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Welcome to the Williams-Sonoma, Incorporated Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] 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, James. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. 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 conditions, results of operations, business initiatives, trends, guidance, growth plans and prospects of the Company in 2018 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. Good afternoon, and thank you all for joining us. With me today are Julie Whalen, our Chief Financial Officer; Yasir Anwar, our Chief Technology Officer; and Felix Carbullido, our Chief Marketing Officer.
In 2017, we made significant progress against our strategic priorities to strengthen our competitive advantages and drive accelerated growth. As a result, we saw new customer growth, improved traffic and conversion and accelerated revenue growth in both retail and e-commerce. We ended the year as one of the few retailers of our scale to consistently deliver sustainable top line growth, bottom line profitability and robust cash flow. In 2018, we will aggressively pursue significant growth opportunities across all areas of the business and particularly, in our global operations and new business initiatives which have demonstrated significant potential.
We also continue to strategically invest in digital advertising, technology and our customer experience while driving efficiencies and cost savings throughout our business. We are confident in our strategies and our proven track record to further extend our leadership in home furnishings and housewares industry in 2018 and beyond. In the context of our overall performance and plans for 2018 and given the benefits of the recent tax reform, we have made the decision to invest in our associates and our customers and in our returns to our shareholders. We'll be raising the hourly wage for associates to $12 per hour in the United States and significantly improving maternity leave benefits. We will also accelerate our digital and supply chain investments to improve the customer experience, which we believe will result in increased sales and reduced costs that are not reflected in our 2018 guidance.
And as we announced this morning, we will also enhance return to shareholders as double-digit increase in quarterly dividends and an increase to our share repurchase program. We would also like to announce that as part of our ongoing efforts to optimize our retail fleet, we are expediting the closure of a number of underperforming domestic stores. We believe this decision is aligned with shifting consumer behaviors and allows us to better leverage our resources for e-commerce growth. We estimate that we could incur onetime charges of up to approximately $50 million but we expect to see associated cost savings once these closures are executed. The impact of these closures are not reflected in our guidance.
Now I want to review our 2017 performance in more detail. We saw the momentum in our business accelerate throughout the year and particularly over the fourth quarter. Our products and operational initiatives drove broad-based comp growth in all of our brands. For the quarter, both revenue and comp growth substantially improved from last year to 6.2% and 5.4% respectively. For 2017 overall, our 4.1% revenue growth exceeded the high-end of our guidance, while our comp revenues were up 3.2%, driven by a 450 basis point acceleration in Pottery Barn, a 190 basis point increase in Williams-Sonoma, and another year of double-digit comp growth in West Elm and in our newer businesses, Rejuvenation and Mark and Graham.
For the year, we delivered earnings per share of $3.61 or 5.2% growth on last year. A highlight of 2017 was the progress we made in the Pottery Barn brand. We returned the brand to growth as a result of our strategic initiatives. In addition to our high-quality proprietary product offering, we delivered on our goal to offer customers a value option and more functionality, including the launch of PB Apartment, our smaller scale, multi-functional furniture collection. We also recommitted to decorative accessories and seasonal ideas to attract new customers to the brand. Furthermore, we improved the customer experience with 8 high-impact store remodels and increased personalized content and 3D product visualization tools to make the shopping experience more engaging and friction-free. As a result of these initiatives, we saw strong improvements in traffic and conversion, as well as existing new and existing customer counts, which gives us confidence in the future growth of Pottery Barn.
We are excited to see this momentum continuing into 2018. We have an exciting product line up with innovation across multiple key categories. Our new aesthetic chapters are resonating with our customers and will expand our PB Apartment collection, which we believe is critical to further broadening the appeal and relevance of the brands. We will grow our online market share with expanded online-only assortments in underserved categories, trends and aesthetics through domestic drop ship. And we will also continue to refresh our retail experience with upto 10 high-impact remodels of existing Pottery Barn stores in the New Year.
Now I'd like to discuss our total company progress against our four strategic priorities; digital leadership, product innovation, retail transformation and operational excellence. We believe these priorities are key to driving top line and earnings growth.
First, to expand our digital leadership we accelerated our investments in technology and advertising to drive new customer acquisition, conversion and an improved shopping experience. To highlight some key accomplishments, we enhanced the product storytelling and functional experience of our mobile sites across all of our brands. We made meaningful improvements to our sites and our e-mail personalization program to deepen customer engagement, and we leveraged our digital platform to elevate our cross-channel customer experience with the launch of buy online, pickup in store for the Williams-Sonoma brand, and more recently, for Pottery Barn Kids. We initiated the process of re-platforming The Key loyalty program with a vastly improved mobile and in-store experience.
In digital advertising, we shifted our ad spend to top-of-funnel vehicles that drive brand awareness, social media campaigns that inspire new and existing customers, and in cross-brand initiatives such as The Key to increase customer engagement and cross-selling opportunities across our brands.
And our investments are having an impact; we saw a 5.5% growth in our e-commerce channel for the full year with Q4 accelerating to over 8%. We also drove 5% total customer growth, the highest increase in total customers since 2014 which will fuel our growth over the long-term. And furthermore, our enrollment across brands and channels in our loyalty program, The Key, more than doubled over the past year which will also drive sizeable incremental revenue annually.
As you know, we also made the exciting acquisition of Outward, Inc. at the end of last year. As a leading 3D imaging and augmented reality platform in our industry, we believe Outward has the technology as well as the tech talent to help us further accelerate digital innovation and drive meaningful impact throughout the business. Over the next year, we will integrate Outward technology in all of our core brands to improve product visualization and design capabilities. This will further elevate our customer experience, increase conversion and reduce returns.
Second, to drive product innovation we evolved our product strategies to better align to shifting consumer preferences and broaden our brand's market reach. Our proprietary product development capability has allowed us to stay ahead of trends across all brands, and our direct sourcing model enables us to deliver superior value and quality to our customers. As exemplified in the Pottery Barn brand, we focus on the value creation across all categories and introduce more opening price points to drive accessibility to more consumers. We also refined our products offering to address our customers' specific needs and lifestyles at different life stages.
For example, in addition to our PB Apartment collection, we introduced the curated assortment of best-in-class baby gear at our Pottery Barn children's home furnishings business which led to more registry creations and new customer acquisitions. We also launched industry-leading offering of GREENGUARD-certified nursery furniture to meet the increasing demand for healthier, more sustainable products in the home. In West Elm, we successfully expanded our new modern collection, asserting our design leadership, broadening the distance between us and the competitive set in the marketplace and attracting new customers to the brand.
Collaborations and partnerships continued to play an important role in expanding our market reach by differentiating our products through exclusivity and novelty. In Williams-Sonoma, exclusive collaborations with vendors and chefs are core to our brand differentiation. Over the past year, we partnered with our trusted vendors, including Hestan, USA Pan, Shun and All-Clad to launch exclusive innovative products that attracted new and loyal customers. We also continued our partnerships with major food festivals across the country to enhance our interaction with chefs and local food communities.
In our Pottery Barn children's business, licensed collections such as Harry Potter generated strong demand from our new and loyal customers. And in West Elm, we built upon our innovative value-based approach to collaborations with the launch of our partnership with Leesa Sleep, whose social mission is complementary to the brand's commitment to supporting the communities in which we operate.
Third, to accelerate our retail transformation, we focused our efforts around value-added services, inspiration and convenience as our stores remain an important source for new customer acquisition, establishing brand loyalty and driving sales across our multi-channel platform. Over the past year, we have introduced new value-added tools and services such as our cross-brand design crew to simplify the home decorating experience for our customers. We have better leveraged our retail fleet to enable a cross-channel shopping experience through the launch of buy online and pickup in store in Williams-Sonoma and Pottery Barn Kids stores. And our store remodels in the Pottery Barn and Williams-Sonoma brands are driving accelerated growth in these stores and are exceeding our internal four-wall profitability metrics.
We continued the expansion of Williams-Sonoma Home, a key growth initiative, with the addition of 24 more locations in Williams-Sonoma stores and 2 free-standing stores, all of which are contributing to increased traffic and sales online and in-store. Given evolving consumer behavior, we've also been prudent and deliberate in our approach to fleet optimization with the closure of 19 underperforming stores during the year on lease expiration.
Fourth, to achieve operational excellence, we focused on cost efficiencies in the supply chain and inventory optimization to offset our investments in the business. For example, we improved the speed of order fulfillment and delivery by an average of 20% and 6%, respectively, and reduced the rate of returns and damages which generated significant cost savings during the year. These improvements resulted in a reduced number of escalation calls to our care center and higher customer satisfaction metrics as our customers received their orders more quickly and with more visibility during delivery. While we see significant opportunity to further optimize our inventory, there has been a notable improvement for in-stock service levels and reduced local market out-of-stocks across the Company.
All these accomplishments are underpinned by our Company culture and values, which have long defined the way we operate. Doing business the right way is important to us and important to our customers. Just last month, Williams-Sonoma, Inc. was ranked Number 14 in Barron's inaugural list of the 100 Most Sustainable Companies in the United States; and Number 2 among the Industry of Consumer Discretionary Companies. We are proud to be recognized for our efforts in advancing sustainability initiatives from verifying that our products are produced ethically and from sustainably sourced materials, to our commitments paying Fairtrade Premiums back to workers. We are constantly working to achieve our business goals while improving our social and environmental performance.
Looking forward to 2018; I am optimistic about the growth opportunities that lie ahead. We will continue to execute against our four strategic priorities to strengthen our platform and drive profitable growth across our brands. Couple of key initiatives for 2018 include; the launch of buy online, pickup in store in Pottery Barn and West Elm, following the successful pilot in the Williams-Sonoma brand last November and the recent rollout in Pottery Barn Kids. In digital advertising, we will continue to fund more top-of-funnel vehicles to drive awareness and improve brand perception while optimizing our catalog strategy and in-house capabilities to maximize our total ad spend.
In e-commerce, we'll focus on removing conversion friction by re-platforming our mobile sites to progressive web app technology, streamlining our checkout process and implementing the next-generation of our machine learning, on-site search and personalization experience. In addition to these initiatives, we will aggressively pursue growth in product categories and markets where we see significant untapped potential.
Let me first talk about the product categories. We have a pipeline of new sizable product initiatives that we'll be announcing later this year. For the first time, we'll be launching 2 cross-brand collaborations that feature distinctly different aesthetics from what's available in the markets today. Our Lilly Pulitzer collaboration announced last month is the first of our One Home collaborations across the Pottery Barn brand and marks the first time that all 3 brands have simultaneously released coordinating collections, giving customers the opportunity to create a cohesive look throughout the home.
And as I mentioned earlier, we are taking advantage of a substantial opportunity in curating an online marketplace in our Pottery Barn brand. We are partnering with synergistic, high-quality vendors to significantly expand our online-only direct-ship assortments in underserved categories, trends and aesthetics. This online marketplace will give us the ability to accelerate growth without inventory cost and to test new products and price points.
Second; we see significant opportunity in the design-oriented functional home furnishings market for our West Elm brand to capture more share. As one of the fastest growing, most profitable brands in the industry, it has continued to deliver accelerating growth domestically and globally despite very low brand awareness. We will continue to leverage the brand's leadership in design to expand into new categories and in our emerging B2B and hospitality businesses. We will also increase West Elm's brand awareness through new stores and high-impact advertising campaigns that have proven successful in driving new customers to the brand. We are confident in the brand's potential to reach $2 billion in the near-term and be our biggest brand overtime.
We also believe there is enormous potential in the high-end home furnishing space for Williams-Sonoma Home to lead. We will continue to drive growth through expanded product assortment, innovative marketing and the expansion of Williams-Sonoma Home's retail presence. Our Rejuvenation brand will also continue to solidify its leadership through digital and retail expansion in the high-end lighting and hardware market while increasing offerings in utility and furniture to position this brand as a partner in quality remodeling projects and heirloom home furnishings.
In the international market, we have a tremendous opportunity to become the world's leading specialty multi-channel retailer in home furnishing and housewares. In 2017, we successfully entered South Korea and Ireland, launched our e-commerce presence in Canada and expanded our presence in existing markets. We grew our global presence by almost 40% over the past year to a total of 128 selling locations. We delivered a significant improvement in profitability in our company-owned operations driven by our continued focus on operational excellence. We also laid the foundation to better position us for entry into bigger markets in the near-term. We developed and implemented a marketing strategy which is already proven effective in Australia, in the U.K.; and we've also improved our sourcing and inventory management which is streamlined delivery to our franchisees.
In 2018, we will continue this momentum to further realize our global potential. We have plans to open new West Elm locations in the U.K., both company-owned and with existing partners. We will introduce Pottery Barn Kids to the U.K. market through our John Lewis Partnership, and this increased retail presence will also drive growth in our fast growing U.K. e-commerce business. In other parts of the world, our existing franchise partners plan to open over 20 locations during 2018, and over the next 3 to 5 years, we are focused on our multi-channel expansions into larger-sized market, particularly Asia, Europe, the Middle East and Latin America, which have a combined addressable market of approximately $350 billion. Currently, we are in active negotiations with potential partners for entry into one of the biggest markets in Asia.
Undoubtedly, we are excited about these opportunities but driving profitable growth has been and is our top priority. We are relentlessly focused on driving efficiencies and cost savings to mitigate risks that may arise. We're proactively streamlining our operations, optimizing our organization, reducing inventory levels and downsizing our retail footprint. We expect to generate significant cost efficiencies that will help fund our strategic investments in the business. Specifically, in the supply chain, we see substantial cost savings opportunities in inventory management, increased order visibility and improved speed and quality of delivery, all of which will further enhance the customer experience and drive down returns and replacements as well as drive down costs overtime.
Inventory management is a top priority across all of our brands. To lower our inventory carrying costs, we will be flowing smaller purchase order quantities more frequently. To stabilize inventory growth as well as reduce back orders, aged inventory and out-of-market shipping costs, we will continue to invest in the necessary talent, tools and resources to drive better inventory accuracy. All of our brands are transitioning to one inventory, which means we will be managing our inventory across channels to help optimize our inventory levels, leading to improved productivity and throughput across our regionalized distribution network. To increase order visibility and speed of delivery to the customer, we will be improving the operating performance and reducing production lead times across our manufacturing facilities as well as increasing transparency across the supply chain for a better view of order status and progress. Within our distribution centers, we will reduce turnaround time and further improve our packaging and order consolidation to increase pieces for delivery and reduce the number of deliveries per order.
In 2018, we will also introduce online self-service scheduling for furniture orders to enhance customer visibility during the delivery process. To reduce returns and damages, we will continue to increase transparency and scrutiny throughout the supply chain and increase customer touch points during delivery to maximize customer interaction satisfaction. In digital advertising, we are focused on maximizing our ad spend by bringing more of the CPC, cost per click, bidding process in-house. Furthermore, we are optimizing our catalog strategy to shift more of our marketing mix to high-impact digital channels.
And regarding our retail fleet, in addition to the accelerated store closures we announced today, we will continue to close stores upon lease expiration to further streamline our store base. We anticipate the closure of approximately 80 stores over the next 3 years unless we receive more favorable rent terms. We will also be opportunistic and disciplined in new store openings as we look to partner with landlords who understand the new retail dynamics and are willing to make investments for the future.
Technology, of course, will play a critical role as we drive process improvements and automation throughout our business to enhance productivity and efficiency. We are excited to welcome our new Chief Technology Officer, Yasir Anwar, to this call.
Yasir, do you want to say a few words before I wrap up and turn the call over to Julie?
Absolutely. Thank you, Laura. I'm very excited to have joined the Williams-Sonoma team. Looking ahead, we are focused on unleashing the power of technology to propel our business forward with the hyper focus on customer experience. We plan to shift our culture from output to outcome, to use efficiencies that can be reinvested towards the business growth. We will tap into and leverage important technology trends like augmented reality, virtual reality, artificial intelligence and machine learning as the underpinning of everything we do in technology, cloud computing and robotics.
We are already at the edge of the 3D visualization technology through a recent acquisition of Outward, Inc. We work closely with our Outward team to scale and innovate and to help define industry standards around 3D visualization and its application across AR and VR and other mixed reality applications. We are exploring ways to automate and remove friction in all applicable areas of our business to become faster, nimble and more efficient by commoditizing machine learning throughout our company. Our immediate focus for 2018 will be on mobile excellence; friction-free shopping; supply chain optimization, doubling down on buy online, pick up in store; and increased personalization and relevancy through content and visualization techniques.
I look forward to collaborating with our talented team to achieve these goals. Laura, back to you.
Thanks, Yasir. As you know, the retail landscape is rapidly changing, and we will continue to build upon our competitive strength to take advantage of the opportunities that market disruption has created. The progress we made against our strategic priorities in 2017 gives us confidence that our investments are paying off in the form of a stronger business that's better positioned for long-term growth. We look forward to continuing the momentum in 2018 and further extending our leadership in the home furnishings industry.
Before I pass the call over to Julie, I want to thank our associates who are one of the key reasons why I'm very optimistic about our future.
Thank you, Laura, and good afternoon, everyone. Our fourth quarter results demonstrate our ability to execute against our growth and operational initiatives while maintaining strong financial discipline to drive further efficiencies across the business. And we are pleased that, once again, we were able to outperform both our top line and bottom line financial commitments. Before I walk you through our financial results for the fourth quarter in more detail, I would like to review some financial and operational highlights for fiscal year 2017.
Fiscal year 2017 was another year of solid accomplishments. For the full year, we delivered net revenue growth of 4.1%, including comparable brand revenue growth of 3.2%, which was an acceleration of 250 basis points year-over-year. Pottery Barn returned to growth with revenue comps accelerating 450 basis points year-over-year following our aggressive efforts to revitalize the brand. The Williams-Sonoma brand performance was strong for the full year and particularly, over the holiday period. Their revenue comp on the year of 3.2% more than doubled from last year and was driven by a thriving e-commerce business and the strong momentum we are seeing in Williams-Sonoma Home.
West Elm continued on its strong growth trajectory, crossing the $1 billion revenue threshold in 2017 and delivering its eighth consecutive year of double-digit comp growth at 10.2%. And our newer businesses, Rejuvenation and Mark and Graham, along with our company-owned global businesses, all generated another year of double-digit profitable growth. By channel, our e-commerce revenues accelerated almost 100 basis points to 5% growth, expanding to 52.5% of our total revenues. And our retail channel also improved, accelerating over 400 basis points from a negative 3.2% comp last year to a positive 0.9% comp this year despite a nationwide decline in mall traffic of 7.3%.
From an earnings perspective, we generated an operating margin of 8.9% and almost $470 million in operating income, which includes our strategic investments in the business, which were substantially offset by our supply chain efficiencies and cost savings as well as the ongoing cost structure leverage across our e-commerce channel, our newer businesses and our global operations.
We delivered net earnings and earnings per share higher than last year at $3.61, which was an increase of $0.18 or growth of 5.2% over last year. These earnings allowed us to maintain an above industry average return on invested capital of approximately 16%, and we delivered another year of robust operating cash flow of almost $500 million. This allowed us to maintain our commitment to return capital to our shareholders, where in 2017 alone, we returned over $330 million to our shareholders through dividend payments and share buybacks at an average dividend yield of 3% at an average stock buyback price of $48.43 per share.
Now I'd like to discuss our fourth quarter financial results. Our fourth quarter results reflect another quarter of strong top line momentum and market share gains with our home furnishings and housewares businesses outperforming the industry.
During the quarter, we generated net revenues of almost $1,680,000,000 for a year-over-year growth of 6.2% and comparable brand revenue growth of 5.4%, which was an improvement of 630 basis points over last year. Like every quarter this year, our fourth quarter comp was a substantial acceleration from the prior quarter, accelerating approximately 210 basis points from the third quarter. This was also the highest fourth quarter comp we have seen in several years, further demonstrating that our investments as well as the strategic growth initiatives that we have been executing against to accelerate our top line are working.
Growth was driven by broad-based strength across all of our brands with all brands returning to positive growth at this quarter. This includes the Pottery Barn brand at a 4.1% comp, which was a substantial acceleration from the third quarter comp of a negative 0.3% and was the highest fourth quarter comp they have seen in years. Williams-Sonoma delivered a 4.3% comp, which was also a substantial acceleration over their third quarter comp and outside of the recessionary period, represents the highest holiday comp they have seen in over 10 years.
West Elm, our newer businesses, Rejuvenation and Mark and Graham, as well as our company-owned global operations all delivered another quarter of profitable double-digit comps. And by channel, revenue growth accelerated across both channels by over 650 basis points year-over-year to growth of 8.4% in the e-commerce channel and 3.9% in the retail channel.
Moving down the income statement. Gross margin for the fourth quarter was 38.5% versus 39.3% last year. Occupancy costs of $177 million versus $169 million last year leveraged 20 basis points during the fourth quarter. The 80 basis points of gross margin deleverage was primarily driven by lower selling margins as a result of our strategic decision to provide more value to our customers through more competitive product pricing, and the continued momentum we are seeing in our top line growth is evidence that our efforts to provide more value are resonating with our customers. We also incurred higher year-over-year shipping costs due to the higher rates associated with our new UPS contract, which we discussed last quarter, and a higher demand for furniture during the quarter, which is more expensive to ship.
SG&A for the fourth quarter was 26.1% this year versus 25.7% last year. This 40 basis point deleverage was primarily associated with higher digital advertising spend resulting from our decision all year to drive new customer acquisition as well as higher fourth quarter employment-related costs resulting from the year-over-year timing of incentive compensation. We are pleased that our efforts in digital advertising are paying off, evidenced by the improvements we are seeing in traffic, conversion and new customer count as well as the continued top line momentum we have seen not only this quarter but also all year long.
Operating margin for the fourth quarter was 12.4% this year versus 13.6% last year. By channel, the operating margin in the e-commerce channel was 22% this year versus 23.7% last year. This 170 basis point decline was primarily associated with lower selling margins, which includes reduced shipping income and higher shipping costs as well as our investments in higher digital advertising, all of which helped drive our fourth quarter e-commerce revenue growth to the highest growth we have seen in several years, all while maintaining industry-leading operating margins and generating approximately $200 million in operating income. The operating margin in the retail channel was 15.6% this year versus 15.7% last year. The 10 basis point decline was primarily associated with lower selling margins, which is almost entirely offset by strong expense control throughout SG&A.
Corporate unallocated expenses as a percentage of net revenues were 6.6% in the fourth quarter of 2017 as compared to 6.2% in the fourth quarter of last year. The 40 basis points of deleverage is primarily associated with employment-related costs resulting from the year-over-year timing of incentive compensation. On the year, however, corporate unallocated expenses as a percentage of net revenues leveraged 10 basis points, further demonstrating strong financial discipline across employment and all other general expenses.
The effective income tax rate during the fourth quarter was 31.6% this year compared to 36.5% last year. This lower tax rate reflects the continued incremental benefits we are seeing from the substantial improvement in profitability across our international operations, which are taxed at a lower tax rate as well as the impact of the 2017 Tax Cuts and Jobs Act that went into effect the beginning of January. This resulted in diluted earnings per share of $1.68, which was $0.13 or 8.4% over last year and is inclusive of a $0.05 benefit from the reduced federal tax rate in the quarter.
On the balance sheet, we ended the quarter with a cash balance of over $390 million versus $214 million last year. We generated $387 million in operating cash flow during the fourth quarter, which we utilized to invest $54 million in the business and to return capital to shareholders in the amount of $75 million through dividend payments of approximately $33 million and share repurchase of approximately $42 million.
Moving down the balance sheet; merchandise inventories were $1,062,000,000 for an increase of 8.6% over last year. Although this is a continued sequential decrease from prior quarters, we continue to believe that we have the opportunity to optimize our inventory levels even further across our brands. Inventory optimization remains one of our key priorities to driving cost savings across our business. And as Laura mentioned, we have several initiatives in 2018 that we'll be executing against to further reduce our inventory levels. And it's always about: We are focused on delivering a superior customer experience, and having the right inventory in stock when the customer wants it is a key component to an overall great customer experience.
Finally, we ended the quarter with no outstanding balance under our revolving line of credit. However, as we announced last quarter, we did enter into a new $300 million term loan in conjunction with the renewal and extension of our current revolver in order to further optimize our capital structure, allowing us to reduce the reliance on our revolver and provide us with additional financial flexibility. As such, our balance sheet at the end of the year reflects this new outstanding term loan for approximately $300 million.
Now I would like to discuss our 2018 guidance. But before I discuss our specific first quarter and fiscal year 2018 guidance, let me walk you through some of the key assumptions behind this guidance.
First of all, fiscal year 2018 has a 53rd week for us this year. As a result, our guidance reflects an extra week of revenue and earnings during the fourth quarter and fiscal year. This extra week is estimated to be worth approximately $100 million in revenue and $9 million in earnings or approximately $0.08 in EPS. Second, this guidance reflects our estimated net tax benefit from the recent tax reform. We have estimated that the new tax code will lower our effective tax rate for the year to be in the range of 24% to 26% and is therefore worth approximately $50 million in reduced tax expense. And for those companies like us who generate substantial earnings, this is a huge opportunity to use this onetime incremental benefit as competitive advantage.
As a result, like many companies, we have decided to reinvest a portion of this savings. We believe a balanced approach to returning this benefit to our stakeholders, our associates, our customers and our shareholders is appropriate. As a result, we plan to reinvest approximately 50% of this tax benefit by investing in our people through increased compensation and benefits, which Laura has already announced. We also plan to invest in our customers through further enhancements to the customer experience, particularly within our e-commerce business; and finally, we also plan to invest in our shareholders by returning half of this tax benefit or $25 million in earnings to our bottom line, driving increased earnings and earnings per share, including double-digit year-over-year growth as well as an overall increase in operating cash flow and return on invested capital.
As we announced earlier, to further support our investment in driving incremental shareholder returns, we have also increased our quarterly dividend by 10% to $0.43 per share, and we have expanded our share repurchase authorization to $500 million. As a result, this guidance reflects this net tax benefit of approximately $25 million in reduced tax expense and improve net earnings or approximately $0.30 per share.
Additionally, as Laura said, we have been closely monitoring the performance of our retail fleet to ensure that we are aligning our growth strategies with the ever shifting consumer behavior, allowing us to better leverage our resources for further e-commerce growth. We have approximately 250 stores across our domestic retail fleet that come up for renewal at the natural lease expiration over the next 3 years, of which we expect to permanently close approximately one-third. We have recently, however, decided to accelerate a smaller portion of our future store closures ahead of their natural lease expiration as they are either brand denigrating or they no longer meet our minimum required internal four-wall profitability metrics. These closures are predominately across the Pottery Barn Kids and Williams-Sonoma brands. And if we are unable to negotiate a more favorable terms with our landlord or are unable to sublease to a third party, we can incur charges of up to approximately $50 million.
By closing these stores, however, we expect to see total company operating margin expansion of approximately 20 basis points on an annual basis post these store closures. The financial impact from any of these early store closures have not been reflected in the guidance we have provided today.
For the first quarter of 2018, we expect net revenues to be in the range of $1,135,000,000 to $1,170,000,000 with comparable brand revenue growth in the range of 2% to 5%, and we expect diluted earnings per share to be in the range of $0.55 to $0.60. For the year, we expect net revenues to grow at 3.5% to 6.5% and be in the range of $5,475,000,000 to $5,635,000,000 with comparable brand revenue growth in the range of 2% to 5%. Our operating margin is projected to be in the range of 8.2% to 9% and reflects our decision to leverage the tax reform benefit to accelerate investments in our associates and our customers, which we have already discussed and which we believe will strengthen our business to drive profitable growth.
Most importantly, we are focused on delivering both top line and bottom line gains. We are committed to operating income dollar growth relatively in line with revenue growth and earnings per share growth exceeding that of revenue growth. We expect that after this onetime tax reinvestment this year that our operating margins should stabilize and improve over time. Our effective tax rate on the year is projected to be in the range of 24% to 26%, and our diluted earnings per share is expected to be in the range of $4.12 to $4.22. At the high end of our ranges, we are guiding to revenue and EPS growth of approximately 6.5% and 17%, respectively.
In terms of our capital allocation strategy, we will utilize our strong operating cash flow to first invest in the business to support our ongoing growth initiatives with capital expenditures expected to remain within the range of $200 million to $220 million; and we plan to return excess cash to our shareholders. As far as our capital investments for fiscal year 2018, we remain focused on those areas that support our 4 strategic priorities that Laura spoke to earlier, where we see sustainable long-term returns for our shareholders. These investments will support our top line and bottom line growth, improve the customer experience and drive operational efficiencies, all of which will continue to strengthen our competitive positioning.
As a result, all fiscal year 2018 capital investments are primarily focused around the continued enhancement of our e-commerce channel, the optimization of our supply chain and the transformation of our retail fleet by investing in new and remodeled stores, particularly in our West Elm and Pottery Barn brands. We also expect to return excess cash to our shareholders in the form of share repurchases and dividend payments. Today, we announced a double-digit dividend increase of 10% for a quarterly dividend payment of approximately $0.43 per share. We also announced the expansion of our current share repurchase authorization to $500 million. This expansion will not only allow us to continue to repurchase shares annually at a level to at least offset equity dilution but will also allow us to opportunistically increase our rate of share buybacks if appropriate.
Our decision to increase the quarterly dividend and stock repurchase program reflects our commitment to continue to return capital to our shareholders and reflects our confidence in our ability to continue to generate long-term sustainable revenue and earnings growth as well as a strong operating cash flow.
In summary, 2017 was a year in which we made important progress in strengthening our business for long-term profitable growth. Our financial performance with another quarter of accelerated growth and outperformance in both the top and bottom line demonstrates our proven ability to consistently deliver upon our financial commitments and to drive growth while investing in our business for long-term success.
And as we enter 2018, we are confident that with our competitive advantages, including our portfolio of strong brands with proprietary product, our multi-channel shopping experience, our strong operating income and operating cash flow, which this year was a material tax benefit recently afforded to profitable companies like ours, has become a further expanded competitive advantage along with our drive for continuous operational excellence and our proven track record of strong financial discipline helping to drive efficiencies across the organization, that this will allow us to continue the momentum we are seeing in our business and to deliver long-term sustainable returns for our shareholders.
I would now like to open up the call for questions. Thank you.
[Operator Instructions] And we'll take our first question today from Michael Lasser with UBS.
It's on the margin profile of the business. So it sounds like a lot of the investments that you're making because of the tax benefit are in areas like e-com, supply chain and wages. Does that mean you won't be making investments like you made last year in some of the revenue driving activities like promotions and acquiring new customers?
And then my second question, just on the recapture rate that you've assumed from these closed doors and what benefit that might -- on your comp in the upcoming year.
So as far as the investments, we're going to continue to make the necessary investments to drive the top line. What we're highlighting is those areas where we're going to accelerate investments, and those are particularly associated with e-commerce. And so -- but obviously, we have the fact that we are lapping some of the investments. This year, they're going to be less pronounced as we move throughout next year. But we have this benefit from the tax reform that has allowed us to accelerate some additional investments which, by the way, we haven't fully baked all of that into our guidance. And so depending on how those test and measure over time, we could see upside associated with those.
As far as the store closures and what that impact is, I had said that in my prepared remarks. Ultimately, based on this list of stores that we are aggressively going after, all depends, of course, on what the outcome is with each particular landlord. But in the situation where we were to shut these stores, the year following, a full year benefit will be worth about 20 basis points of operating margin expansion to us.
And in terms of the question around whether we're investing in acquiring new customers, we absolutely are. When we say digital leadership, e-commerce, that includes everything from the technology supporting a friction-free shopping experience to our investment in driving new customer acquisition and engagement online.
[Operator Instructions] We'll now hear from Peter Benedict with Baird.
So I guess, I'll follow up a little bit on Michael's question. What have you seen with respect to market demand when you guys do close stores? Do the sales just generally transfer directly online? Do they go to other stores kind of in the market?
And as you think about that 20 basis point of operating margin improvement, if you do accelerate the closing of these stores, what's the revenue implication of getting rid of those stores?
Yes, thank you. So we see -- it depends is the answer, depends on how many stores are in the market. And we will often see some transfers to stores in the market if there are multiple stores in the market. Sometimes we don't see any transfer, and we see some pickup online. You have to remember that we have a very profitable fleet. We've been pruning it for years. And so the stores that we've outlined really are not contributors to much.
And in terms of quantifying that in the top line, it's really hard to do because it depends on what we do and when we do it, and there's a lot of variables there.
Next, we'll hear from Matt Fassler with Goldman Sachs.
I also have a question about the retail fleet, and it's kind of a two-part question. Number one, you intimated that you had closed about 1/3 of the 250 stores with lease expirations over the next several years. Presumably, that's a gross number. I know you have 20 gross openings planned for the year, I believe, against 30 gross closings. So the net change in the fleet is not quite as severe. Are you thinking about the outlook for store count that way on a multiyear basis?
And then also out of curiosity, of the stores that you're closing, has this been a dynamic list? In other words, a year or two ago, would these have been stores that might have been suitable for closing? Or has the retail landscape evolved to the point where this is something you need to take more seriously today?
So a couple things there. Let's make sure we have all the numbers correct. There's definitely some moving parts. So first of all, there is about 250 stores that come up for renewal, if you will, over the next 3 years across our entire fleet. What we're saying is there's about 80 of those to 1/3 of them that we'd like to shut. All else being equal today, if we're looking at the list, we'd like to shut them. And so we're going to be shutting them at the end of their natural lease termination unless we get some better deal with a landlord. There is a smaller group that if we could shut them today, it makes sense because of the 20 basis point improvement in op margin that we spoke to. And so those are the ones we're going after. Obviously, this list is dynamic.
To your question, we are constantly evaluating which stores should be on that list and which stores don't -- no longer need to because maybe the landlord showed up and gave us the right deal. And so it definitely is a moving target. As far as the number of closures that we've put into the press release for the guidance, the 30 closures, to be clear, have nothing to do with the ones that we are looking to accelerate. That's part of the normal set of store closures, that's within our numbers. And yes, there is about 20 that we are opening at the same time.
So there will always be stores that we're going to have on the other side that open. I don't know if I can tell you it's going to be that exact ratio for the foreseeable future, but we'll definitely have some offset to those store closures.
[Operator Instructions] We'll now hear from Simeon Gutman with Morgan Stanley.
I'll make my one question, it might have 1.5 parts. First, maybe for Laura. On the top line, how do you distinguish between merchandise wins, merchandise leading the improvement versus the value proposition, whether it's price, the speed to market or maybe the free delivery?
And then if we look at the EBIT dollars for next year, including the 53rd week, at the midpoint, it looks like they're up maybe slightly, so that implies that may be down. And I get you're accelerating investments, but I guess, trying to understand where this model flushes out maybe in the outyear. Does the business grow EBIT dollars or leverage on, let's say a 3-ish sort of comp or is the profile a little -- you need a little bit of a higher comp than that?
So I'm going to try to answer your question without answering it for the competition. In terms of what works for customers, it's clear when you have a bestseller that it's the merchandise. And we see bestsellers in the high end as well of our pricing tiers in all of our brands, for that matter, including in Pottery Barn; so there's the obvious bestsellers. When we look at value proposition, we can look at core programs, high-volume programs over time and see the elasticity of demand based on changing of price. And so that is very clear, whether it's worsening or not, and we study that constantly. And believe it or not, it's different by category. It's different by product, and I think that has a lot to do with the competition.
One of the things that really makes us different from a lot of people out there, particularly those that are copying us, is that we are one of the very few retailers that own exclusive designs. Our product finishes, our vendor community is very loyal. And as a result, because of our vertical integration, our quality is far superior. And we're going to be very competitive this year or, I should say, aggressive about protecting our design assets because this is where we really win, and there's a lot more we can do on that than we've done in the past in terms of protecting our assets.
And as far as the EBIT question, yes, you're right, but obviously, we've indicated that next year is a year of investment because we are reinvesting the tax savings. So whether we like it or not, the tax savings goes below the line and the investments go above the line, so depending on which line you're measuring against, right, it's going to show less growth than we'd like. But this is a special situation. We have tax reform once every 30 years, and because we make earnings, we're taking this opportunity to drive a competitive advantage that we think we have of others that don't generate the same amount of income. So it's a onetime thing, it's a reset.
And we believe going forward from that perspective, that we are 100% committed to driving EBIT dollar growth in line with revenue growth and EPS even faster than revenue growth, and we have -- we believe that our operating margins will stabilize and they will expand post this next year.
Our next question comes from Brian Nagel [ph] with Oppenheimer.
So I wanted to jump back to the topic of the store closing or repositioning the fleet as well. And Julie, you had mentioned in your prepared comments, you've -- just about mall traffic being weak across the board, which is obviously not news to us. But as you look at these store closures and potentially accelerate them, is that also reflecting the business you have in the weaker malls? Is that playing into this?
I mean, our traffic is better than the malls and it has been. We drive a lot of traffic because of our store experience. Clearly, there are some areas that have not been performing, malls that is. And then there are some where we just deal -- the rent deal's too high. I mean, so there's a tale of two different stories when you look under the -- into the detail.
Christopher Horvers with JP Morgan has our next question.
This is Tommy Zakaria [ph] on for Chris Horvers. It seems that the international segment of your business has become more profitable with scale. So could you give us color on how much the international segment helped gross margin in the fourth quarter and the year overall? And are you currently profitable internationally?
Thank you for asking the question. I do believe that is something that tends to be underappreciated with our company. We saw tremendous growth in both the top line and the bottom line from a profitability perspective and in particular in the fourth quarter. And so that's really exciting for us as we're continuing to generate momentum globally and have all kinds of opportunity to grow that. And I think Laura alluded to it even in her prepared remarks as to where we're headed for 2018, but that also has the double benefit that I always like to articulate because we've earned it of generating even further tax benefit, which, believe it or not, even with the reduced tax rate that the federal government has provided us, is still lower outside of the United States.
And so this is something that we're going to continue to talk about. It certainly did have some impact on our op margin, gross margin, but it's still relatively immaterial. But as that continues to gain momentum, we think this could be significant to our company both on the top line and bottom.
We have time for one last question that will come from Adriane [ph] with Wolfe Research.
Laura, I wanted to know about some of your competition is talking about owning the last mile, that white glove delivery and investing in transportation and logistics. I was wondering if kind of when you look at the business, if that's an area where you foresee having to invest more as we get through 2017 -- or I'm sorry, 2018.
For more than 60 years from Chuck Williams and our first Williams-Sonoma store, we have been focused on customer experience, and his attention to the customer is deeply embedded in our culture today. Our service platform extends from online and how we talk to our customers there and all the way through the last mile. We have been relentlessly focused on driving efficiencies and cost savings, particularly in the supply chain, where we see substantial opportunities. And as I said in my prepared remarks, over the next year, we're going to focus on inventory management, order visibility and the speed and quality of delivery but at the same time, we want to be in stock.
So we don't want to just take the inventory down without maintaining part of the service is to be in stock when the customer wants it. And technology, of course, is going to play a critical role as we drive these process improvements in automation throughout the supply chain. I want to let Yasir talk a little bit today, put him right on the spot in his first 6 weeks on how technology will support these cost efficiencies.
Yes. I think I strongly believe that the current availability of technology frameworks in the industry, especially the artificial intelligence and application of machine learning for these type of activities, which is supply chain, inventory optimization and distribution center optimization, is going to be very powerful for us. I'm personally very passionate about powering up the machines and getting them do the work instead of a lot of manual work, which takes a lot of cost into the system.
So we believe we're going to drive our top line growth also by applying machine learning in supply chain world, would also deliver a lot of cost efficiencies, which can then be invested in the top line growth. So looking forward to that.
So Yasir, just from your experience, should we expect the investment in shipping and handling logistics to, in the near term, hurt gross margin but result in a much more robust EBIT op -- EBIT margin for the e-commerce side of the business?
No. I wouldn't say that you're going to see a significant difference in the short term. I think what is exciting to know and having known Yasir, I guess, for 6 weeks, I have learned a lot about what he believes he can drive from both from a strategic perspective but also from a cost efficiency perspective. So I think the exciting part is, in the not-too-distant future, we should hopefully be able to be talking to you about substantial cost savings that he's been able to create out of the supply chain organization and elsewhere.
And that concludes our question-and-answer session for today. I'll now turn the conference call back over to Ms. Alber for any additional or closing remarks.
Well, I want to thank all of you for joining us and for your support, and we look forward to talking to you after the first quarter.
Thank you. And that does conclude our conference call for today. We thank you for your participation. You may now disconnect.