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What Led Williams-Sonoma’s EBIT Margin to Improve in Q1?

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First-quarter gross margin

In the first quarter, Williams-Sonoma (WSM) reported a gross margin of 35.9%, representing a marginal contraction from 36.0% in the first quarter of 2018. Increased shipping costs, primarily due to a greater mix of furniture sales, lowered the company’s gross margin. However, an expansion in its product margin and a decline in its occupancy expenses offset the majority of the contraction in WSM’s gross margin.

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The company’s management has credited its strategy of focusing on relevant products rather than broad-based promotions and improving its supply chain efficiency for its higher product margin. Its occupancy expenses fell 0.4% due to its retail optimization initiatives, the closure of its underperforming stores, and lower occupancy-related other expenditures.

Expansion in EBIT margin

During the quarter, WSM’s SG&A (selling, general, and administrative) expenses fell 0.8% to 28.9% of its total revenue compared to 29.7% in the corresponding quarter of the previous year. The company’s implementation of cost-saving initiatives led to a decline in its advertising, employment, and general expenses, leading to an expansion in its EBIT margin.

Peer comparison and outlook

For the comparable quarter, analysts expect Bed Bath & Beyond (BBBY) and RH (RH) to report EBIT margins of 1.9% and 10.5%, respectively.

For 2019, WSM’s management expects its adjusted operating margin to be in line with its previous year’s margin of 8.5%.

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