of off-site warehouses and higher than planned inventory levels, they established an accrual for the year at about the same rate that their experience indicated for 1995. It appears their efforts to close those off-site warehouses, lower inventory levels, and strengthen internal control has had a positive impact on shortage since their end-of-year physical inventory indicated that actual results were below the accrual. They took that into income. The impact of that on their fourth quarter margin was approximately 100 basis points of the 730 basis points improvement over last year. Also included in the gross margin was 40 basis points of occupancy leverage during the quarter. Overall they feel pleased with their progress on gross margins. They had a full-year increase of 290 basis points. But they fully expect and are planning to see further margin improvement in 1997.

OBJECTIVES SET AT THE BEGINNING OF THE YEAR. At the beginning of the year they said they had four major initiatives. One was to fix Memphis and get it operating correctly. Two was to improve their inventory management during the year because they exited the prior year with excessive inventories. Three was to strengthen their expense management. Four was to improve their operating margins.

MEMPHIS DISTRIBUTION CENTER. The results for the year are that they feel they did get Memphis operating superbly during the year. They have an entirely new management team there. The holiday season went without a hitch. A couple of interesting facts -- after the very poor season they had in 1995 with their catalog customers, this holiday season they were up 30% over the year before on a 9% overall circulation increase and in December alone they were up 40%. They think that is a testimony to the loyalty of their customers, perhaps the strength of their brand, and to some extent the execution they had this Fall.

INVENTORIES. With regard to their inventories, the inventory pickup that took their earnings outside the previously announced range is a further verification of the improvement they made during the year in the management of their inventories.

EXPENSE MANAGEMENT. With regard to their initiative to improve expense management and strengthen it, they did improve SG&A in each quarter for the year and they hope to continue doing that in the future, perhaps not to the extent they have in the past, but they believe they can continue to improve in that area. With regard to SG&A, they saw 90 basis points of leverage in the fourth quarter and 120 basis points for the year. This was slightly less than the third quarter for two reasons. They made some expense investments in their call centers and their fulfillment operation to absolutely ensure a strong holiday season and they are pleased they did that given the strength of business and the profitability in the quarter in their catalog business. In addition, this year they had some incentive plan accruals that, obviously, they didn't need last year given the performance. The added investment they made in their call centers and in Memphis would be about 100 basis points. The incentive plans, profit sharing program, etc. would be about 75 basis points. They are pleased, but to get where they want to be on operating margin they will need to continue to make progress in this area as well as in margins. Their long-term goal has always been to be at least at 10% operating margins, and perhaps better than that if they can get there.

OPERATING MARGINS. While their operating margin is better, they did get back on track to some extent. They improved their operating margin from 1.3% to 5.4% and feel that is a good first step. They are very pleased with the year given the position they came from. They are aware that they are not where they need to be to perform as a great retail company with the peer group that they would like to be compared with. They are hopeful they will be able to continue to improve that as they go forward during the next year.

CASH AND WORKING CAPITAL. They ended the year with $78.8 million in cash against $4.2 million a year ago. This included $112 million of cash from operations. There are 3 major pieces here. They had earnings of $22.7 million, depreciation of $24.3 million, and $66.5 million from working capital. The big chunk in working capital was inventory management. Inventory turnover this year improved by about one-third, with average inventory per store at year end down 15% from a year ago. This is the third quarter in a row where they have had less inventory than the prior year on an absolute basis. Going forward, they don't expect that to occur. They will now begin to build inventory in total as they support the expansion of stores in 1997.

PREPAID AND ACCRUED EXPENSES. Prepaid catalog expenses are $11.9 million, down from $15.6 million a year ago. Two things occurred here. First is that the strong catalog sales in the fourth quarter led to faster amortization of advertising expenses and this year they don't have all the sale books they had a year ago, so they don't have the prepaid expenses that go with those. Accrued expenses were $28 million versus $17 million a year ago. There are a number of pieces there. The added volume leads to additional percentage rent. They have some store closing expenses relative to stores they will close in 1998, some additional worker's compensation and health insurance and some payroll support for new stores, and the incentive plans at year end.

TAXES AND OTHER LIABILITIES. The increase in taxes payable simply reflects the improved earnings compared to a year ago. In the other liabilities category, at $20 million versus $15 million, the largest piece there is very strong gift certificate sales. As part of their business in the Fall season, they are seeing customers purchase Williams-Sonoma gift certificates as a key item for holiday business. Deferred lease credits reflects the landlord allowance money for new stores opened during the year. They are enjoying significant landlord support in the attraction of both Pottery Barn and Williams-Sonoma to the centers, so that helps them in terms of the balance sheet.

LONG-TERM DEBT. Long-term debt on the balance sheet at $89 million consists of three pieces with a $40 million private placement they did in August of 1995, with $40 million of the convertible notes they sold in April of 1996, and then they have a small mortgage on their office facility in California. It is important to note that they ended the year with $89 million of long-term debt and $79 million in cash, so they are essentially debt free at the end of the year with the exception of the small mortgage on their office.

GOOD PROGRESS ON BALANCE SHEET IMPROVEMENTS. They feel good about their balance sheet improvement during the year. They feel they will be cash flow positive in 1997. At this point they fully expect to support their future expansion, certainly through 1997, with internal cash generation. They expect net interest expense approximately equal to 1996. They anticipate that the cash position will allow them to not go into their line of credit until the Summer and they will be into the line for probably 90 days.

CURRENT PERFORMANCE. Last year at this time they were liquidating the inventories they had above plan. First quarter they reported comps up 7.5% and their mail order business up 25%. The bad news is that they are anniversarying those numbers, the good news is that they are anniversarying the margins that went with it. As a result they have planned their first quarter very conservatively on the sales line with flat to low-single-digit comps. They are running just slightly below that right now, but fully expect to be back on plan by the end of the quarter. Their catalog business they planned at high-single/low-double-digit numbers, and they are trending on plan there. Fortunately, both businesses are reflecting extremely strong gross margins at the moment, again reflecting the cleanliness of the inventories coming out of the holiday season. Consensus on the Street for the company at the moment for the first quarter is break-even. They are comfortable with that at this time. The consensus for the year is $1.14 and they also feel comfortable with that. They budgeted their comps for this year at approximately a 4% level and planned their catalog business in the low-double-digit levels. In terms of timing of leveraging of occupancy, at the 4% level, it would probably be fourth quarter before they would leverage comps as far as total occupancy expense at the company.

POTTERY BARN PERFORMANCE. The design studio, larger format Pottery Barn stores had an outstanding fourth quarter. They had difficult comp store sales in those stores in the first three quarters of the year and many of the stores anniversaried their opening numbers. Those stores had the strongest December of any of the concepts with double-digit 10% increase during the month of December an finished the quarter with positive comps. From a profitability point of view the stores are performing on plan. They are not disappointed in any way with any of the new stores.

PERFORMANCE BREAKDOWN BY CONCEPT. All concepts performed with positive comps in the fourth quarter. Williams-Sonoma was around the mid-single-digits, Pottery Barn in the lower-single-digits, and Hold Everything was mid-to-high single digits. On the catalog side, sales for the quarter were up about 29%. Williams-Sonoma catalog was up 25%, Pottery Barn catalog was up 37%, Hold Everything catalog was up 24%, Gardener's Eden was up about 16%, and Chambers was up 32%. Overall circulation was up about 8.6% and most of that increase was to support their store trade areas and in the non-store areas their circulation was up about 5%. It was the lowest in Williams-Sonoma where they had about a 3% circulation increase there and about a 12-15% increase in the other concepts. The fourth quarter numbers are very similar to the full-year numbers on all of the concepts.

EXPANSION PLANS. For 1997, they plan a 22% increase in square footage with about a 2-to-1 ratio favoring Pottery Barn to Williams-Sonoma, with one new Hold Everything test concept store this Fall in the Washington DC area. They would anticipate that if they continue to make the progress they plan on making this year, that in 1998 they would get more aggressive than that, with their Pottery Barn and Williams-Sonoma stores in particular, and hopefully open a few Hold Everythings if the new store works out well.

CAPITAL EXPENDITURE PLANS. Their capital expenditure plans for 1997 include the 22% square footage growth and they have total capital expenditures planned at $45 million and it breaks down to approximately $25 million for stores, $10 million for systems, and the balance is uncommitted at this time. The offset is depreciation for the year at $30 million, up from $24 million in 1996.

MERCHANDISING INITIATIVES FOR POTTERY BARN. As far as merchandising initiatives, they think there are a couple of exciting things happening. With Pottery Barn, if you go into the stores now you will see the first layer of the Spring merchandise has hit the stores and their new color palette. That merchandise is selling extremely well after the first week's numbers. There will be more flowing in over the next several weeks as well as Summer merchandising flowing in the first week of April to coincide with their Pottery Barn catalog drop, which will represent the new goods in the catalog. The other thing that coincides with that is that they have a major national ad campaign that premieres in House and Garden, House Beautiful, and all the major shelter magazines that reflects the Spring goods, so they think there will be a lot of excitement there.

MERCHANDISING INITIATIVES FOR WILLIAMS-SONOMA. For Williams-Sonoma, they think people will find it really innovative and exciting that they plan in April to kick off a "Taste of Asia." Asian influenced cuisine is really the hot trend in restaurants today and they are merchandising a whole theme within the store that includes a variety of new and innovative foods and cooking related items like woks, tabletop items, etc. as well as a little booklet called "The Taste of Asia" that people will get anytime they walk into a Williams-Sonoma store that was developed with an internationally renowned cookbook author and chef of Asian foods that is a lot of fun and includes Asian dining customs, tips about how to eat with chopsticks, information about soy sauce, etc. They will have tastings, demonstrations, and recipes going on in all of their stores.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.