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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Williams-Sonoma Inc. Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the presentation. This call is being recorded.
I would now like to turn the call over to Elise Wang, Vice President of Investor Relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.
Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release.
This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operation, business initiatives, trends, growth plans and prospects of the company in 2020 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
Please refer to the company's current press release and SEC filings, including the most recent 10-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.
I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer.
Thank you, Elise. Good afternoon, everyone, and thank you all for joining us. Also on the call with me today are Julie Whalen, our Chief Financial Officer; Felix Carbullido, our Chief Marketing Officer; and Yasir Anwar, our Chief Technology Officer.
As you saw on our press release, we delivered an exceptional second quarter with net comp growth of 10.5%, operating margin expansion to nearly double that of last year at 13.1%, and record earnings growth of over 100%. E-commerce again drove our results growing 46% in the quarter, and our stores performed better than expected, improving throughout the quarter as we reopened.
The time when home is more important than ever, we've taken this opportunity to push our longer-term plans. We will do this in three different ways. First, we will accelerate digital growth and fundamentally shift the channel mix of our business. Second, we're focusing our marketing strategy on content and building customer relationships. And third, we're stepping up our profitability in our longer-term earnings outlook.
Our digital first strategy, our trusted brands, our omni-channel approach, and our commitment to sustainability will continue to provide a powerful source of differentiation and a competitive advantage for our business. As always, and especially in challenging times, what makes us proud of the company goes well beyond the products we sell. In the last several months, we've witnessed not only the ongoing impact of the global pandemic, but also heartbreaking reminders of racial injustice in our country.
As we continue to support COVID relief efforts in our communities, we are also taking action to help drive positive change and create a more equitable, inclusive future for all. We are committing to multiyear donations to racial justice organizations, and increasing black representation internally, and deepening our diversity and inclusion efforts.
These are extraordinary times that require us to continuously evolve and rethink how we best serve all of our stakeholders. We are rising to the challenge, learning, adapting and leading with our values in everything we do. We know thoughtful actions now will shape the next phase of our growth. We are firmly focus on this opportunity and investing in long-term strategies.
Now let's talk about Q2 in more detail. While our net comp was at 10.5%, demand comp was substantially higher. Our e-commerce business grew at net comp of over 46% and includes purchases made through our omni-channel services such as curbside pickup and ship from store. We further optimized our digital experience adding more inspiring content and enhancing the speed and usability of our e-commerce sites.
As it relates to our stores, traffic was down, but conversion was up substantially and our stores outperformed expectations, improving materially from May to July with third quarter to date demand comp, improving to negative high single digits.
Another highlight of the quarter was a significant expansion in our margins. In addition to cost savings across the business, we substantially pulled back our promotions and leaned into content lead marketing. Our value equation is driving lasting, authentic connections with our customers and also attracting record high new customers.
Our e-commerce performance this quarter was a powerful example of our brand and digital strategies that work. The key drivers of our growth were innovative, sustainable products and engaging content rich experience and technology improvements.
Our newly designed single page checkout experience, improved site speed, extensive product information page improvements, and our outward powered design crew room plan or enhancements all drove strong results.
Also this quarter, we continue to optimize our digital spend, high returning investments, leveraging our in-house media capabilities, and a strict test and learn agenda across the portfolio. Our content rich online experience, coupled with our marketing strategies drove another quarter of very strong customer growth in the e-commerce channel, as well as substantial increase in organic traffic.
Now let's talk about our brands. Probably the most impressive was Williams-Sonoma brand, which delivered a record quarter with a net comp of 29.4%. We maximized the shift to cooking at home during the pandemic, and executed on a relevant marketing strategy. Customer growth reached over 15%. We saw an increasing number of new and returning customers turning to us for their cooking and at home dining needs.
Our marketing and relevant content strategies were driven by our food first approach, highlighting ideas, recipes and culinary skills that revolved around eating well at home. To support the vendor community across the country, we added perishable products from local restaurants and increased our assortment of foods to meet the rising demand from our customers.
As we look forward, we are excited about the growing interest in cooking, especially for millennials, which will not only benefit our business in the short-term, but as more people learn to cook, it will become a lifelong skill that should drive our business over the longer-term.
To continue our growth trajectory in the Williams-Sonoma brand, we are focused on innovative exclusive products, further improving our digital experience, driving more awareness and interest in cooking at home and optimizing our channel mix.
Our Pottery Barn brand also had a very successful quarter, driving a net comp of 8.1%. Our product line continue to improve with exciting new aesthetics and high-quality sustainable products at great price points. Businesses that saw a particular strength in the quarter were outdoor furniture, work from home solutions and products update family living spaces.
Our growth initiatives, PB apartment and marketplace also grew ahead of expectations and contributed meaningfully to our comp growth. The foundation of our Q2 performance was a tremendous result in our e-commerce channel, which reached over 70% of our sales. We continue to improve our site experience by adding inspiring content that drove strong organic traffic, high average order value and units per order.
Our Pottery Barn Children's Home Furnishings business is also strong in the second quarter, with a net comp of 4.8%. It's clear that customers are responding to our sustainable high-quality products. Our industry leading assortment of GREENGUARD certified organic and fair trade products are resonating with customers more than ever, especially in our baby business, which continue to accelerate in Q2 as a key growth category.
One area of softness has been our backpack business, as most schools are starting the academic year with distance learning. But we are seeing a surge in our study at home solutions, especially home study furniture across both part of our kids and teens, as we become the destination for study from home for kids of all ages.
West Elm continue to deliver very strong net comp year-over-year at 7%, and on a two year basis up 24.5%. This brand continues to have high appeal, particularly in our furniture categories, where we saw substantial growth in indoor and outdoor, as well as key successes in home office, dining and storage furniture this quarter.
We substantially enhanced our digital experience in previously retail dominant categories, like upholstery, textiles and decorative accessories, which also contributed to our growth online. Also in the quarter, we expanded our Steelcase partnership for the launch of a new furniture collection, aimed at helping our customers work from home comfortably and productively with products that provide form and function.
Cross-brand, our business-to-business division reaccelerated substantially to double digit growth. As you know, this is a large, highly fragmented industry that we are disrupting. We have invested in a strong sales team and support in our infrastructure to turn this opportunity into a $2 billion.
In the second quarter, as states reopened, we were there for our customers in offering a furniture resource that was immediately available for hotels, restaurants and corporate public spaces. We also continue to see significantly higher sales growth from our cross-brand loyalty key members compared to non-members, and more customers shopping across our portfolio of brands to furnish their homes.
It goes without saying that none of these results will be possible without our people. Their ongoing resilience and dedication have never been more apparent than during these difficult times. We are proudly continue to invest in our associates through several initiatives announced this quarter, including increasing the minimum wage for hourly associates and further enhancements to our press release policy.
Building on our strong culture, especially in times of real adversity, is not only the right thing to do, but also creates more loyalty and a better experience for our customers.
Looking forward to the second-half of the year and beyond, we are confident in our growth trajectory. The strong trends from last quarter are continuing. Our product pipeline is one of the best we've ever seen. Our e-commerce initiatives are driving, accelerating KPIs and our inventory position will continuously improve.
Longer-term, we believe that behavioral changes and industry shifts that have emerged from the pandemic will persist and continue to favor our business. Over the past five months, we have seen an acceleration in online sales. And with our powerful digital platform and trusted brands, we are maximizing the shift and driving e-commerce sales to new levels. We expect this trend to continue and are executing to a future, where stores will be fewer in number but even better in experience.
As a result, we are not only more confident in our long-term financial outlook, but in our potential to further expand our profitability. We're investing in the next phase of our growth and the opportunities that position us for accelerated market share gains. And as we look ahead, we are more optimistic than ever about our future.
Now, I'll turn it over to Julie, who will provide more detail on our second quarter financial results.
Thank you, Laura and good afternoon, everyone. Our second quarter performance demonstrate our ability to deliver strong topline growth at record profitability levels. Our topline acceleration, combined with strong financial discipline resulted in the highest operating margin we have seen outside of a holiday fourth quarter, and earnings per share of more than double last year.
This performance reaffirms the resilience of our digital first model and the enduring appeal of our innovative and sustainable products. It also speaks to the strength of our team and their agility and strong execution during these challenging times.
Before I discuss our financial results in more detail, I wanted to give you an update on our response strategy to the current pandemic. As COVID-19 continues to present ongoing challenges, safety and adaptability remain our guiding principles for how we are operating during this time. This has met heightened safety measures in all of our supply chain operations in our reopened stores and across our corporate offices.
From a financial perspective, given the uncertainties and the macro environment going forward, maintaining strong financial health remains a top priority. As we continue to prepare our business to the various economic scenarios that could unfold the next six to 12 months, we are maintaining tight expense control over all nonessential spend, including the elimination of almost all business travel and other discretionary spend. Advertising investments are limited to those initiatives with the highest returns.
And our capital expenditures have been prioritized for those initiatives that support our e-commerce growth, and further our long-term competitive positioning, including investments in technology and our supply chain operations, while reducing our investments in store remodels and relocations. These actions and our culture of strong financial disciplines have allowed us to deliver strong profitability, despite the incremental operating costs associated with COVID-19.
Our liquidity position remains robust as our strong performance year-to-date has generated over $216 million in operating cash flow, and has contributed to bringing our cash balance to almost $950 million. And as mentioned on our last call, we further improved our financial flexibility recently by adding a $0.5 billion of liquidity through the extension of our $300 million term loan to January 2022, and the addition of a $200 million 364 day unsecured revolving credit facility. We believe this level of liquidity puts us in a very strong position to continue supporting our operations, while investing in the long-term accelerated growth of our business.
Now turning back to our second quarter performance, net revenues in the second quarter grew 8.8% to $1.491 billion, with a net comp growth of 10.5%, the highest quarterly comp we have seen in the past 10 years. Our demand comp, which includes orders placed, but not yet filled in the quarter was substantially higher at almost 19%. This growth was driven by another quarter of incredibly strong e-commerce growth, which accelerated to a net comp of 46.4% and reached almost 76% of our total revenues in the quarter.
By brands Williams-Sonoma has delivered a record net comp of almost 30%, driven by triple digit growth in e-commerce business. Pottery Barn accelerated to its highest quarterly net comp in recent years of 8.1%, and West Elm grew at a net comp of 7% on top of 17.5% last year. Our Pottery Barn Children's Home Furnishings business drove a net comp of 4.8% with particular strength in our Teen business. And our emerging brands Rejuvenation, and Mark and Graham delivered another quarter of double digit growth.
Moving down the income statement, gross margin for the second quarter was 37%, compared to 35.4% last year. The 160 basis points of expansion in our gross margin was driven by higher merchandise margins and occupancy leverage. Higher merchandise margins resulted from reduced promotional activity, as we continued with our shift to a content led marketing strategy that focuses on the overall value equation of our high-quality sustainable products.
Occupancy leverage was driven by higher sales and an almost 6% or $11 million reduction in year-over-year occupancy cost, which includes the impact of reduced rent and operating costs from fewer stores, as well as reductions from COVID-19-related rent abatements. And this resulted in occupancy leverage of 170 basis points at $166 million or 11.2% of revenues this year, as compared to $177 million or 12.9% last year.
The combined impact of these two drivers was partially offset by higher shipping costs. Shipping costs were up in the quarter as a result of the substantial shift to e-commerce sales in the quarter, as well as shipping surcharges from our third party shippers that went into effect in the last month of the quarter.
In addition, we continued to be negatively impacted by incremental China tariffs.
SG&A leverage 460 basis points 23.9% of net revenues, compared to 28.5% of revenues last year. This was primarily driven by significant advertising leverage, as we further optimize our digital spend on those initiatives that drove high returns in traffic and conversion, employment leverage and other leverage throughout SG&A, primarily from higher topline performance, lower variable store payroll, and strong financial discipline.
These results led to our record profitability with operating income growth of 108% to $195 million, and operating margin expansion of 620 basis points to 13.1%, the highest operating margin we have seen outside of holiday fourth quarter. This resulted in diluted earnings per share of $1.80, which was more than double that of last year $0.87.
We are very pleased to be able to achieve these levels of profitability while continuing to pay all our corporate associates and store associates, who are working over 12 hours per week, as well as store the incremental costs to help keep our associates and customer safe during this pandemic, including personal protective equipment, frequent cleaning, testing and COVID bonuses for our supply chain associates.
Going forward, even though our profitability is at record highs, given the uncertainty in the economic environment due to the COVID pandemic, we will continue to eliminate all nonessential spend to ensure that we can continue to fund the operations of our business and to invest through this crisis and emerge as an even stronger and more resilient business delivering sustainable long term profitable growth.
On the balance sheet, as previously mentioned, we ended quarter with a strong cash balance of almost $950 million compared to $120 million last year. This reflects the strength of our cash balance as we entered 2020. The full draw down on our $500 million line of credit with the support of our banking partners back in March, as well as the resilience of our business during this pandemic, generating positive operating cash flow over $216 million year-to-date. This cash balance has allowed us to not only fund the operations of the business, but to also invest over $76 million in capital expenditures in support of our future growth, and return over $79 million in the form of continued quarterly dividend payments to our shareholders.
And given the strength of our business and our current liquidity levels, we have made the decision to return our capital expenditures to pre-pandemic levels. We are also contemplating reducing the amount outstanding on our $500 million line of credit during the third quarter. Our decision process will take into account various factors including the uncertainty that still remains in the macro environment.
Moving down the balance sheet, merchandise inventories were $1,042 million for a decrease of 12.2% compared to last year. This reflects our efforts to cut and push out our inventory purchases to preserve our liquidity at the beginning of the pandemic, and the impact of our subsequent substantial e-commerce outperformance in the past two quarters. We have been working closely with our vendor partners, the majority of whom have returned operating at full capacity, and we expect to see continuous improvement in our inventory position.
Turning to our outlook for the second-half and our fiscal year guidance. We have made the decision not to provide specific full year guidance at this time, given the uncertainty in the economic environment due to the COVID pandemic. What we do know now is that our business continues to be very strong in the third quarter, quarter-to-date sales remain robust across all brands and inventory will continuously improve through the balance of the year.
However, as much as we expect to improve our overall profitability on the year and going forward, the Q2 level of SG&A is not sustainable. We have significantly reduced payroll and ad cost spend as our sales expectations were lower than what we actually delivered this quarter.
In terms of margin, we believe they were going to continue to be able to reduce promotions, as well as deliver occupancy leverage, but shipping will be a major headwind in the back-half. Various surcharges have been announced by third party shippers on all retailers. And these higher costs will affect us in Q3, and more so in Q4, as a result of peak surcharges during the holiday season.
In addition, we also expect to incur incremental costs associated with keeping our people and customers safe during the pandemic. Regardless, we remain confident in our ability to drive higher operating margins on the year compared to last year, due to our strong performance to date, including our robust e-commerce performance, which we believe will persist through the balance of the year.
With regard to capital allocation, given our business has not only recovered substantially, but excelled during this pandemic, we have increased our capital investments in high returning initiatives that focus on digital to drive our long-term growth. And as it relates to our dividend, we have announced today another quarterly cash dividend of $0.48 per share, which speaks to the confidence we have in our business, as well as our commitment to shareholder returns.
Looking further ahead, as Laura mentioned, we are even more confident in our long-term financial outlook. The renewed appreciation for the home and at home experiences such as cooking and working from home, together with the accelerated shift to online for home furnishings continue to favor our business on all fronts.
We are executing with speed and agility to capture the unprecedented opportunity that lies ahead for our company. Our strong performance through this crisis reinforces the relevance of our design-led sustainable products and the power of our digital first platform. With more consolidation expected in our highly fragmented industry, we are confident that we are one of the very few retailers who are best positioned to outperform and to aggressively take share.
As a result, we now believe that with the acceleration of our profit with e-commerce business, becoming a bigger part of our total growth, we can drive operating margin expansion.
In summary, this past quarter was another powerful display of our competitive strengths that continued to extend our leadership in the home industry. Our innovative sustainable products, our multi-brand digital first model and our content rich marketing are the reasons why customers are choosing us over the competition. And this combined with our long-term growth roadmap and strong execution gives us the confidence in our ability to maintain this growth and increase profitability in the years ahead.
Before I turn the call over for questions, I want to thank our associates for their ongoing dedication, flexibility and resilience during these challenging times. They are at the core of our company's success and our ability to continue to serve all our stakeholders, our customers, our associates, and our shareholders.
I would now like to open the call for questions. Thank you.
Thank you very much. [Operator Instructions] We'll go ahead and take our first question from Adrienne Yih with Barclays. Please go ahead.
Good afternoon. And let me say a remarkable quarter, really, truly remarkable. Laura, I was wondering -- actually Laura or Julie, if you can talk about what drove the late quarter demand comp? The differential between the 19 and the 10.5. Should we assume that that's sort of a tailwind that should be recognized on top of whatever kind of momentum comp you had in the third quarter?
And then just really quickly, are you seeing trends outside of major metropolitan suburbs, this notion of de urbanization as a sustainable trend? How do you think about that going forward? Thank you very much.
Thanks, Adrian, it's Laura. So we thought we've seen a very strong demand. And as you know, when the pandemic began, we substantially cut our inventories. And our partners are so reactive that they were able to do that. And so, obviously as our demand exceeded the inventory levels not only do not fill it in some cases, you put it on that quarter but also the demand itself is constrained. So one could say that the demand comps have actually been even higher, had we had the inventory in stock.
So the inventory levels were point one. Point two is mix. So our business is growing really across the board but more rapidly in furniture, and specifically drop ship furniture. We made a big strategic move to move a lot of our Asian upholstery particularly for West Elm into our Sutter Street operations. And so of course, that inventory previously was stored in our distribution center, and now we're making it to order. So there's a natural delay that also just happens, because we're shifting into domestic upholstery.
In terms of your second question about demographics, we have Felix here. Felix, do you want to talk about our customers and what we're seeing across the board?
Sure. You got it. In terms of urban suburban, we haven't seen dramatic shifts. But I think what's noteworthy is the shift into a slightly younger demographic, with the millennial population getting into household formation. We also are seeing a nice growth in condo and apartment dwellers, where I think we've spent a lot of time and energy focused on the size and scale of our furniture as well as our opening price points.
I think that, coupled with the fact that we do offer such a great assortment that is sustainably built, is part of the attraction of what millennials are finding. So I think those are two trends that we're starting to see from a demographic perspective.
Great. Thank you. Very helpful.
We’ll go ahead and take our next question from Peter Benedict with Robert W. Baird. Please go ahead.
Hey, guys, thanks. So I guess maybe Julie can maybe frame the tariff hit this quarter. And as we think about the second-half here, the tariff headwind should basically be a push, I would think. But I just wanted to confirm that.
And when you think about that, how's the shipping cost headwind in comparison to the size of the tariff headwind -- that shipping headwind just basically replaced what's been the tariff headwind? So kind of a cost question, I know you mentioned in the prepared remarks, but can you give us maybe a little bit more detail around those so we can think about that correctly. Thank you.
Sure, so from a China tariff perspective, as we've said before, as we move throughout the year, the year-over-year impact becomes less. There's still a year-over-year impact in the back-half, but it's not as big as Q1 and Q2. And so that will reduce as we move throughout the year. But we'll still have, obviously, the China tariff.
As far as the shipping, the shipping charges are material. I think you've heard from the third party shippers that they are imposing surcharges on all retailers. And so that will be a headwind as we move into the back-half, particularly in the fourth quarter with peak surcharges. And it'll be sizable. We haven't disclosed the amount. Obviously, it's confidential from a contractual perspective and we can't speak about it. But it is something that will have put pressure on our gross margins.
But, of course, with occupancy leverage and higher margins that are expected and ongoing SG&A leverage, we're very confident in our ability to drive margin expansion.
Okay, great. Thank you very much.
[Operator Instructions]. We'll go ahead and take our next question from Brian Nagel with Oppenheimer. Please go ahead.
Good afternoon. Great quarter, congratulations. So I will stick to the one question rule. Just maybe to elaborate further, just on the trended business through the quarter. And Laura, you had mentioned in your comments about how stores are tracking. I'm looking just how the business trended through the quarter both in-store and online, and particularly as the stores opened? Maybe if you could elaborate further on just what we're seeing so far into the third quarter?
Yes, I mean, there's nothing really there that would be interesting, I don't think to you, even if you saw everything. It's very consistently strong as it is still now. Of course, the stores open and then now we have, I think, 22 currently reshut. So that doesn't help, when I read you the comp and I told you earlier where the comp is right now that includes that.
So, we have to trust our store people who are driving business, not just on the stores are open, but also driving online through design and virtual chats, which is quite amazing. And so they're just so dedicated, we're so proud of them. And, that's a big part of I think these results is what they're doing. And they're training, we kept them all working and they're so valuable to us because they know how to sell furniture to our line of furniture and they are able to do it from home.
So it wasn't great that stores we closed, that was hard for everyone, but we're making the most of it. So, the big question becomes, I think as we look in the second-half is what happens to more stores shut and more stores open. And that would be a benefit. I think the stores are really an add to our digital first strategy, and they certainly bring to life our product and allow you to make even a better decision.
So we're very hopeful that they'll stay open and keep everybody safe, as we have done with our appointments and our safety protocol, constant cleaning. So we're very optimistic about the back-half. We have a lot of things in our favor. And, we feel very lucky in the time where I know, it's not the case for everyone and we're very cognizant of that and apathetic about what's going on in the world and doing our part to use our strength to also make a big difference in the communities and with our employees to drive every -- both safety but also mental health and racial justice.
So I know it's a lot of an answer to your one question, but it's important to us and it's our True North right now. And our values are driving our business, and our businesses allowing us to do more for our stakeholders.
So through Q2 the business strengthened through the second quarter?
It was strong throughout, -- it's a strong throughout. There's different things that happen, when you comp different promos you decide not to comp a promo, and that has nothing to do with demand, it's just how it flows. But there's not a lot of change there.
Okay. Congrats again, and thank you.
Thank you.
We'll take our next question from Oliver Wintermantel with Evercore ISI. Please go ahead.
Yes, thanks very much. Laura, you mentioned several times in the prepared remarks like your digital first strategy and investments in CapEx more on the e-commerce side and IT investments. What does that mean for your store base? Is there an underlying message that that we might see an accelerated store closures? Just want to see you in two years or three years, how would your store base look compared to today?
Yes, sure. So first of all, we have been investing in e-commerce for many years, so we have a very sophisticated platform. It's not as if we have some big hockey stick to come with the tech stack. I'm going to let Yasir in a minute who's with us talk about the things we are adding that are driving significant performance, but let me answer your store question specifically. So we see stores as an addition to our strategy. That said, we have significant amounts of leases up for renewal in the next three years, over half come up. Over half.
So, whether we keep them, close them, renegotiate them or relocate, we are sitting in a very strategic place in this time. And we are investing in our stores where we operate and we are closing others, so that we can be very focused on running great stores with great experiences in them.
The mix will continue to shift, obviously, because the growth in DTC is much greater and stores are contracting. And this is giving us a lot of occupancy leverage. And our landlord partners we have some very, very good ones really see us as a very strong partner. They want to keep us and we're working together with them to stay in those stores and have very high profit levels. And where that doesn't work for them, we go somewhere else to re-lease entirely the market.
I think this pandemic has shown us that we are agile, and we can operate regardless. And the store people are the people who make this happen, whether they have their stores open or they're talking to customers from home, and that was something that I think we were all really just we hoped would happen but we're so impressed continues to be a strength.
Okay. So now I'd like to pass it over to Yasir to talk about our stands on technology and investment and e-commerce.
Great. Thanks, Laura. So I think connecting it with the stores and then I'll get into the e-commerce. Like in stores also like we said, we have provided -- continue to provide and invest great tools into the hands of our associates especially over designers, who are connected deep into the community. The design experience as Laura just mentioned about the design tools, the virtual chat, the appointments, all of that, that has given strong tools into the hands of our designers and that have made an impact in engaging with the customers.
And we have also been continuously investing in converting stores into more omni experiences, whether it's buy online pick up in stores, ship from the store, shift to store, curbside pickup, especially be providing safety to the customers during the COVID times. And that has worked very well for our customers and for our associates.
And our e-commerce which has been a huge business and has been a big growth engine for us, we continue to invest. In COVID time we took a understanding, we took a step back and looked at the optimized way to keep investing in tech. And right now we are trending back towards our pre-COVID investment in technology all over including definitely and doubling down on e-commerce. And that whole technology team I would say at this time is I'm so proud to have such a growth mindset and everybody in my technology team agility, commitment and willing to fight against all odds.
So, during these covert times, as you know many companies have gone through faster transformation, digital transformation. We have done the same, many, ex many times. And we have gone faster in implementing building things, which might have taken six months in a regular time period. My teams have built it in two months, one and a half months. We have gone very fast to the market to experiment with the customers and learn the signals from the customers, what they need in our sites and experiences, using our own home grown experimentation platform, using our own home grown recommendations platform. And the outward power which Laura and everybody on leadership talks about is like we're trying to connecting out for much better than ever, with our website experiences with our store experiences and design.
So, I can go on and on, the supply chain transformation we're doing. And one important thing to see is like the transformation of the past few years has been to focus and drive our decisions based on data, analytics and powered by artificial intelligence and ML, whether it's search engine, whether its outward experiences and all.
So, I think we have developed a very, very strong package talent, platform, technology and the innovation stream is growing very fast. And we believe that this is like sort of the -- its not end, it's at the beginning and we're going to build so much more which is going to be very long lasting beyond COVID and beyond 2021 and further.
Got it. Thanks very much. Good luck.
We'll go ahead and take our next question from Chris Horvers with JPMorgan. Please go ahead.
Thanks. Good evening. Very nice quarter. A couple of questions on the margins first in the near-term. Do you expect gross margin to be down in the back half but leverage operating margin overall on the SG&A?
And in secondly, as you think about the SG&A some of what happened in this quarter, what's the right baseline that we should be building off of what we would you consider, sort of the onetime cost bucket just as we think about normal seasonality of SG&A dollars?
Hi, Chris, this is Julie, I'll take that. So, from a gross margin perspective, I think what we were really excited to see was the expansion we saw this quarter and that's both from the fact that we have higher merchandise margins and occupancy leverage, and we have every reason to believe that that's going to continue.
Certainly there'll be higher pressure on shipping costs. But we're not, obviously guiding to where the gross margin is going to be. But we're really thrilled to be able to drive that gross margin expansion, even with this quarter having some pressure from the shipping costs.
And certainly SG&A has been leveraging for a while now. We expect that to continue. We've been having some, obviously really strong cost controls, eliminating all nonessential spend and being very thoughtful about that. Because there's different scenarios you can model. And we got to make sure we're ready to continue to invest in this business and take market share as we come out of this even more so.
But I will say Q2 was certainly some of the lowest levels we've seen. So there's, as we move into the back-half with peak holiday season and things like that, we may have to spent a little bit more on advertising and a little bit more invariant variables to our payroll. So, I wouldn't necessarily take our Q2 levels and model those out. But we do expect to have SG&A leverage and we absolutely expect to have operating margin expansion.
We'll go ahead and take our next question from Chuck Grom with Gordon Haskett. Please go ahead.
Hey, thanks. Good afternoon. And just a couple for me. On the spread again between net comp and demand, can you just help us think about that from a banner perspective? And I guess how that's going to impact third quarter results? Do you expect to recapture that demand comp?
And then on the long0-term guide, can you provide us some guide for where you think operating margins can go to or maybe set differently what you think the flow through will look like going forward? Thanks.
Hi, Chuck. So, sorry we're not going to give you the guideposts you're looking for. We're not ready to do that. What was changing is to say that previously we said we are at margin 86 would stay there, and we drive sales. Now what we're saying is we're going to drive sales but we're also going to drive profit ahead of the 86. Okay, that's all we're willing to say at this point.
In terms of by banner, that's an interesting question. So, of course, because of the dynamic I talked about with furniture, the spread is larger with the furniture brands, because Williams-Sonoma, although there is components that are to come and that are furniture, it's a much smaller percent. So, the other brands have more higher demand comp versus net than the Sonoma banner.
And then let's say third quarter, you asked me -- What -- remind me what you asked me about third quarter?
I guess just I'd like to know what the quarter-to-date comp is. But I know, you're not going to answer that. But I guess, like when you expect it? When would you expect this to recapture that? I mean, how long does it take them to calculate?
Yes. You asked me where the net comes? I mean, it's an interesting question. If demand continues to exceed our expectations, then the inventory constraint will just be kicked down the line because you'll run out faster. So if everything stuck to where we think it's going to be, you'd see recovery in the back-half, all the way into next year, by the way. But if we beat the numbers again, then you're going to be hearing me say this next time.
The numbers are within what you're seeing us hit now. There's some variation here and there. But they're within the same range of what the comp is that we just shared with you for Q2. I hope that's helpful.
Yes I got it. Thanks a lot.
We'll go ahead and take our next question from Seth Basham with Wedbush Securities. Please go ahead.
Thanks a lot, and good afternoon, and great quarter. My questions around SG&A. Clearly over time you're planning to reduce your store footprint, which will reduce your occupancy costs, but also take out store labor. As it relates to store labor in the interim, would you plan to reduce that even ahead of store closures because of reduced traffic levels?
No. In fact, it might be the opposite because things get more complicated. The abating factor is that we can't have that many people in our stores. So even if the demand is there, we can only have so many people. But you should not model that store labor will leverage any further. Holiday will cause us to bring more people in. So the sales are higher.
Got it. Okay, that's helpful. If I could just follow-up if you don't mind as relates to SG&A, thinking about the go forward run-rate. Clearly, we're talking about levels that are higher than the second quarter. Just to reframe the question that others have asked, we're thinking about it a year-over-year basis. Would you expect SG&A to be down year-over-year in the back-half of the year?
We expect SG&A in the back-half to be down to last year's SG&A in the back-half.
Thank you.
[Operator Instructions] We'll go ahead and take our next question from Brad Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks for taking my question. Congratulations from me as well. I want to ask about the dynamic of sustainability and pull forward that we're all asking of many home-related companies right now. I've been asked by investors how many bread makers does the American need to buy? I'm of the belief that these trends are probably pretty sustainable. But I was hoping you could share some more data on maybe how the customer is shopping you now? And what you're seeing in terms of repeat purchases and ability to cross pollinate customers across your brand? Thank you.
Yes. Our cross brand performance has never been better. And we've been driving, it's not a surprise. I mean, we are driving it through our key rewards and our cross brand marketing. It's interesting in the beginning, we saw the obvious bread maker trends, ice cream maker. But now the strength is broad based. And you can just see that people are very interested in making their home more comfortable, and we are top of mind with our curated products and our trusted brands. And we're delivering it for them in a way that they can expect to get it and we stand behind it.
So, there's a lot that we have going for us right now. It's very relevant to this time and a competitive advantage that will continue to drive our results.
We'll go ahead and take our next question from Michael Lasser with UBS. Please go ahead.
Good evening. Thanks a lot for taking my question. Laura, you probably saw some of your competitors report like 80% growth at least their target comping up 30% in the home category. Why do you think in light of those, you might have lost share in the quarter?
And also how much demand comp was realized that was coming out of 1Q into 2Q to contribute to the comp in 2Q?
Okay. I don't -- we'll have to come back to that piece. But versus competitors, but I want you to look at our profit levels versus last year, first and foremost, and compare to some of these other people. You can drive sales. We could we could drive them higher. Frankly, we didn't have the inventory to do that. We want to have a great customer experience. We don't want any more than we have to have on backorder. We know the items they're willing to wait for, that don't become excessive, but if you put too much on backorder, it's a bad customer experience.
So we're very focused on taking share. I've said before, it's not an either or with us in Wayfair, as the disruption in brick and mortar happens and the smaller players, there's a couple people who are going to win. And we're one of those people, because currently 80% has been done at retail. And that has obviously changed forever now. And so they are going to us and they're going to go to those other retailers too.
And the thing that is really the differentiator with us is that we have curated brands. You don't have to search through a ton of products, you can trust that level of quality. The products are sustainable. The value equation is fair. And, those are all very important attributes to a customer. And we're able to do that because we design our own products, and make your own products. So we're giving you a great price point for what we're selling you.
So, it doesn't faze me to think about their growth slightly higher. We also obviously, in terms of demand questions, let me try to understand what you asked, I think you're asking, did we fill -- we're always going to fill from the other quarter. We have more of a gap and we have the benefit, right? I mean, we have more demand than we can fill now, and that effected the Q2 negatively.
Okay. Understood. Could I ask one quick one on the Williams-Sonoma concept? How much of that growth came from like consumable products? There's a lot of foods that that business sells versus devices and other items that go into the support of clicking something.
All good.
All good? Okay. Thank you very much.
Thank you.
And we'll go ahead and take our next question from Anthony Chukumba with Loop Capital Markets. Please go ahead.
Good morning. Let me thank and add my congratulate the nice quarter as well. I guess my question is, I mean, obviously, your e-commerce penetration sounds like it was at all-time high. And it sounds like that's kind of where the business is shifting. Historically, you've been sort of like 50/50 between in-store revenues, DTC. What do you see in the business, sort of a long -- even just kind of directly kind of a long-term kind of sustainable mix going forward?
Is it more like 60/40 e-commerce the doors that maybe 70/30? How do you sort of think about that? Thank you.
I think the best way to think about it is how big do you think the total business could be. I mean, clearly, we're ahead of our targets with respect to e-commerce as a percent of our total, and that's where the growth is going to come from. Our results show that our digital first platform has a lot of capacity to meet our customers demand online. And it also depends on how many stores we close and what our landlords do with our leases in the future.
But our physical stores play an important role in continuing to differentiate our offering to the customer. And they are experiential, and they offer our customers the convenience of omni-channel services too, which we haven't talked about, but that is a real benefit in getting the product close to the customer, particularly, as we see the shipping battlefield. And so, we're currently at 70. Could you say could it go higher? Yes, but you might see better than expected store results through the back-half as well.
Got it. That's helpful. Thank you so much.
Sure.
We'll go ahead and take our next question from Cristina Fernandez with Telsey Advisory Group. Please go ahead.
Hi and I'll add my congratulations for the quarter. I wanted to ask about the holiday season. How are you planning it differently this year, given the cadence of events and in-store limits? And do you think the merchandise that has worked so far will continue to drive that demand through the holiday season? Thanks.
Yes. Thank you for the question. Of course, yes, we always know they're getting a running start in the holiday with both customers, new customers that also products that are selling makes for a better season and also gives us the ability to get the inventory levels right. we can chase it. So, that is all good.
In terms of the competitive posture and how we're planning the holiday season, I hesitate to go through that now, because it is so competitive. But we're very optimistic and planning for a variety of different outcomes that could occur as I mentioned earlier in case we have a second wave of store closures, how will we handle that. And if we continue to be demand in DTC how we make sure that we get it to our customers on time.
We'll go ahead and take our next question from Bobby Griffin with Raymond James. Please go ahead.
Good afternoon. Let me add my congrats on a great quarter. Just real quickly from a high level perspective. Laura, do you think the pandemic has delayed any of the new product innovation or development that the industry typically has? Or is once the industry gets caught up kind of in this, from this demand and kind of supply chain gets back to normal, will we be back on a typical product introduction cycle as we have been in the past?
We are not delayed in our product introductions. I don't know if maybe others are but we are not. Our teams have been doing it virtually and approving samples by Zoom. And it's been pretty amazing what they've been able to do. So no, we're not behind the fact. We're probably it's an interesting point that I hadn't thought of, we're probably gaining speed on others who aren't as agile.
We'll go ahead and take our next question from Marni Shapiro with Retail Tracker. Please go ahead.
It's really outstanding. Could you just update us on some of your smaller brands a little bit on Mark and Graham and Rejuvenation? And just an update as well on your international businesses. I don't recall hearing an update on that.
Yes, sure. Thank you for that question. So, Rejuvenation delivered a very strong quarter, strong customer engagement, big time increase in traffic, and stores have shown vast improvement, the ARV is up substantially. And, as I said customer growth. You can imagine with customers spending more time in the homes focused on home projects. We've seen our core categories like lighting, hardware and kitchen and bath all drive strong, quarter-to-date double digit comps.
And we saw that furniture that was impacted more greatly because the store closures rebound later in the quarter. And we remain really focused and bullish on the strategy accelerating our digital growth, optimizing our marketing strategy, and accelerating our contract trade strategy which is a big part of this business.
Mark and Graham, also a very strong quarter, despite the fact that they're not as focused on home, which is quite interesting. And they continue to pivot that merchandising strategy to areas that are the strongest and incremental categories like pet and baby are working. And we're really focused on optimizing the customer site experience there. We're updating the pet with a new creative overhaul, cleaner personalization, experience et cetera.
In terms of global, this is a good one, because we did see some weakness in Q2 to the franchise orders being down, but that quickly changed directions. And now we are chasing orders. And just to reiterate, our strategy for global is franchise, it's not company-owned. As it relates to our company owned-though, Australia is doing pretty well, UK is under a little pressure. And we are well-positioned to continue to drive e-commerce across our franchises and our company-owned.
The thing you didn't ask which, we did mention was B2B, which is quickly becoming a very sizable business for us and one that I think people questioned whether would stay healthy during the pandemic. And we are gaining momentum and confidence in this business with very large companies who are investing with us. And our speed to market is a huge competitive advantage here. Our team is very aggressive out hunting new deals all the time versus just waiting for them to come in. And that's a big change, frankly.
And then also people love that they can shop our cross brands, with a single person and have us coordinate delivery for them. So, it makes it a lot easier versus going to a bunch of different purveyors. So, thank you for the question, Marni.
That does conclude today's question-and-answer session. I'd like to turn the call back over to Laura Alber for any additional or closing remarks.
Well, thank you all for joining us today. Thank you for your thoughtful questions. And we look forward to seeing you and talking to you soon at the next quarter earnings results.
Once again, that does conclude today’s conference. Thank you so much for your participation, you may now disconnect your phone lines.