Williams-Sonoma (WSM) Q1 2021 Earnings Call Transcript

Williams-Sonoma (WSM -2.16%)
Q1 2021 Earnings Call
May 26, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Williams-Sonoma, Inc. first [Audio gap]. This time all participants are in a listen-only mode. We will conduct a question-and-answer session after the presentation.

This call is being recorded. I would now like to turn the call over to Elise Wang, vice president of investor relations, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead.

Elise Wang -- Vice President of Investor Relations

Thank you. Good afternoon. This call should be considered in conjunction with the press release that we issued earlier today. Unless indicated otherwise, our discussion today will relate to results and guidance based on certain non-GAAP measures.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in Exhibit 1 of our press release. This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial conditions, results of operations, business initiatives, trends, growth plans, and prospects of the company in 2021 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.

Laura Alber -- President and Chief Executive Officer

Thank you. Good afternoon, everyone, and thank you all for joining us. We are proud to report another record quarter of accelerating revenue and profitability with over 40% comp growth and a 950-basis-point expansion in our operating margin. These results were driven by strength across all of our brands.

We are seeing strength in our core businesses and our new growth initiatives have outperformed. As reopenings accelerate across the country, a record number of customers continue to shop with us as they invest in their homes. We are honored to be our customers' destination for their entertaining and home furnishings needs as they welcome friends and family back. As a result, we are raising our full-year guidance from mid to high single-digit revenue growth to the low double-digit to mid-teen revenue growth and year-over-year operating margin expansion.

We believe our business is uniquely positioned to gain market share, given our growth strategies and our three key differentiators, which are one, our in-house design; two, our digital-first channel strategy; and three, our values. These differentiators are more relevant than ever with our customers and are setting us further apart from our competition. Starting with our in-house design capability. We know that ultimately everything starts and ends with the product. Our in-house designers combined with our vendor partners create proprietary products that are high-quality, sustainable, and aesthetically unique.

The strength of our value proposition has given us the opportunity to pull back on promotions. We see this as a sustainable change in our model and a game-changer for the long-term strength of our margins. In addition, our world-class design capabilities are driving new product launches across our brands. In Q1, we saw strong indicators of growth in these new initiatives. For example, in Pottery Barn, our rustic modern, casual point of view in furniture home furnishings and decorating are driving double-digit growth in all categories.

Growth in our bath renovation business accelerated to nearly 50% in the quarter and our marketplace business gain momentum growing over 70% in the quarter and reaching over 6% of our total Pottery Barn brand sales. In Pottery Barn Kids and Teen, we continue to amplify our leadership in the children's home furnishings market with our emphasis on design and sustainability. We are proud that 100% of our children's furniture is GREENGUARD Gold certified and our in-house design furniture collections are distinctive in the market. Furniture continues to be a key growth driver for the brand.

We also saw outsized growth in key initiatives such as baby, which grew over 30% on our aesthetic expansion into modern, which comped nearly 70% over last year. In West Elm, in addition to broad-based strength, our aggressive expansion in the outdoor category has been successful and incremental. This quarter, our outdoor furniture business grew at a comp of nearly 140% driven by line extensions and our top-performing collections and new product introductions. We've expanded our year-round assortment and plan to introduce several near -- new collections over the next year that will nearly double our outdoor business.

Another exciting growth initiative is the expansion of our Western Elm Kids business, which includes the launch of a dedicated e-commerce site. In the Williams-Sonoma brand, cooking at home and now entertaining at home are driving our customers' purchases. This quarter we saw significant growth in all areas of entertaining, particularly outdoors and Easter gatherings. As the momentum builds with people coming back together and celebrating, we are well-positioned to meet their cooking and entertaining needs as we head into the back half of the year. Additionally, in our Williams-Sonoma Home business, we delivered a 40% comp for the quarter. Our decision to reposition the brand as a furniture destination is paying off and customers are responding very favorably to our high-end sustainable casual aesthetic. Our outdoor collections, for example, are delivering over 200% growth.

We continue to believe that the Williams-Sonoma Home is one of our biggest growth opportunities as the high-end luxury furniture market remains significantly underserved, especially online. Our cross-brand growth initiative, B2B, delivered another record-breaking quarter, up nearly 165%, or 100 million in revenues, and is on track to reach over half a billion by year-end. The momentum in our contract business accelerated throughout the quarter as businesses started to reopen and our win rates and large projects continued to improve. One example of a high-profile project is with the Austin Football Club. Over the past 16 months, we have been furnishing the club's state-of-the-art Q2 stadium that set to host its first international game next month.

We are also thrilled that we continue to see repeat business from some of our key customers like Salesforce, and we have a growing number of new projects currently under way. Now, I'd like to discuss our digital-first positioning as a key differentiator. E-commerce is and will continue to power our growth, demonstrated by our sustained step-ups in the top and bottom-line results. We have built our e-commerce platform over decades of investment including a supply chain custom-built to ship directly to customers, industry-leading in health digital marketing capabilities, a digital-first house file, and a sophisticated tech stack. This quarter, our in-house tech platform and rapid experimentation program continued to deliver strong results.

We introduced new features and improvements across the digital experience, insight navigation, and personalization, PIP experiences, and our proprietary product recommendations platform, all of which drove double-digit growth and engagement and a significant lift in revenue per visitor. More of our customers are also utilizing our 3D design tool, the Design Crew Room Planner, with total plans created in Q1 up nearly 50% compared to last year. As a reminder, customers who utilize this tool continue to generate twice as many sales as the average customer. We also have the advantage of being digital-first but not digital-only. Our stores helped drive our online growth in our key competitive advantage. They give our customers the ability to experience our products in person, access our convenient omnichannel services, and take advantage of our free in-store or in-home design services.

This operating model allows us to generate strong e-commerce growth, maintaining over 65% of our revenue mix while delivering some of the highest retail growth we've seen on both a one-year and a two-year basis. As a reminder of our channel performance, we are up against store shutdowns from March 18th through the end of June last year and limited retail traffic due to COVID  restrictions through the balance of the year. We are thrilled to see both our retail and DTC channels outperforming expectations. Our results this quarter also demonstrate the effectiveness of our digital marketing investments. We continue to focus on high ROI advertising vehicles. We manage our advertising spend in-house and have developed a robust test-and-learn agenda across our portfolio brands, allowing us to find efficiencies and to reinvest. In the margin upside, we have seen from less promotions and also enables us to invest more in incremental high ROI marketing initiatives to drive the top line. We've also identified a large growth opportunity in cross-brand migration.

We've seen a significant change in behavior since we launched the Key, our free loyalty program that allows customers to earn points across our brands and to use the rewards in any one of our brands. New customers are increasing their cross-brand spend at record levels and we have just begun to tap into this opportunity. This year, we'll be implementing new cross-brand program, messaging, and events that will further accelerate this cross-brand shopping behavior. W believe this is one of our key incremental growth opportunities. We look forward to sharing more with you as we have some very exciting launches coming this fall.

We are also proud to have made progress in the area of values, which is our third key differentiator. Last month we became one of the first in our industry to commit to a science-based target for emissions reduction by 2030, including the goal of carbon neutrality across our own operations by 2025. We underwent an extensive yearlong data gathering process using third-party experts and independent research alongside our company data to measure our carbon footprint and to arrive at this carbon reduction target. We are also proud to be gaining traction on our goal to plant 3 million trees in three years with 1 million trees already planted since the campaign's inception at the beginning of 2021. In addition, we have recently included the Top 100 companies of Forbes Best Employers for Diversity, which honors our progress in creating a diverse and inclusive workplace for associates. We also continue to build on the relationships with our black equity action partners, the NAACP, The Jackie Robinson Foundation, and The National Urban League. And we have just established our new partnership with Asian Americans Advancing Justice -- Asian Law Caucus.

Hate-motivated attacks against the Asian community are simply unacceptable. We stand with the Asian community and our Asian associates and we will continue to use our collective power to fight against hate, racism, and inequity in all forms. I would now like to discuss our outlook for the balance of the year and provide some insight into what we are currently seeing in our business. Quarter to date, our business remains strong. We are seeing top-line growth and strong margin continue.

This is particularly important because we are now comping a substantial spike in home category demand last year as a result of the pandemic lockdown. And this trend further confirms our confidence in our growth outlook in a more normalized environment. From a supply chain perspective, although backward has remained high, we are working to restore our in-stock levels. We continue to do all that we can to expedite inventory flow and we are proactively extending our product lead times where necessary and reaching out to customers with timely updates as we work through these delays. The situation, however, remains difficult, especially with the heartbreaking COVID crisis in India, which, of course, is impacting production. Our current estimate is that we should be back in stock during the third quarter.

As it relates to cost increases that continue to pressure the industry, i.e., shipping costs and raw material increases, we are confident that we can achieve our profitability goals due to our strong product margin expansion and occupancy leverage. From a macro perspective, we believe trends will continue in our favor. High consumer confidence, spending shift to e-commerce, the continuation of remote hybrid work, and a robust housing market provides a strong backdrop to our strategies. Also, as kids return to school, we've seen a significant recovery in our gear and dorm businesses and expect this will continue and be material as we move into the fall. In addition, the outsized growth across all of our entertaining-related categories, such as outdoor, dining, and tabletop gives us confidence that the entertaining trend will further accelerate as we move throughout the year and as people welcome friends and family back into their homes, especially for the holidays. We also see a big opportunity in gift-giving this year as people gather and reconnect to give gifts in-person this holiday. As far as other parts of our business, our B2B sales are accelerating week after week as our project pipeline continues to expand with the reopening of businesses across the country.

And our global operations are also gaining momentum with the reopening of our company-owned stores and strong franchise business across the world. As we look ahead, we are confident in our runway for growth and profitability. The goals we have set are driving incremental growth faster than anticipated, our brand differentiators continue to accelerate, and favorable macro trends should continue to benefit our business for the long term. We are the only home furnishings retailer that's able to serve customers at scale online and provide the experience and convenience of physical retail with exclusive sustainable products, giving us the unique advantage to gain share for many years to come. Before I pass the call to Julie, I want to thank our associates for their ongoing hard work and dedication. Their resilience and innovation are a key part of our success and our ability to continue to deliver profitable market share gains for the long term.

Julie Whalen -- Executive Vice President and Chief Financial Officer

Thank you, Laura, and good afternoon everyone. We are pleased to report another outstanding quarter of financial results. Revenue growth, margin expansion, and earnings per share all accelerated and exceeded expectations, demonstrating the power of our three key differentiators and the great execution by our team. The strength we saw across all of our brands reinforces that the consumer has a continued appreciation for the home, resulting in a shift in consumer spending to our category, which should continue to benefit our business for years to come. Let's now review our first-quarter results in more detail. Our net revenues reached approximately $1.75 billion, with comparable brand revenue growth accelerating to 40.4%.

We saw strong sequential acceleration across all brands, starting with West Elm at a comp of 50.9%, Pottery Barn at 41.3%, Williams-Sonoma at 35.3%, and Pottery Barn Kids and Teen at 27.6%. Our emerging brands, Rejuvenation and Mark and Graham combined, delivered comp growth of over 35%, and our global business grew over 81% to approximately $100 million. Moving down the income statement, gross margin expanded a record 850 basis points to 43% driven by substantially higher selling margins and occupancy leverage. Selling margins expanded for another consecutive quarter, up over 440 basis points year over year and 310 basis points from the fourth quarter driven by higher merchandise margins and ship cost leverage, which reflects the higher mix of retail sales versus last year. Higher merchandise margins were driven by a significant pullback in promotions. Our continued focus on marketing, our proprietary design, sustainability, and value in lieu of sitewide promotions allowed us to deliver another quarter of strong merchandise margins. Occupancy leverage of approximately 410 basis points in the quarter resulted from higher sales and another quarter of relatively flat year-over-year occupancy dollars at approximately $176 million, as compared to $175 million last year. Our ongoing efforts to optimize our retail fleet by either renegotiating rent or closing less profitable stores have enabled us to minimize our occupancy dollar growth and to deliver this occupancy leverage.

As a reminder, we closed a total of net 33 stores last year and expect to close 25% of our total retail fleet in the next five years. SG&A in the first quarter was 27.1% of net revenues, compared to 28.1% last year, leveraging 100 basis points year over year. This was primarily driven by leverage in employment and other general expenses resulting from higher sales and overall cost discipline, partially offset by higher advertising as compared to our significantly reduced ad spend last year. As you may recall, as part of our initial financial response to COVID, we substantially reduced our spend across the business, particularly in advertising at this time last year. Since then, we have been incrementally investing back into advertising to drive our profitable top-line growth and we expect this to continue as we move throughout the year. Given the strength of our business, including our record profitability levels, we are pleased that we are able to incrementally invest in high ROI advertising to drive top-line growth and market share gains while still delivering another quarter of SG&A leverage and substantial operating margin expansion. Operating income grew over 250% to $278 million and resulted in operating margin expansion of 950 basis points to 15.9%, a record high first-quarter operating margin. This resulted in diluted earnings per share of $2.93 or nearly four times higher than that of last year at $0.74. On the balance sheet, we ended the quarter with almost $640 million in cash and over $238 million in operating cash flow, a significant increase over last year.

This strong liquidity position allowed us to fund the operations of the business, including $42 million in capital expenditures, and to provide accelerated shareholder returns of over $361 million, consisting of increased quarterly dividends of over $45 million and a substantial increase in share repurchases of over $315 million. These accelerated returns, combined with a full paydown of our $300 million term loan during the quarter, along with the recent expiration of our 364-day, $200 million line of credit facility, reflect our confidence in the long-term strength of our business and our commitment to maximizing returns for our shareholders. Moving down the balance sheet. Merchandise inventories were $1.088 billion, for an increase of 1.6% over last year. While our inventory levels have sequentially improved, they continue to be impacted by our stronger-than-expected demand across all brands, as well as supply chain disruptions such as the West Coast ports congestion and Suez Canal blockage earlier in the quarter, the container shortage out of Asia, and the COVID-related delays coming out of India. As a result of these challenges, we expect backorder levels to remain elevated until at least the third quarter of this year. We are also experiencing delays in our upholstery furniture production from the recent foam shortage, which is currently causing our upholstered furniture quote times to be longer than usual. Now let me turn to our expectations for the rest of the year.

As Laura mentioned, we are raising our 2021 outlook from mid-to-high single-digit revenue growth to low double-digit to mid-teen revenue growth, along with year-over-year non-GAAP operating margin expansion. We are confident in our ability to deliver this higher revenue outlook, given the strength of our business year to date, the strong housing environment, and people's deeper appreciation for the home, the accelerating momentum in our growth initiatives, B2B marketplace, and our global operations, and a planned sequential improvement in our inventory, enabling us to fill our significant back orders as we move throughout the year. Now I would like to talk about profitability. Although there are ongoing cost pressures from freight and raw materials, as Laura mentioned, we believe our operating margin expansion will be driven by overall sales leverage, continued occupancy leverage from the renegotiation of our lease agreements and store closures, continued expansion in our merchandise margins due to our differentiated positioning with design-led value-engineered and sustainable products, as well as from overall strong financial discipline. As far as our capital allocation in 2021, we are maintaining our balanced approach to first investing in the business and then returning excess cash to shareholders. We are on track to invest approximately $200 million to $250 million in the business this year, with spend prioritized on technology and supply chain initiatives that primarily support our e-commerce growth. We also plan to return excess cash to our shareholders in the form of quarterly dividend payouts and increased levels of share repurchases compared to last year.

Our total share repurchase of over $350 million in the first quarter reflects our continued belief that our stock is undervalued, given our growth and profitability outlook. As a result, we believe investing more in our own stock will also drive long-term financial returns. Longer-term, we remain well on track to reach $10 billion in net revenues and maintain at least 15% operating margins in the next five years. In summary, our results in the first quarter and the progress we have made across our key growth initiatives, reinforce our ability to drive long-term sustainable growth and increase profitability. We believe we are in the best position to take market share, especially in an environment where consumers are investing more in their homes, shifting increasingly online, and are prioritizing design, value, and sustainability in their purchases more than ever before.

All of these give us the confidence to deliver on our long-term outlook and to drive strong financial returns for our shareholders for years to come. I would now like to open the call for questions. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] ] And we will go first to Oliver Wintermantel of Evercore ISI.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yeah, good afternoon. Thank you. Laura, I'm looking -- you said the strength continued into the second quarter in revenues and margins while lapping the spike from last year. Does that, you know, if you could give a little bit more details on that? And then secondly, the raise of the guidance that you provided today, if I look at the -- it is really strong outperformance in the first quarter versus expectations would probably get you there without touching the rest of the year.

So is there anything that you learned during the first quarter that applies to the second half of the last three months of the year? Thank you.

Laura Alber -- President and Chief Executive Officer

Sure. Thanks, Oliver. In terms of, you know, I mean, the quarter today, I mean, it's early in the quarter but we are seeing strengthened. You know, the stores are amazing, traffic is still under where it was in '19. And that just shows you how much more room there is as traffic really comes back.

I think that people feel even more comfortable shopping in our stores and, you know, e-commerce continues to be a strong driver. And you know, we are running a really regular price business. That said, we are running -- we will run markdowns where we have seasonal issues. But there's substantial upside with a margin throughout the back half of the yea,r as I said earlier, and it's an important change for us, it allows us to do a lot of other things that create that virtuous cycle where you can invest in other things that drive topline like the ad costs, which is very effective. So in terms of the guidance, Julie, do you want to talk a little bit about that?

Julie Whalen -- Executive Vice President and Chief Financial Officer

Yeah. I would say, Oliver, I wouldn't read too much into that. We are very confident in where we are today, obviously, because of our Q1 performance, which was phenomenal but also where we are quarter to date. And if you look at it on the high end, basically, we are guiding to a mid-teen level on top of a 17 last year with operating margin expansion on top of last year's outperform that was above 560 over the year before. So we feel very confident in the future of our business, both on this year and to reaching our five-year $10 billion targets.

So I wouldn't read anything into that at all. It's just we're early in the year. I mean, that's the reality we gave, you know, the previous outlook two months ago and now we've completed one quarter and we've got three big quarters to go. And so you know obviously as we move through the year we will update you accordingly. But we feel very confident in our business.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Thanks very much and good luck.

Operator

And we'll go next to Adrienne Yih of Barclays.

Adrienne Yih -- Barclays -- Analyst

Good afternoon. Another great quarter, so congratulations. Laura, my question is on something that you had just said earlier in the Q&A session. It was about ad spend.

And when we look at last year, the ad spend as a percent of the much higher sales, obviously fell to 5%, but it's historically been at 7%. As you move more and more to a pure-play e-commerce model, how do you look at that line item? And where do you think the right number should be? Thanks.

Laura Alber -- President and Chief Executive Officer

Sure. It's an interesting question and one that I think you may need to remain flexible on as we see different things happen in our business. We have Felix here. Felix, do you want to make some comments about our at-cost approach?

Felix Carbullido -- Chief Marketing Officer and Executive Vice President

Yeah, absolutely. Thank you for the question. We continue to invest in advertising where we see the ROI. And as Laura mentioned, we've taken all of our online media buying in-house, we manage a cross-brand learning agenda across our seven brands, which allows us to test and learn on one brand and roll it to the other.

You know, our legacy and performance marketing dating back to our catalog days gives us that competitive advantage when it comes to just identifying top ROI tactics. So to answer your question, yes, we continue to see investment online, it's paying back. We are still dedicated to the op margin goals for the company. But we are passionate about investing where we see the ROI.

Adrienne Yih -- Barclays -- Analyst

Yep. And then, Julie, one quick one for you. So with the total store closures, so 25% over the horizon. I mean, that sort of implies that you will be closing decently four-wall positive stores.

So how do you think about that? And you know, I guess the question is, is that the case? Are you OK with closing four-wall stores that other people might look at and actually want that four-wall contribution? But because e-commerce is so much more accretive, it's the right move. Thank you very much.

Laura Alber -- President and Chief Executive Officer

Adrienne, it's Laura. I'd love to take that one. You know, you're right. We are closing less profitable stores, but I think under anybody else's framework, they would like the four-wall.

The difference is we would like to have the stores rival our e-commerce and profitability and we think that's off. We also know that there are some malls that we don't want to be in anymore. They're just not -- they're not good for the brand. We also have some markets where there are too many stores. We never overstored, but there's still room for consolidation and room to have bigger, greater stores versus so many because we are a destination and people will drive to us. In some cases, we're moving from one place to the next.

We just opened a few great Williams-Sonoma stores and Pottery Barn stores in some new centers, lifestyle centers, and I'm thrilled with the results. So you're going to see us do great things for the retail and prune the bottom and take the total profitability of the company up.

Adrienne Yih -- Barclays -- Analyst

Thank you very much. Great luck to you.

Laura Alber -- President and Chief Executive Officer

Thank you.

Operator

And we'll go next tea to Max Rakhlenko of Cowen and Company.

Max Rakhlenko -- Cowen and Company -- Analyst

Great. Thanks a lot and congrats on a very strong quarter. So first, can you maybe discuss a framework for what EBIT margin could look like this year, maybe the lower end to the higher end of what's achievable, and really the most pertinent factors that could get you there? And then separately, longer-term, as we think about your $10 billion revenue outlook, how do you think that could shake out in the quarter versus some of the newer businesses? And you know, ultimately, when we sit in '25, what would it take for the core to be at the lower or the higher end of what is feasible? Thanks a lot.

Julie Whalen -- Executive Vice President and Chief Financial Officer

So from an EBIT perspective, I think the most important thing is that we are very bullish on our ability to drive profitability. We have not seen this level of merchandise margin expansion to this degree for a while now, though we've been driving it from 2018 because of our change in our operating model and our perspective as to how to pull back on promotions, and that's a fundamental shift that we've made. To this level, it's been incredible. And then you combine that with our occupancy leverage and, of course, the SG&A leverage that we've been able to drive, it gives us a lot of confidence in a very profitable operating margin like we delivered last year. I mean, I think everyone was surprised by 14.2%, which is 560 over the prior year.

And then they were surprised that we said, we expand on top of that this year, and we are committed to doing that into driving at least 15% in five years. And I think it could be higher. But for right now, you know, obviously, we've got puts and takes like everybody else out there, we've got raw material increases, and we've got freight increases and things like that, but we are best positioned to be able to offset that drive very strong profitability that we're committed to doing for the foreseeable future. On the revenue side, we are very confident as well about our $10 billion in the five years that come. Obviously, the core is a big base, and so that's a big driver of that growth.

But really, our growth initiatives, I think you can't underestimate. I mean, one of my favorites that I always speak to is B2B. I mean it is on fire, and we have committed to well over 500 million for this year, and I think it's going to go even higher, much quicker than we thought. And so I think our growth initiatives, whether it's B2B, whether it's a marketplace, whether it's our global operations, all of that, our smaller businesses. Williams-Sonoma Home is a huge opportunity for a luxury market that's clearly underpenetrated.

And we really have just gotten started on a lot of these, so that's what gives us the confidence and the excitement to drive to that $10 billion number.

Max Rakhlenko -- Cowen and Company -- Analyst

Great. Thanks a lot. Very helpful.

Operator

And we'll go to our next question from Cristina Fernandez of Telsey Advisory Group.

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Hi, good afternoon, and also congratulations on the quarter. I had a follow-up on the operating margin as well. If you look at this quarter, much higher gross margin but also higher expenses. Are these levels sort of sustainable for the rest of the year? Should we think about opting for gross margin in that 40-plus percent in SG&A at this level? And then also specific, I wanted to ask about the merchandise margin.

It's been increasing for the past couple of quarters. Is this a peak level or you think it can go higher even still from here? Thanks.

Julie Whalen -- Executive Vice President and Chief Financial Officer

Yeah. I mean, again, first, as I said a minute ago, I mean, we're very confident in our ability to drive operating margin expansion and to be a profitable company from that perspective. We're very confident in our ability to continue to drive merch margin expansion. Where that will actually play out on each quarter and whether it's above 40% or no, we're not going to be providing that kind of level of disclosure at this time, but we have no reason to believe that that's going to discontinue. And so I think you can't model out.

You know, obviously, we had 950 basis points of expansion and 850 in gross margin. I would model that out by quarter for the rest of the year. But I do believe that we've got a lot of strength left to come because of our fundamental shift in our pullback on promotions. And the reason we can do that is because of our differentiators. It's the fact that we design our product in-house and we engineer our product for value and sustainability while still being of high quality.

And so because of that, we are able to then lead with content-led marketing and get the product that people want to them at a very good price. And so we don't see that changing anytime soon and we're unique in that perspective because others are not able to do that. And so I think that's what gives us the confidence that we'll be able to maintain these strong margins going forward.

Operator

And we will move to our next question from Steven Forbes of Guggenheim Securities.

Steven Forbes -- Guggenheim Securities -- Analyst

Good afternoon and congrats on a great quarter as well. I wanted to try to focus on the cross-banner or cross-brand migration strategy, it's the best we can, right? It sounds like we've got some exciting stuff coming up here in the future. But curious if you can update us on just the number of cross-brand customers and how that's evolved, right, from the last data point that we got, which I think is probably two years ago or so? And then just any color, right, on their behaviors relative to the average, their spending trends, their frequency trends? And really just any color on what gets you so excited, right, about the potential to continue to lean into that strategy. 

Laura Alber -- President and Chief Executive Officer

Great. I'm going to let Felix take that one.

Felix Carbullido -- Chief Marketing Officer and Executive Vice President

Yeah, thank you for the question. Yeah, we are crazy excited about the cross-brand opportunity. We think it's one of our biggest opportunities in the company. And I know we get compared to the pure-play question about spending, spending, spending.

But it's not just about customer acquisition, it's also about the share of wallet you have with each customer, right? And so we believe that our sales per customer can increase dramatically when we start to migrate customers from one brand to another. And the key is really the foundation of that. And we've seen a record number of customers migrate across our brands. I think what's particularly exciting is that our new customers are migrating or participating in one or two or more brands at record levels since we launched the Key. And now, almost 80% of our customers are enrolled in the Key.

So that bodes incredibly well for our future state. It also bodes well for our lifetime value proposition when we look at customer retention and customer profitability. We will increase the number. I don't want to give away our total playbook, but you're going to be seeing a lot more cross-brand awareness throughout a customer shopping journey from the homepage to in-store, from shopping by category to looking for inspirational ideas. We think it's the key to owning a share of wallet for existing customers, and we're very focused on that.

We do have some announcements coming in the fall, which we're thrilled about. But at the end of the day, the excitement drives from the KPIs we are seeing from customers who have migrated across our brands.

Steven Forbes -- Guggenheim Securities -- Analyst

And maybe just a quick follow-up, if I can, on that. Because I think, Laura, you mentioned before, right, on the question about stores and consolidation in regions and locations, is part of that going to come in the form of larger stores that merchandise across the banners? I think you mentioned larger stores in any of the questions. Any sort of thought on just the evolution of the footprint? The potential evolution of the footprint in terms of true migration, right, or consolidation of the banners within one store?

Laura Alber -- President and Chief Executive Officer

You know, there's a wide range of sizes that we currently run in our fleet. And it's not that we're going to open stores that are larger than our largest stores now. It's that we're not going to have -- we have a bunch of smaller stores that are pretty dated that we would trade up to be more of a standard for each brand. There's a standard that we feel we've optimized, and we don't have plans to change that at this point.

I'll just mention also while we're talking about the flexibility and resilience of our operating model and how important the channels are to each other. We are seeing really outsized growth also in our omni services, particularly BOPIS and BOSTS. We're seeing a two-year comp of almost 90%, just showing the importance and the relevancy of these stores to the online business.

Operator

And I'll just remind everyone to please limit yourself to one question. We will go next to Curtis Nagle of Bank of America.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Great. Thanks very much for taking the question. So I guess, not to belabor a point here, but just trying to think out the promotional cadence and see what's going on in the industry. I totally get what you're saying in terms of what you're doing with your marketing and not having to rely on discounting, obviously, to drive sales. But I guess just -- what do you think happens when at some point, whether that's, you know, I don't know, next year and to this year, kind of who knows, when things settle down a little bit more? And backlog's clear and there, you know, we're in a period right now, you just don't need to promote, right, for all sorts of obvious reasons. Do you think that you may have to step back in a little bit or just -- how should we think about that, you know, kind of outside of what's still kind of non-precedent operating environment, just crazy good sales sort of across the board?

Laura Alber -- President and Chief Executive Officer

Yeah, sure. You know, I think the way to think about it is really about our three key differentiators and our growth drivers. And we have really incremental and real growth drivers that we're showing you right now that we're only in the first couple of innings of. So those things are going to continue to help us drive growth at a regular price.

And the key part of our pricing strategy, which is important, is that we want to give the customer great value. So we continue to bring in new products at opening price points and products that can't be rivaled by anybody for the quality and design that is. I mean, we are relentless in our pursuit of gorgeous sustainable design. And that's what we're going to continue to do.

That's our focus. And it's one where customers understand that if they want something from us, they're not going to buy it elsewhere. And if we give them a fair price, and not overprice our products, and we give them great quality, they will come to us over and over. And that's why we see a very high average order size, we see customers coming back at greater rates than other brands out there, as we compare our numbers. And I don't see any reason why this should abate, especially given what I know we have in the pipeline for growth initiatives.

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

OK. Thank you very much. Appreciate it.

Laura Alber -- President and Chief Executive Officer

Thank you.

Operator

We'll go next to Seth Basham of Wedbush Securities.

Seth Basham -- Wedbush Securities -- Analyst

Thanks and congratulations on great results. My first question is thinking about the sales outlook for this year by brand. Based on your growth initiatives, which brands do you expect to outperform in terms of comparable store sales growth for the balance of the year?

Laura Alber -- President and Chief Executive Officer

Julie, how would you like to --

Julie Whalen -- Executive Vice President and Chief Financial Officer

I mean, first of all, comparable store sales growth, and we haven't been giving that number truly out. But if you're saying comps in general, I mean, quite honestly, we're seeing broad-based strength.  So I mean we're not going to be disclosing by brand where we think the comps will be, but we haven't seen anything that in our business, obviously, look at the results in Q1, we're phenomenally strong. And we're seeing strong results in events in the second quarter. So whether it's with kids returning to school and you've got gear and backpacks and dorm rooms to fill in across our kids business. You know, whether it's Williams-Sonoma business, and you're entertaining outdoors with food and cooking, or whether it's all of our other brands with our home furnishings offerings for outdoors and for entertaining.

And as we move through the back half of the year, and we have gift-giving, I mean, they all have something incredible to offer for the quarters that come. So I really think it's going to be broad-based.

Laura Alber -- President and Chief Executive Officer

And they're quite competitive with each other so it will be interesting to see they have their plans, and they have great -- all of the incremental growth strategies as well as core growth strategies. But I think we have a strong year across the board.

Seth Basham -- Wedbush Securities -- Analyst

Got it. And when you think about the cadence of the growth through the year, obviously, you're facing tough comparisons as the year goes on. Are you expecting growth in each quarter in terms of revenue?

Laura Alber -- President and Chief Executive Officer

Yes.

Seth Basham -- Wedbush Securities -- Analyst

All right. Wonderful. Thank you. Good luck.

Laura Alber -- President and Chief Executive Officer

Thank you.

Operator

And we'll go to Simeon Gutman of Morgan Stanley.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, everyone, hope you are good. I'm going to stick with margins for a second. First, have you talked about the assumptions related to the promotion or this merchandise margin environment of the back half of the year? And Laura, I think you probably did cover it. You mentioned in your script, the game changer for margins and I think a lot of the answers you provided, probably applies to this question, but how do you balance the structural improvement some of the perception improvements around the brand versus a promotional cycle that is almost likely to come back at some point?

Julie Whalen -- Executive Vice President and Chief Financial Officer

I mean we haven't highlighted per se with the back half merch margins or gross margins will be, except to say that we continue to believe that we can drive merch margin expansion and occupancy leverage. And so we have -- we're very confident in our ability to drive gross margin expansion. Obviously, you can't model exactly what we've done this quarter or make those sort of assumptions as we move throughout the year because to your point, we certainly will have more pressure as we move through the year. And of course, we'll have raw material costs and freight costs that are going up like everybody else. But we are best positioned to be able to handle those, given our scale and given our unique offering, and still be able to deliver merch margin expansion and gross margin expansion.

So that's sort of what we've called out on that front.

Simeon Gutman -- Morgan Stanley -- Analyst

Is there anything you could provide on the marketplace in terms of margin structure? How to think about it?

Julie Whalen -- Executive Vice President and Chief Financial Officer

On the gross margin line, technically, they are lower than our regular retail price, but they also offer breadth and new customer counts and the ability to give the customer what they want. And ultimately, with that volume, they're operating margin accretive. So it want us to deliver those every day of the week.

Laura Alber -- President and Chief Executive Officer

I'll just add to what Julie just said to make sure it's clear that we really are applying our same standards for sustainability and design and quality to our marketplace product. And we are offering a pretty edited assortment compared to other people, oftentimes exclusive only offered with us. And that's an important factor in what we're doing. A lot of the categories we've brought in are categories that we don't offer.

So for example, ceiling fans, we never have them before and the marketplace allows us to be in that business, which is really important for the home in a lot of areas and it allows us to go in there and be in that business and do it in a capital-light way.

Operator

And we'll go to our next question from Chuck Grom of Gordon Haskett.

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Hey, thanks. Good quarter here. On occupancy dollars, Julie, $176 million down about $5 million sequentially. Just wondering how we should be modeling that line item in the coming quarters? I know it can be a little bit lumpy but do you think this is a good run rate, or do you think it could continue to drop? And then the follow-up question unrelated would be B2B.

I think it was $400 million last year, you said earlier, $500 million this year. I know the long-term is $1 billion. I guess does it make sense to the backfill of that opportunity now, invest more in it to grow? It seems like it's coming in a lot stronger and with the economy reopening, it seems like there could be some pretty nice sales ahead.

Julie Whalen -- Executive Vice President and Chief Financial Officer

So on the occupancy dollars, I wouldn't necessarily make that assumption going forward. Certainly, because we shut, you know, net 33 stores, mostly toward the end of last year, we're getting the benefit from that rent that's come out of the equation. But we also have our distribution centers that are layering in. As we've mentioned, we're adding 2 million square feet to support our significant e-commerce growth. And so that goes in there.

There's also the timing and the size of the capital expenditures that hit depreciation, and that's what makes it be lumpy. So I don't think you can just take this current quarter's run rate and assume that throughout the back of the year. But certainly, we will still be driving occupancy leverage, given our high sales and our ability to mute that cost because of the lower rents from the stores and so we are committed to doing that throughout the rest of the year. On the B2B front, we -- I think it was closer to $300 million, a little lower than that. But yes, very strong business, very bullish on it.

We think we've got a huge opportunity. That's an $80 billion business and we are coming in at $500 million this year, so to speak. So -- and the trajectory that we've seen, the week-after-week acceleration in that business has been phenomenal, and we're really just getting started. We've been building the infrastructure from a people perspective, from a system perspective, from a supply chain perspective, and it's really gaining momentum.

And so trust me that we are investing everything we need to in that business to drive it because we do believe it's a significant growth opportunity for us.

Operator

[Operator instructions] We will hear next from Chris Horvers of J.P. Morgan.

Chris Horvers -- J.P. Morgan -- Analyst

Thanks. Good evening. So first, I have two questions. So can you talk about the sequential improvement in gross margin relative to the fourth quarter? How much of that was perhaps the shipping volume surcharges fading, how much of that was perhaps taking some price increases on existing inventory as raw material costs have accelerated and some of the shipping costs have accelerated. And then just to clarify on the guidance raise, you talked about strength quarter to date being the part of the driver.

So is the top-line raise just related to the fourth -- to the first quarter beat or is it also your expectations around the second quarter? Thank you.

Julie Whalen -- Executive Vice President and Chief Financial Officer

Sure. So, as far as relative to the fourth quarter, the outperformance on the gross margin line was relatively broad-based. It was, you know, merch margin expansion was significant. And we did see shipping cost leverage and that is both because you're coming out of the peak rates, but more so because we also had a pretty sizable shift to retail, and the strength of retail even on a two-year basis was phenomenal. And so when you have that, and there are more POS sales, so to speak, there are less shipping costs just generally for the sales that you drive on the topline.

And so we had that benefit as well. And then we had the factor that we shut net 33 stores toward the end of last year where we started to get the benefit on the lower occupancy, particularly in the first quarter. And so that plus the significant sales growth we had, really delivered all three of those. And the second question, I'm trying to remember what that was.

What was your second question, Chris?

Chris Horvers -- J.P. Morgan -- Analyst

It was just Q2 and Q1.

Laura Alber -- President and Chief Executive Officer

Yeah, yeah. I got it, yeah. It has taken all of it into consideration, to be honest with you. And again, on the high end, it's a mid-teens revenue outlook on top of 17 last year and it's taking into consideration what we are able to see to date. And so it's both Q1 and our performance coming into the second quarter.

And then it's also just realizing the benefits that we have ahead of us, in particular, in relation to the strong housing market, which tends to, if you look back in time, bode well for us for years to come. So that is a very strong scenario for us that's going to help us, plus we have the fact that you have the acceleration of folks buying our category online. You have also got the fact that there is much more interest in companies that stand for values and sustainability, and we've seen that and we think that's going to continue. And then, of course, you layer in the fact that we've got higher backorders and all of that, we expect to come back in the back half of the year, gives us a lot of confidence in our ability. But as we said earlier its the first quarter and we gave outlook two months ago, and then we've raised it, call it, 600-plus basis points in two months. So we feel like this is a good spot to be, given we were one quarter in, but we are absolutely confident in our ability to deliver strong performance this year.

Operator

And we'll move to our next question from Brian Nagel of Oppenheimer.

Brian Nagel -- Oppenheimer & Company -- Analyst

Hi. Good evening. Another great quarter, congratulations. So I have two questions that are short, I'm going to merge them together.

Just, with regard to sales trends, are you seeing, you know, through the quarter then, I guess, into Q2, are you seeing any divergence in trends in markets that may have opened or reopened sooner than others? And then the second question I have, I don't think this is relevant for you but every retailer is out there talking about the benefits of stimulus. So I think it's worth asking. Did you see any type of acceleration in your business across your brands as the stimulus checks hit? Thanks.

Laura Alber -- President and Chief Executive Officer

OK. So in terms of markets, so I'm going to give us to the data guy. I feel like in terms of open and closed markets -- go ahead, Felix.

Felix Carbullido -- Chief Marketing Officer and Executive Vice President

Sure. Our data guy said, we looked at 100 different points, whether people are by state, by vaccination, mask requirements, there is no correlation. I mean, and it depends on last year when they were open. When you look at the two-year, which I think is more important, the great news is that we're seeing strength across all the states, in all the areas, regardless of their vaccination rate. So that too gives us confidence about the balance of the year.

Brian Nagel -- Oppenheimer & Company -- Analyst

Got it.

Felix Carbullido -- Chief Marketing Officer and Executive Vice President

And then from a shift perspective, there's no major change in demographic shift perspective. The younger customers continue to -- we see a nice bump there that's not just driven by stimulus, but that's also driven by just the growth of the millennial and Gen Z base. And we're seeing, you know, they're now, the majority of our growth in new customers. We think that's due to our opening price point positioning in PB Apartment. Obviously, the West Elm brand aesthetic and value plays well to that.

And of course, our kids and baby business, which is driven by the younger generation is benefiting from that and has plans for expansion as well. So that's what I can answer for that.

Operator

And we'll move on to our next question from Steven Zaccone of Citi Research.

Steven Zaccone -- Citi -- Analyst

Great. Thanks for taking my question. Congrats on the strong results. I had a question on the SG&A outlook for the balance of the year.

So the amount of leverage you saw in the 40% comp seemed to moderate versus what you've seen in the past few quarters. You know, as sales growth moderates through the balance of the year and you continue to prioritize advertising expenses, how should we think about the cadence of SG&A spending, or maybe the ability to drive leverage?

Julie Whalen -- Executive Vice President and Chief Financial Officer

Yeah. I mean, I think what you have to look at is that this time, last year, we substantially pulled back like just about everybody, when everything was shutting down and the equity markets were coming down. And so we dramatically pulled back our spend. And so given our performance, we've been continuing to invest in that.

And so this quarter reflects a higher investment in advertising, which, by the way, also drives future sales. And so we think it's really important to continue to make these investments, as Felix alluded to earlier, it's a competitive benefit that we can do this. Most people don't have the merch margin expansion that we have. They don't have the occupancy leverage even if they have the top line, and they can't afford the cost of advertising right now, and we can. And so we're going to make that investment and be competitive about it and go aftermarket share gains that will benefit us for future quarters and years, quite frankly.

And so yes, you will see pressure on the SG&A line, mostly from advertising. There are some higher hourly wages that we're lapping, so to speak. But the reality is there's a lot of COVID expenses that we're in within SG&A as well last year that we hopefully won't be comping again based on what we know today. And so that will also provide us benefits in the back half to be able to offset that.

Regardless, we are very confident in our ability to deliver merch margin expansion and occupancy leverage. And so where our commitment is on the bottom line of operating margin expansion, which we feel very confident about being able to deliver.

Laura Alber -- President and Chief Executive Officer

And I think to add to what Julie just said, and you can see this in our results over not just this quarter but over the last year, and even when you look back to 2018, 2019, we've had acceleration in our comps and we are now looking at a growth company again, and we are very confident in that. And that means that we're going to improve our op margin but we are going to reinvest to drive those top-line sales because we have that opportunity. We're still very small in comparison to how good our brands are. And people love our brands, and with our differentiators, and our growth drivers, there is no doubt in our minds that we're going to reach that $10 billion faster than people expect and to do it more profitably than I think probably anybody else in our space.

Operator

And at this time, I would like to turn the call back to Laura Alber for any additional or closing comments.

Laura Alber -- President and Chief Executive Officer

Well, thank you. Good questions. I really appreciate your interest and I look forward to talking to you again after the next quarter.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Elise Wang -- Vice President of Investor Relations

Laura Alber -- President and Chief Executive Officer

Julie Whalen -- Executive Vice President and Chief Financial Officer

Oliver Wintermantel -- Evercore ISI -- Analyst

Adrienne Yih -- Barclays -- Analyst

Felix Carbullido -- Chief Marketing Officer and Executive Vice President

Max Rakhlenko -- Cowen and Company -- Analyst

Cristina Fernandez -- Telsey Advisory Group -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Curtis Nagle -- Bank of America Merrill Lynch -- Analyst

Seth Basham -- Wedbush Securities -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Chuck Grom -- Gordon Haskett Research Advisors -- Analyst

Chris Horvers -- J.P. Morgan -- Analyst

Brian Nagel -- Oppenheimer & Company -- Analyst

Steven Zaccone -- Citi -- Analyst

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