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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Williams-Sonoma Third Quarter 2021 Earnings Conference Call At this time, all participants are in a 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.
Good afternoon and thank you for joining our third quarter earnings call. 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 guidance for the fourth quarter of 2021. Although, we believe these statements reflect our best estimates and all available information, we cannot make any assurances that these statements will materialize and actual results may different 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 the 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. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures, along with an explanation of how and why we use these measures, appears in Exhibit 1 to the press release we issued earlier today. This call should also be considered in conjunction with our periodic and annual financials with the SEC. Finally, the call is being recorded, and a replay will be available on our IR website.
Now, I'd like to turn the call over to Laura Alber, our President and Chief Executive Officer.
Good afternoon, everyone and thank you all for joining us. We're extremely proud to deliver yet another quarter outperformance with comps of 16.9%, building to an accelerated two-year stack of 41.3%, and operating margin expansion of 60 basis points. These results are a function of both the advantages of our distinctive positioning in the market and our successful execution against our long-term growth strategies.
Furthermore, our performance demonstrates that we can continue to take share in a fractured market and deliver high quality sustainable earnings. As a result, we are raising our full year outlook reflects revenue growth of 22% to 23%, and operating margins of 16.9% to 17.1%. Customers are clearly responding to our product and channel strategies, and we expect drive an outstanding finish to the year and beyond.
On the macro front, the industry remains large and fragmented with more than half of its sales generated from smaller brick-and-mortar retailers. We are one of the strongest market players and have incredible opportunity to capture more of an almost $1 trillion market opportunity. We are at a pivotal point of change, both in the way we live and work. And we will intensely focus on our unique ability to capitalize on this change and in turn capture market share.
The housing market continues to hold strong with purchases of larger first and second homes. Additionally, hybrid work arrangements continue to gain traction as a permanent work model. Both of these trends result in the stronger need and desire to outfit the home for working, entertaining and cooking.
In addition, another large point of disruption is the shift of a consumer to make purchases online. Certain factors continue to bolster the shift in behavior, including the lasting impact of the stay-at-home dynamics of the pandemic and the entrance of the millennial generation into their home formation years, a customer segments who naturally gravitate towards digital purchasing.
And an industry occupied by market players who have not yet made significant investment in their ecommerce capabilities, and pure ecommerce players without the service element of a retail business, we believe we are uniquely positioned to benefit from this trend as a digital first, but not digital only company. Our incredible store shopping experience satisfies our cross channel customers who shop both online and in-store.
Our customers continue to place importance on and in many instances demand the prioritization of sustainability. In fact, almost 70% of consumers today want to support brands that are purpose driven and doing good in the world we share. Our company is committed to being a values led sustainable company and is proud to be a leader in the home furnishings industry.
In short, the fragmented industry, the strong housing market, the shift of the consumer online, and the consumer demand for sustainability provides specific unique and sizeable opportunities for our company to continue to grow. And these macro trends are perfect fit with our key differentiators. Our in-house design capabilities along with our adept ability to value engineer our products allows us to offer exclusive, relevant and high quality products.
Our channel strategy provides a competitive edge and scaling the business into the future compared to both the retail and marketplace dominant players. And of course our values which are deeply rooted in sustainability, diversity, equity and inclusion are embedded in our products and central in our actions. These principles have been and will continue to be fundamental and non-negotiable to the customers and communities we serve.
This combined our growth strategies not only provide for sizeable opportunities to grow our core businesses but also drive momentum in reaching new customers, geographies and industries. This expansion and diversification of our customer base presents many exciting opportunities to deliver solutions for underserved spaces in places.
From B2B which brings an exciting new customer profile to our global business, which drives expansion across new geographies, to our cross brand and marketplace opportunities, which expands the reach of our current base and the expansion of Williams-Sonoma home, which is tends to an underserved, high-end luxury market and has massive future potential for scaling.
We have in fact, many opportunities to drive our business forward into the next chapter of growth. Simply put, it's these macro shifts, combined with our key differentiators and our long-term growth prospects that result in us strongly believing in our ability to continue to take market share and deliver earnings well into the future.
Before we talk about Q3, let's take a minute to review the supply chain, which I know is a top of mind for all. It is no surprise that we have been intensely focused on supply chain bottlenecks around the world. Like all companies, we are not immune to the ripple effect from the short-term and long-term delays. I want to share with you our status and the extraordinary accomplishments of the team.
Our upholstery lead times continue to improve and our industry leading as a result of our in house domestic capabilities, our immediate and decisive responsiveness, our strong long-term vendor relationships, and our scale have all minimized production and delivery delays relative to our competition. And as a result, approximately 85% of our holiday receipts have already been received.
And finally, when we have delays, customer service is our priority, which has resulted in declines in escalations, cancellations and calls into the care center. All that said, I do want to highlight some important challenges we are facing as a result of this supply chain disruptions.
First, as you know, we saw a sizable amount of inventory out of Vietnam, which has recently shut down for three months. This country has since reopened, but is experiencing significant backlog across factories as they ramp up. As a result, we are experiencing some inventory delays particularly in our children's home furnishings businesses.
Second, given the ongoing strong demand we are seeing across our business and the impact of the Vietnam delays, we do not expect full recovery of our inventory levels until the middle of 2022.
Now, let's turn to the results of the third quarter, which clearly demonstrates the strength of our business and our ability to execute with all brands outperforming again this quarter. West Elm delivered a 22.5% comp with all categories driving strong growth.
The upholstery business is very strong, and customers responded well to new products, including bestsellers and bedroom, dining and occasional categories. Additionally, new categories such as bath, kids and kitchens also contributed to incremental growth.
Pottery Barn delivered another high performance quarter with a comp of 15.9%, driven by strong growth in all product categories, including our seasonal decorating business. In addition, we saw strengths across our core lifestyle furniture category, our design services, and our furniture advantage growth initiatives such as apartment and our curated marketplace assortment.
Pottery Barn Kids and Teen grew with a comp of 16.9%. The demand for our GREENGUARD Gold Certified furniture remained strong, emphasizing the importance of both our proprietary design aesthetic and our commitment to sustainability and our customers buying decisions. Our baby business continues to accelerate as our customers expand the families, and the response to our holiday and gifting offerings the strong with Halloween products driving record results.
The Williams-Sonoma brands accelerated to a 7.6% comp with growth across all key categories, driven by product innovation, edited and relevant assortments, and high demand for Thanksgiving and holiday products. Both our exclusive products and WS branded products continued to grow, and we saw strength in key entertaining items.
Operationally, an intensified focus in our key vendor partnerships has allowed us to increase inventory positions in high demand categories, despite a supply chain constrained environment. And we believe the improvements made to our online and store experience, yield and momentum in the quarter.
Finally, last week, the brand launched a new recipe app and a reserve membership program, both of which provide a new way for our customers to engage with the brand, while supporting our ongoing strategic initiatives to develop and deploy content distribution.
Our Williams-Sonoma Home businesses also accelerating as a result of our strategy to reposition the brand as a premium online furniture destination, we believe that with a refined curated assortment and appealing digital presentations, Williams-Sonoma Home will be one of our biggest growth opportunities.
Cross brand, we're excited to share that our B2B growth initiatives continues to produce record performance, with a largest quarter ever generating over 200 million of sales nearly doubled added last year. Significant accomplishments of the business include an increase of 44% in new clients over the last year and acceleration of our contract grade lineup as businesses reopen, and growth and diversification our large project pipeline.
The business is also building across industries capturing additional market share. This growth initiative continues to outperform, and we see significant opportunities this business to contribute long-term.
In our cross brand global business, we are focused on expansion, but through a disciplined capital light brand enhancing franchise model. This quarter, we opened our first franchise store in India, and rolled out ecommerce capabilities across that country to great success. As we look forward, we see additional opportunities to lead in digital around the world.
Additionally, our initiatives to promote selling across our brands continue to yield results. Cross selling metrics including total customers and percent to total of customers shopping across brands are at record levels.
Not surprisingly, the span of a cross brand customer is a multiple of that the single brand shopper and increasing our share of spend with these customers will have a significant impact on incremental volume for the long-term. We are excited about the many initiatives we have in place to capture this opportunity.
Also in this quarter, we launched our new cross brand credit card programs where customers can apply for credit, purchase and earn rewards any of our brands. This new initiative complements our existing loyalty program for all of its tenders. These two tiers of loyalty programs help us acquire and retain customers, irrespective of their method of payment.
The advantage of our loyalty program is twofold. First, as we previously shared the multi-brand customers with two to three times more than the single brand customer. We know we have an opportunity to increase our share of wallet with these customers. And with our portfolio of complementary brands, this is a tremendous competitive advantage. Few if any have in our industry.
Seconds, our loyalty program dramatically enhances the richness of our first party data. With almost 70% of our volume derived from ecommerce, we understand the importance of first party data in the cookie-less future that is rapidly approaching.
The loyalty program, along with hundreds of other attributes in our in-house file is consolidated across our brands and channels, which allows us the ability to aggregate browsing behavior, transactions, demographics, channel preferences, and many other attributes. This risk first party data along with our own in-house advertising expertise allows us to be prepared and equipped as privacy rules evolve across the digital space.
And finally, I'd like to spend a minute on our impact initiatives. We are proud to announce that in the third quarter we raised minimum wages again to at least $15 an hour for all of our employees. Additionally, we also announced new goals to both expand our purchases of nest ethically handcrafted products to 15 million and to nearly double our investments in fair trade certified products to 10 million by 2025.
As the first home furnishings retailer to set significant ESG goals, we continue to lead the industry. These actions not only positively impact people and communities that make source and distribute our products, but also deliver value to our stakeholders, customers, vendors, shareholders and our communities.
Our unwavering commitment to values is gaining further recognition. For example, our Pottery Barn renewed program was included in Fast Company's 2021 innovation by Design Awards. We are ready top score above the Sustainability Furnishing Council for the fourth year running.
And our MSCI ESG rating was upgraded to AA, driven by strong commitment to ethical production, and our newly announced climate goals, which further distinguishes our company as a leader in sustainability.
Advanced in the fourth quarter, we are seeing strong sales and margins continuing. We are thrilled with our customer's response to our holiday gifting assortments, and we are ready to drive an outstanding finish to the year.
Our teams are prepared to fulfill record orders, leveraging our new technological capabilities, and maximizing our digital first omni advantage to meet the outside demand we are seeing from our customers.
In summary with our strong results today are winning positioning in the industry and are outperforming growth strategies. We are more confident than ever in the long-term strength of our business into fiscal 2022 and beyond. We continue to be confident in our outlook of at least mid-to high-single-digit comps accelerating our revenues to 10 billion by 2024 with operating margins, at least that of fiscal 2021.
Before I pass the call to Julie, I want to thank our team for their outstanding work, creativity and relentless focus on driving the business. Their talents, energy and commitment underscore all of the success that we have had.
And with that, I'd like to wish you all happy holiday season.
Thank you, Laura and good afternoon everyone. We are pleased to record another quarter of record revenues and profitability. It is clear that our high quality products and value proposition are resonating with our customers. Our growth strategies are outperforming and our operating model is positioned well to continue to deliver revenue growth and profitability in the future.
Our unique operating model has proven to be a competitive advantage and difficult to replicate. 95% of our products are proprietary or exclusive to our brands. We have a vertically integrated digital first, but not digital only operating model that is nearly 70% ecommerce in an industry that primarily consists of brick and mortar or pure ecommerce players, and we are a sustainable and values-driven company.
These advantages along with the macro trends that favor our business, a strong housing markets, the permanent adoption of hybrid work, a shift to online purchasing, and the demand from customers for values and sustainability and their products are clearly driving our results and will fuel our growth and profitability for the long-term.
Turning to our third quarter results in more detail. Net revenues grew 16% to 2,048,000,000 with comparable brand revenue growth of 16.9% with comps accelerating to 41.3% on a two-year basis. This strong performance was broad based across all brands and both channels. In fact against tougher compares, our ecommerce business accelerated to over 67% of our total revenues from the second quarter and was our highest two year comp ever at 64%.
By brands, West Elm delivered a 22.5% comp taking year-to-date revenues for the brands over 1.5 billion. Pottery Barn our largest brand drove their fifth consecutive quarter of double-digit comps with a 15.9% comp. Pottery Barn Kids and Teens grew at a comp of 16.9% and have their highest two year comp ever.
Williams-Sonoma drove a 7.6% comp accelerating from a second quarter and on top of 30.4% last year. And our emerging brands Rejuvenation and Mark and Graham combined continue to drive significant growth at a 26.5% comps. And all brands grew nearly 40% or higher on a two year basis.
Moving down the income statement, gross margin expanded 370 basis points to 43.7%. Our selling margins dropped 280 basis points of this expansion, and relative to 2019, our selling margins are up 430 basis points in line with our first half results despite higher ocean freight costs occur during the quarter.
These strong margin results reflect our pricing power from our proprietary design products, and the advantage of our vertically integrated sourcing and production, which allows us to engineer our product for value and to best navigate through the various macro complexities. We are pleased to deliver another quarter of strong top line sales and merchandise margin expansion.
Occupancy cost leverage was also a factor in our gross margin expansion, leveraging approximately 90 basis points, resulting from higher sales and low occupancy dollar gross. Occupancy costs were approximately $183 million, up 5.1% year-over-year, and relatively in line with our second quarter growth.
The year-over-year increase includes a one-time impact from rent through ups and rent abatement last year as well as the incremental impact from our new East Coast distribution center, which gives us additional capacity to support our strong customer demand. We were pleased to see another quarter of occupancy leverage reflecting the strength of our top line and the ongoing success of our retail optimization efforts.
SG&A in the third quarter was in line with the prior quarters at 27.5% of net revenues. Year-over-year, SG&A deleveraged 320 basis points driven by higher advertising spend coming off of our substantially reduced costs in 2020 and our decision to incrementally invest in advertising.
As we have said all year, given our record levels of profitability, we have been strategically and aggressively investing in high ROI advertising to drive new customer acquisition, retention and top line growth which clearly is working. We continue to see record new customer counts and strong demand which has benefited our business to date and will continue to drive growth well into the future.
Furthermore, we view it as a competitive advantage to be in a position to increase spend today, while the competition may need to pull back to offset incremental supply chain costs. And despite this expected to leverage, we still delivered SG&A rates historically low pre pandemic levels and another quarter of record profitability.
Operating income grew to a record of $333 million, resulting in an operating margin of 16.3% expanding 60 basis points over last year. This resulted in diluted earnings per share of $3.32. up 30% from last year's record third quarter of $2.56 per diluted share.
Put these results in context. We have not seen our performance weighing all year, despite any shifts in the consumer wallet as the world reopens and being up against accelerating tougher year-over-year compares. In fact, year-to-date, we are tracking to a 28% comp or 41% on a two year basis, with 400 basis points operating margin expansion at a 16.3% operating margin and over 85% growth in earnings.
Turning to the balance sheet. We ended the quarter with strong liquidity levels and a cash balance of almost $660 million. The strength of our business has generated operating cash flow of almost $790 million year-to-date, which is approximately $60 million over last year's elevated cash flow levels.
This cash flow strength has allowed us to fund the operations of the business to invest over 140 million in capital expenditures and return almost 790 million to our shareholders in the form of over 135 million in dividends and over 650 million in share repurchases. These decisions reflect our confidence and the sustainability of our growth and our commitment to maximizing returns for our shareholders.
Moving down the balance sheet. Merchandise inventories which include inventory and transit were 1,272,000,000, representing an increase of 13% over last year. Inventory on-hand and available for sale was up 3% year-over-year, well, that is an improvement from where we were in the second quarter.
Our inventory levels are still not aligned with demand and are below optimal levels. Our backorder levels continue to be at record highs driven by our strong demand and supply chain disruptions that unfortunately continue to delay our order fulfillment, including the most recent delays out of Vietnam.
As Laura mentioned, our phenomenal team and their aggressive actions combined with our scale has enabled us to navigate through these challenges better than others. And given our ongoing strong demands, we expect to return to more normalized inventory levels by mid-2022 with backorder levels remaining elevated is the first half of 2022.
Now, let's turn to our expectations for the rest of the year and longer term. We are raising our 2021 outlook to reflect revenue growth from high-teens to low-20s to now 22% to 23% and operating margins from 16% to 17% to now 16.9% to 17.1%. This is our third consecutive raise this year.
Additionally, we're also reiterating our longer term outlook of revenues accelerated to 10 billion by 2024, with operating margins, at least in line with our ways to see your 21 levels, which implies at least a mid-to high-single-digit comp with margins at least holding over the next three plus years.
We, of course will revisit our 2022 and longer term outlooks next quarter in more detail. We are very confident in the fundamentals of the business and our strategies to sustain our growth into the future. In addition to the macro trends, our key differentiators and our successful growth initiatives as previously mentioned. We have several other factors that give us confidence.
First, our results today, we saw comp accelerating even before the pandemics as a result of our growth initiatives to a tie the 10% comp in February 2020. Our results during the pandemic continue to accelerate despite our retail stores being closed. And our results every quarter this year have held at a three year comp of approximately 40% despite accelerating tougher year-over-year prepares. And we did this while pointing back at all site wide promotions and with low levels of available inventory for sale.
Second, our proprietary products and vertically integrated sourcing and production, which provided pricing power and the ability to optimize and engineer our products for value, drive strong merchandise margins in an environment with rising costs to competition.
Third, our operating model. In addition to our pricing power, our operating model provides several opportunities to drive strong operating margins. From leverage from higher sales, including the additional accretion from our growth initiatives that have a higher operating margin through an accelerating shift online, which is more profitable. The continue occupancy leverage from the renegotiation of our lease agreements and further store closures, the various supply chain efficiencies, including automations, and in-stock inventory levels, and the continued emphasis on overall strong financial discipline holding costs below sales growth.
And finally, our liquidity. We have maintained a very strong and disciplined balance sheet with ample cash and no debt, which provides dry powder for opportunistic investments and incremental shareholder returns. All of this is what gives us the confidence in our short and long-term outlook and our abilities to deliver sustainable long-term growth and profitability with strong financial returns for our shareholders in 2022 and beyond.
I would now also like to thank our associates. Without their unwavering commitment to driving these results, none of this would be possible. Happy Holidays to all on the call.
And now, let's open the call for questions. Thank you.
[Operator Instructions] Our first question comes from Seth Basham of Wedbush Securities.
My first question is around the backlog that you mentioned. You said that record highs. Do they increase from second quarter of the third quarter and then your demand comp exceeds your sales comp this quarter?
This is Laura, thanks. Yes, unfortunately, the back orders did increase from where they were before. And the demand comps are relatively in line with a net comp. There's really no big story there.
And my follow-up is around your customer acquisition costs that you leaned into advertising. You talked about Apple's privacy changes. Are you seeing customer acquisition costs go up, down, sideways? And how should we think about those going forward?
Hi, it's Felix. Thanks for the question. The digital advertising environment has always been dynamic and competitive, but what I guess we have the competitive advantages is that, we have invested over a year in our in-house measurement lab, which is staffed with our own data scientists and mathematicians. And we also have our own in-house campaign managers who work side by side on developing the right audience. We measure results across our spend leveraging our proprietary toolset. So, even as the prices fluctuate, we're able to quickly identify the high ROI programs.
And secondly, we've always been performance markers, which means, our spend is primarily on marking and vehicles we can measure in tie directly to our top line and our bottom line. And then I guess, lastly, we have the advantage is that we centrally manage our marketing budgets, and so Laura and I have the advantage to look across our portfolio. We test and learn across our brands. And when we find best practices, we can roll it out to our seven brands. So despite the dynamics of the marketplace, we feel we're better suited than others in our space?
Thank you. Your next question comes from Adrienne Yih of Barclays.
I just have the consistency of what you've been able to accomplish is really remarkable, so congrats. Laura, I am interested in the comments he made about Williams-Sonoma Home and how that's going to be a growth vehicle for the overall business. How did that fit into the $10 billion kind of longer term target? How much of that number represents the WS Home opportunity? Or is that upside to that?
And then, on the $15 an hour of net that's also very much, on the offense playing here, here and there with Walmart, Target and a lot of people are multiple dollars behind you. So is that entry level, obviously at the stores? What does that look like at the DC? And where was the average hourly rate before this? Just curious how we should model that into our P&L? When did they get instituted and what was it beforehand? Thank you so much.
Okay, let me see if I can get all that. So in our IR deck, which is online, you can see our past to 10 billion in revenues, which I think is a great thing to reference back to. And, of course, we'll update this next year. But my optimism in Williams-Sonoma home is not reflected in the 10 million. It is that you just look at the growth even the Williams-Sonoma brand has from 2020 to 2024, it's 300 million. So of course that doesn't contemplate Williams-Sonoma becoming a big driver.
We see a huge gap in the marketplace, for proprietary high-end products that great values and that are sustainable. And so, we're working hard to do that, but to do it really well. So we're going to have patients also and what we bring in and when. But so far, it's really -- it's working, the changes we've made have already produced great results and we're seeing momentum in that business.
We're also very focused on improving our website, so that you can really envision this product in your home without having to visit a new store. And that also using our stores to show wood samples and fabric samples and do design help in home even though we don't have standalone [waiting] from home stores. So it's a lot of exciting things happening there.
In terms of the hourly wage, minimum, minimum is different than average, of course, right. So, the minimum we've moved it over the last couple years from 12 to 15. Most recently, it was at 14. And we made that change when, Julie?
Industry is quite…
Well, the 14.
At July 2020.
Yes. Thank you. Good memory. And so, but our average hourly wage is higher, obviously. And we have stores all over we have manufacturing all over the country. So, we didn't have that many people in under 15 buckets to actually begin with. Our goal is to be competitive and hire the best in all these places, and so wage is one part of it, but it's a lot of other parts to the whole, the whole ecosystem of benefits and pay for our employees, and we're going to continue to really make sure we get the best and we will reward them appropriately.
Thank you. Our next question comes from Cristina Fernandez of Telsey Advisory Group.
Thank you and congratulations also on a good quarter and the continued momentum in the business. I wanted to ask about the inventory flow, particularly with the supply chain challenges and the Vietnam disruption. How should we think about inventories over the next six months until they normalize? Should we expect them to be stable? Should we expect them to get worse before getting better? Some color there will be helpful?
They get better per plan unless sales demand gets better faster. Yes, it's always a relationship. But our predictions are pretty, pretty good. They should get marginally better, but to really get back to where we want to be on backorders. We see it moving out of it, because of course a very unfortunate, unpredictable situation that happened in Vietnam.
Remember, Vietnam really predominantly affects our kids business, and seeing business although, it has some impact on the others. It's a relatively small finding. What we care about the most is the customer, right? And getting the customer the right date, and then helping them substitute if need be, and being really empathetic and helping them understand every way through this.
And, so we've been doing call outs, and I'm really pleased to say that our customers have really understood. And I was worried about that, but the customers appreciate the phone calls. And we are not seeing them cancel, and they're willing to wait because everybody else is in the same spot. And they want the high quality and they want the GREENGUARD Gold Certified kids products.
And then my follow-up, I wanted to see if you could talk about the demographics of the new customers that are coming to the brand. With the promotions being lower, are you seeing more affluent customers and perhaps dropped in moderate income customers? Or how, I guess, how has that changed over the past year if any?
Thank you for the question. Our trends have been consistent. We're seeing growth across all generations in all income bands. And I know, there's a lot of questions about geographic trends too, the good news is the positive across the board. I will tell you what is promising is that we are seeing a lot of our customers obviously come from the millennial generation and wedding registries, baby registries are all up not just over LY, but significantly over 2019.
We also know that beyond registries, we're starting to see a lot of growth and people who have moved recently in the past two years, and those are some of our most valuable customers over time. And we know that they have a high percent curve of over 18 months. So we love that.
And I guess lastly is that when we acquire these new customers, we are enrolling as the majority of them in our 2 Tier loyalty program that Laura spoke about, which is great for future sales. As you know, as Laura said the multiple there is 2x to 3x. So, we're thrilled with that performance.
Thank you. We'll take our next question from Chuck Grom of Gordon Haskett.
Just wanted to see if you go to speak to the pathway, that the build off of the sales trajectory going from the $8.3 billion. It looks like you're going to do this year to the $10 billion in 2024. It sounds like back level, backlog levels are strong, so would you expect that high single, mid to high single digit pace to sort of be commensurate each year over the next few years to build that? Just wanted to think about how we get to that $10 billion?
Sure. Hi, Chuck. Yes, so the $10 billion that we put out there that now recently we accelerated right about quarter to 2024, the algorithm associated with that as effectively a mid to high single digit growth per year. And that's what we're saying is sort of, where at least we think we'll be. Obviously next quarter, we'll come out with more specific guidance for 2022, and see, if there's any update to our longer term outlook. But that is where the math comes into play as to where we think it'll be for the $10 billion or better.
And then, Laura, just wanted the $200 million in revenue for B2B is impressive. Just wanted to think about how we size up that opportunity in longer term? I think you had, at one point thrown out $1 billion number but it seems like that could move higher over time. Just an update there?
I think I've said one, I think I've said two, I think I've said, the two is too small, I mean, the market is what 80 billion U.S. B2B. Nobody's doing it from soup to nuts. They have categories where they cover plugs that didn't get your bedding from somewhere else. And we're, we've gotten so much more of our furniture and our products to be contract. So we can actually sell them into these places, and there's so many projects going, and we have such a strong team or building the infrastructure. I think this one is the big deal and I see at least two.
And Chuck back to the algorithm for 10 billion it was assumed was a billion in five years. So for 100 comps, 700 million this year, could it be a billion next year?
And I would think that maybe we're being a little conservative on that.
And then just on occupancy 183 million, you address the increase. Is that a good run right to use sort of quarterly going forward? Or should we expect that to come down as you renegotiate leases, closed doors, et cetera?
Yes, I mean, that's always a tough one to nail with precision. I mean, yes, last quarter, it was relatively in line with this quarter. Q4, there's a lot more variable occupancy that goes into play. And remember that we have a lot more of our capital projects that go in. And we're spending more on capital projects. So there's a depreciation play within occupancy. And we've put in place a new East Coast distribution, which is fantastic news, because it supports our strong growth.
On the flip side, which is fantastic is that we've been really strong with our retail optimization efforts. And so we've brought down the cost associated with rent on our stores. And so we're able to mute the growth of occupancy to be below sales growth, and that is what we expect to continue and why we can continue to drive leverage and occupancy. But to give you an exact growth rate, it's difficult, so -- because it's going to move around a little bit by quarter for those reasons.
Thank you. We'll take our next question from Simeon Gutman of Morgan Stanley.
This is actually Hannah Pittock on for Simeon. My first question within selling margins, if we think about the year-over-year expansion, can you give us some qualitative color on how much of that was lower promotions, taking price and to the extent that there was an offset there and higher product costs to some of the puts and takes for themselves margin?
Obviously, as we've been saying, all year, we've been very successful with gross margin expansion and we saw that continue. So that is the biggest driver is us pulling off of our site wide promos. And we continue that all year. And yet, we've been able to drive incredibly strong, top-line. So that's the biggest piece.
Certainly, we didn't incur higher raw material costs like everybody else. But we've been able to navigate through it much better than everyone else, we believe, because of the fact that we design in house-ware products, and we can engineer it for value. And so we can make the necessary changes that we need to make to be able to still drive value for the customer and still drive profits of the Company.
The other thing I would say that is not reflected in there that you're, that it's something new, that's this quarter as we did incur, a substantial ocean freight costs. And so, I think you need to think about but for those, our expansion would be from a product margin perspective would be in line with Q2.
And so our merch margin expansion is still very strong. We have not seen that come back. We're still driving it. In fact, if you take our selling margins, and a look at them on a two year basis, were aligned with the first half of the year and if you add back the ocean cost we're actually isn't the highest two year comp we've had no selling margins. So we feel really great about the strength of our business.
Got it. And maybe a quick follow-up on any issues raising prices within specific banners? Are there some that the customer tends to display a little bit more elasticity? Or is it consistent across the brand?
Hi, it's Laura. The most important change that we've made is to not run site-wide promotions. And that was a change that we started to test into before the pandemic, and then got more and more bold after we saw the results. And, it really speaks to the pricing power that we have, because we are one of the only people who design and source their own products. We're not selling other people's things to the same extent that a lot of other people in the space are. So you can't compare the price. We are not looking to change our value equation, though. At the same time as we have stopped the promotions, we are giving our customers better value.
As Julie said all the time, it is so important to us that the customers see our product, they love it, the quality, they know it's great, they know it's sustainable, and we have the best price with shipping in the market. And it's really hard for them to find it anywhere else. And that's what we're doing more than thinking about it in terms of, what can they stand and what can they not stand. It's about giving them the best value out there in the entire market.
Thank you. We'll take our next question from Jonathan Matuszewski of Jefferies.
First one is just on industry-wide proportionality. Curious what you saw this quarter, I recall, last quarter you shared an observation that peers were increasing their promotional activity? Well, your selling margins were up and your clearance activity was down a lot. So just kind of big picture, what were you seeing across the competitive landscape? And why do you think peers feel the need to mark down their product to sell in this environment?
So remember that a large portion of our industry is still brick-and-mortar small retailers, many of whom are stuck with wrong inventories, they have to clear they have to cash flow. So there's a lot of liquidation going on the streets, right. And while that's not easy to find a compare to, it's a reality.
In terms of the big players, you've, I'm sure read the reports we seeing who's performing and what they're doing and where their margins are. And you can just, if you sign up for their emails, you'll see a lot of promotions, you'll see 20 offs of the couponing, you'll see site wise, you'll see all sorts of different offers that they produce. And it is coming back. You also are saying people have all their early Black Friday deals in great quantities compared to us. And so those are all factors in the marketplace.
And as I said, we're going to continue to offer the customer great value, and we're going to work to design products that exceeds their expectations and that they can't buy elsewhere.
And then just a quick follow up on the B2B side, you've obviously seen significant share gains on this side of the market in a fairly short timeframe. Are you anticipating any incremental investment required to continue scaling this business going forward? Or is it just going to be a matter of leveraging the current infrastructure with new customer acquisition and being able to continue going without a significant uptick in expenses?
Yes, it's a really profitable business. We've hired a lot more people to sell for us. And that's really what we're doing. But they do a ton of volume each versus when you think about other models that we have or others have. These are big accounts and they're annuities in that, once they start doing business with us, they need to replace things. And so it's, yes, we give them a discount, but it's very accretive to our margin. And it's not a big step up investment. We do have some things we're doing to automate the selling, and make some investment there, but not like you've seen when we've done other initiatives in the past.
Thank you. We'll take our next question from Brad Thomas of KeyBanc Capital Markets.
My question was about the outlook here for the holiday season. And obviously, you've given very explicit guidance for how we think about sales and margins, as it's implied for 4Q. But I was a little more curious about how you're thinking about seasonal merchandise? And how it performs versus the core business? How you're thinking about perhaps some pull forward that may have occurred, if consumers are anticipating shipping delays? And how confident you are and your ability to deliver this given believed you said inventory hands up about 3%. Congrats on a great results and we'd love to hear some color on this.
It's so exciting to be able to get together with family and friends against the holidays. Remember, Thanksgiving last year, was like Thanksgiving turkey for two. And so this year, we're sold out of all the big turkeys, I mean, they're gone. I'm so sorry. And that goes for a lot of other products to that we planned high and the exuberance of the customer to get together with a family and friends has just begun.
We're in the entertaining stage of the holidays, the gift giving, as much as we all want to move it early. They wait till later. But the entertaining and decorating stage is well underway. And as I said, I'm thrilled that we got our seasonal stuff in and stack, it's in our stores, it looks gorgeous, and it's flying. Core business is also super strong. I said in my prepared remarks how strong our core furniture franchise business is.
And so, that's something that we continue to see as an opportunity. Particularly, as we finally get back in stock, because as we get more and more in stock, the customers lead times go down, they do buy more. So, we're doing this well with a lot less inventory than we'd like. The inventory in transit is nice and stout. So we do see some recovery on its way. And we'll see some nice backorder fill coming as well.
Maybe more if I could ask a follow-up just about expansion of new brands. Obviously the Company has a history of making acquisitions and growing from within. I'd be curious, if you could share any color on how you're thinking about new brands down the horizon and how you're thinking about that?
No, we are very focused on growth. And we've identified some very serious growth initiatives in our core brands. And within the core brands, there's very big businesses that are underserved, I think I've mentioned before, how small the outdoor businesses West Elm or how small the Christmas decor businesses for West Elm. In Pottery Barn, they just started to go after that. And we have some that we haven't announced yet but that are categorical and that are big opportunities in the market.
We mentioned B2B. We're now designing into B2B. So for example, before we are just doing contract rate versions of our stuff. Now we're designing restaurant tables and benches, and banquets and all those things that restaurants and hotels want. We actually design it for them and then it goes in our line, just like we did for the workspace. So, there's a lot of product extensions that we are bringing in. And of course, we're always looking at the landscapes and thinking about new aesthetics, and possibly new brands.
Thank you. We'll take our next question from Oliver Wintermantel of Evercore ISI.
I have a question regarding your comp, the compensation of that. If you could talk a little bit about transactions versus ticket and maybe can also talk a little bit about store traffic, I think that was done last quarter, if that improved? And how much of the ticket was pure inflation?
So, in terms of store traffic, we are actually seeing better traffic comps than the national traffic. People love our stores. We tend to be the place you go. So we're better than nationals, but we're still negative to 2019. So I'm so excited about that number, because can you imagine when the number comes up, so we have a lot of room to go, sort of their experience, so we have design services, we have omni services, and we're driving higher ticket conversions, great traffic down.
In terms of all the other metrics that you might think about, it depends. You can have a lot of traffic on the websites on qualified or you can have high conversions qualified. I mean, look, the metrics are great, because we're selling a lot more on both channels. As you can see, we have really strong channel comps on both, but we are selling more units for order and we're selling higher ticket because they're buying whole houses.
And that's really a function of this cross brand initiative that we've talked about, but also as we look to design whole houses and furnish their entire room and use our design services and our online outward 3D services, it really helps them feel more confident, buying more for the room, versus just maybe the bed that they set out to buy.
Thanks, Laura. And Julie, I think you said on SG&A growth, it was, did you say it was all advertising or most of it, or you know, if you could parse it out a little bit more, please?
It's really all advertising the deleverage, but it did come down from the second quarter from a deleverage perspective. And again, the point of that is that we're coming off of low levels of a 2020. And we're seeing this as a competitive advantage to invest in high ROI advertising. Many, many companies as you've been reading and hearing have been pulling back because they have to be able to hit the bottom line. And we see that as an opportunity for us with our record operating margins to be able to go in and really invest in it and drive growth for the future. So, that's what we're doing.
Thank you. We'll take her last question from Steven Zaccone of Citi.
I had a question on the supply chain. Can you talk about your ability to diversify the supply chain just as sourcing continues to be a pain point into next year maybe a little bit worse than you're anticipating? And then I guess the other topic, other questions related to supply chain is just, you probably dealing with some elevated container costs and some other transportation costs. Is there opportunity to recoup some of those costs as we get into next year?
Thank you for the great question. We're vertically integrated. As I said earlier, we design resource. We have, I think, 800 people and our Asia operations. We've been at this for a while, we have strong relationships with our vendors, and we are nimble. You watch us cover the really difficult tariffs that people couldn't believe we could cover. I mean, that was, that's no small situation.
And so, yes, there is always a new challenge around the corner, you just wait for it. But the great news is our team is so strong. And they usually see it coming before anybody else, and they work to mitigate it. We're already thinking about next year, what might be on the horizon and how we get in front of some of those things. It's also an advantage that we have multiple distribution points in the United States.
So we can bring goods into multiple ports, which a lot of people can't do without spending a lot of money on dry. And so that's something that will serve us well, I think next year. And we're also opening up in sourcing and other parts of the world that we've never sourced in large quantity. And so whether it's Mexico or Brazil, we're looking at those markets very, very strongly and see opportunity in those markets.
So I see our supply chain as a competitive advantage that allows us to really bring in great product and to deliver great quality. In terms of next year and the cost pressure, Julie mentioned, we did spend more money this quarter that we just announced was bringing in our goods, so that they'd be ready for the holidays. And while we improved our operating margins better than anyone thought we would, that money was in there.
And that is an opportunity for next year, because we don't see that continuing even into Q4. We see that going forward, we will not have the same amount of costs and we'll have higher costs, in some cases for the general contract on transportation. But we will see the spot rate the bigger percent of our total containers in as we did for Q3 and Q2.
I guess the other question I had is just, given the continued top-line strength in the business, would you ever consider slowing your plans to close stores?
No, only closing stores where we can find a better opportunity what where the mall is not a proud moment or the economics really don't work. And we've been really successful in opening bigger, better stores, and driving the customer to a better experience. I think it's a really important part of a brand's development to keep improving your retail footprint, because that's how the customer sees the brand. And so, if your local store is not up to date, that's not good for your online sales.
So it's a really important part of our, what we do, and we set pretty high numbers for our retail profitability, we're hitting them. But we will continue to consolidate where we have stores that are just lagging. And as I said it can either be lagging in financials or lagging in the brand, the way the brand sits with you as you go into a store.
But I'll tell you on the flip side, we are so proud of our beautiful stores right now. And I really invite all of you to go visit and buy some things for Thanksgiving or the holidays. And you'll see what I'm talking about those gorgeous stores are doing those people in those stores are doing such an amazing job, selling and helping our customers right now, and we're just so proud of them.
Thank you. At this time, I'd like to turn the call back to management for any additional or closing remarks.
Well, thank you all for joining us. It's been another great session talking to you all and I appreciate all of your support. And I again, wish you happy holidays, happy Thanksgiving, and happy shopping.
This concludes today's call. Thank you for your participation. You may now disconnect.