LETTER TO STOCKHOLDERS 2019 ANNUAL REPORT POTTERY BARN POTTERY BARN KIDS POTTERY BARN TEEN WEST ELM WILLIAMS SONOMA WILLIAMS SONOMA HOME MARK AND GRAHAM REJUVENATION OUTWARD [THIS PAGE INTENTIONALLY LEFT BLANK] S t o c k h o l d e r s L e t t e r Dear Stockholders, We write this in the midst of the COVID-19 global health crisis that is having a profound impact on communities around the world. At Williams-Sonoma, Inc., we take our responsibility to all stakeholders very seriously. Our customers, our associates, our stockholders, and the communities where we work are in sharp focus. Although this global pandemic has already tested us in many ways, our commitment to each of these groups has remained our guiding principle. Over these recent weeks, we have been humbled by the agility, commitment and collaboration that our people have shown to support each other and our customers during this difficult time. Across the business, we are taking actions to increase our financial flexibility, and we are confident our e-commerce led business model and our dedicated, experienced team will enable us to navigate through the near-term challenges. It is also important to celebrate our achievements over the last year, which demonstrate the success of our strategies to drive long-term growth. 2019 was an outstanding year for our company. We achieved our goal of maximizing growth and maintaining high profitability with topline and EPS growth at the high-end or above expectations and operating margin expansion, despite absorbing enormous additional costs due to tariffs. Our performance was driven by e-commerce, which reached another all-time high at over 56% of total revenues, while across our brands, growth was led by a significant acceleration in the West Elm and Pottery Barn businesses. Our cross-brand initiatives Business to Business, The Key and in-home Design Crew continued to scale and become more impactful accelerators of our growth. We also made significant progress across our sustainability initiatives, including an expansion of our commitment to responsibly-sourced materials and our social impact programs, such as Fair Trade and VisionSpring, in the supply chain. In the last year, we were proud to be recognized for the third-year running as the only home furnishings retailer among Barron’s 100 Most Sustainable Companies. Our annual Corporate Responsibility Report has also transitioned to an Environmental, Social and Governance (ESG) framework to provide even greater transparency into our sustainability goals, purpose, and progress. Our results and continued success relative to our industry demonstrate the power of our digital first, design-led platform of iconic home brands and our high level of execution. In a fragmented home furnishings industry, it is hard to overstate how important it has been for us to continually evolve to stay ahead of the competition and remain at the forefront of driving profitable growth and market share gains. This, combined with our proven growth strategies and long-standing commitment to sustainability, are a winning combination for us to continue to outperform in the longer term. We thank our customers and our dedicated associates for the strong results in 2019 and for their continued support and loyalty during this time of immense change. Despite the short-term uncertainties, we are confident about our long-term outlook and will continue to serve and inspire our customers with outstanding products and service to build a deeper connection to our brands. We also thank our Board of Directors for their valuable insights and guidance. We are delighted to welcome Bill Ready to our Board. Bill’s experience in leading and scaling high-growth companies combined with his expertise in digital commerce will be instrumental in guiding our continued success. Finally, we thank you, our stockholders. You have believed in our mission to improve people’s lives at home and have pushed us to be a better company. The challenges that we all face in 2020 have clarified what is important, and we believe we will emerge from the current environment an even stronger company. We appreciate your continued trust and support. Adrian Bellamy Chairman of the Board of Directors Laura Alber President, Chief Executive Officer and Director This letter contains forward-looking statements. Please see the section titled “Forward-Looking Statements” on page 1 of our Annual Report on Form 10-K for the fiscal year ended February 2, 2020, which is part of this Annual Report to Stockholders, for important cautionary language regarding these statements. [THIS PAGE INTENTIONALLY LEFT BLANK] FORM 10-K 2019 ANNUAL REPORT POTTERY BARN POTTERY BARN KIDS POTTERY BARN TEEN WEST ELM WILLIAMS SONOMA WILLIAMS SONOMA HOME MARK AND GRAHAM REJUVENATION OUTWARD [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K F o r m 1 0 - K (Mark One): È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 2, 2020. OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-14077 WILLIAMS-SONOMA, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 3250 Van Ness Avenue, San Francisco, CA (Address of principal executive offices) 94-2203880 (I.R.S. Employer Identification No.) 94109 (Zip Code) Registrant’s telephone number, including area code: (415) 421-7900 Securities registered pursuant to Section 12(b) of the Act: Trading Symbol(s): Name of each exchange on which registered: Title of each class: Common Stock, par value $.01 per share WSM New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes È No ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Emerging growth company ‘ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È As of August 4, 2019, the approximate aggregate market value of the registrant’s common stock held by non-affiliates was $4,956,461,000. It is assumed for purposes of this computation that an affiliate includes all persons as of August 4, 2019 listed as executive officers and directors with the Securities and Exchange Commission. This aggregate market value includes all shares held in the Williams-Sonoma, Inc. Stock Fund within the registrant’s 401(k) Plan. As of March 22, 2020, 77,197,681 shares of the registrant’s common stock were outstanding. [THIS PAGE INTENTIONALLY LEFT BLANK] DOCUMENTS INCORPORATED BY REFERENCE Portions of our definitive Proxy Statement for the 2020 Annual Meeting of Stockholders, also referred to in this Annual Report on Form 10-K as our Proxy Statement, which will be filed with the Securities and Exchange Commission, or SEC, have been incorporated in Part III hereof. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K and the letter to stockholders contained in this Annual Report contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and operating results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without limitation, statements related to: projections of earnings, revenues, growth and other financial items; the strength of our business and our brands; our ability to execute strategic priorities and growth initiatives regarding digital leadership, product and technology innovation, cross-brand initiatives, retail transformation and operational excellence; our beliefs about our competitive advantages and areas of potential future growth in the market; our ability to drive long-term sustainable returns; the plans, strategies, initiatives and objectives of management for future operations; our brands, products and related initiatives, including our ability to introduce new brands, brand extensions, products and product lines and bring in new customers; our belief that our e-commerce websites and direct-mail catalogs act as a cost-efficient means of testing market acceptance of new products and new brands; the complementary nature of our e-commerce and retail channels; our marketing efforts; our acquisition of Outward, Inc., including the valuation of intangible assets acquired; our global business and expansion efforts, including franchise, other third-party arrangements and company-owned operations; our ability to attract new customers; the seasonal variations in demand; our ability to recruit, retain and motivate skilled personnel; our belief in the reasonableness of the steps taken to protect the security and confidentiality of the information we collect; our belief in the adequacy of our facilities and the availability of suitable additional or substitute space; our belief in the ultimate resolution of current legal proceedings; the payment of dividends; our stock repurchase program; our capital allocation strategy in fiscal 2020; our planned use of cash in fiscal 2020; our compliance with financial covenants; our belief that our cash on hand and available credit facilities will provide adequate liquidity for our business operations over the next 12 months; the impact of the 2017 Tax Cuts and Jobs Act; the impact of tariffs on our business and our results of operations; our belief regarding the effects of potential losses under our indemnification obligations; the impact of inflation; the effects of changes in our inventory reserves; the impact of new accounting pronouncements; the impact of the coronavirus on our retail store operations, global supply chain and customer spending and demand; and statements of belief and statements of assumptions underlying any of the foregoing. You can identify these and other forward-looking statements by the use of words such as “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. The risks, uncertainties and assumptions referred to above that could cause our results to differ materially from the results expressed or implied by such forward-looking statements include, but are not limited to, those discussed under the heading “Risk Factors” in Item 1A hereto and the risks, uncertainties and assumptions discussed from time to time in our other public filings and public announcements. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements. F o r m 1 0 - K 1 WILLIAMS-SONOMA, INC. ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED FEBRUARY 2, 2020 TABLE OF CONTENTS PAGE 3 6 24 24 25 26 27 29 30 40 41 68 68 69 70 70 70 70 70 71 76 Business Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Mine Safety Disclosures Properties Legal Proceedings PART I PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Item 9A. Controls and Procedures Item 9B. Other Information Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules Item 16. Form 10-K Summary PART IV 2 F o r m 1 0 - K ITEM 1. BUSINESS OVERVIEW PART I Williams-Sonoma, Inc., incorporated in 1973, is a omni-channel specialty retailer of high quality products for the home. In 1956, our founder, Chuck Williams, turned a passion for cooking and eating with friends into a small business with a big idea. He opened a store in Sonoma, California, to sell the French cookware that intrigued him while visiting Europe but that could not be found in America. Chuck’s business, which set a standard for customer service, took off and helped fuel a revolution in American cooking and entertaining that continues today. In the decades that followed, the quality of our products, our ability to identify new opportunities in the market and our people-first approach to business have facilitated our expansion beyond the kitchen into nearly every area of the home. Growth across the Williams-Sonoma, Inc. portfolio has been fueled by three areas of strategic investment: brand experimentation and innovation, for a best-in-class approach to omni-channel retail experiences; operational excellence across the enterprise, from quality product and sourcing, to efficient manufacturing and supply chain; and culture and corporate social responsibility, from commitments to foster women in leadership and embrace diversity, to a healthy impact on our community and environment. Today, Williams-Sonoma, Inc. is one of the United States’ largest e-commerce retailers with some of the best known and most beloved brands in home furnishings. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom and offer international shipping to customers worldwide. Our unaffiliated franchisees operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. Williams Sonoma From the beginning, our namesake brand, Williams Sonoma, has been bringing people together around food. A leading specialty retailer of high-quality products for the kitchen and home, the brand seeks to provide world- class service and an engaging customer experience. Williams Sonoma products include everything for cooking, dining and entertaining, including: cookware, tools, electrics, cutlery, tabletop and bar, outdoor, furniture and a vast library of cookbooks. The brand also includes Williams Sonoma Home, a premium concept that offers classic home furnishings and decorative accessories, extending the Williams Sonoma lifestyle beyond the kitchen into every room of the home. Pottery Barn Established in 1949 and acquired by Williams-Sonoma, Inc. in 1986, Pottery Barn is a premier omni-channel home furnishings retailer. The brand was founded on the idea that home furnishings should be exceptional in comfort, quality, style and value. Pottery Barn’s stores, website, and catalogs are specially designed to make shopping an enjoyable experience, with inspirational lifestyle displays dedicated to every space in the home. Pottery Barn products include furniture, bedding, bathroom accessories, rugs, curtains, lighting, tabletop, outdoor and decorative accessories. Pottery Barn Kids Launched in 1999, Pottery Barn Kids serves as an inspirational destination for creating childhood memories by decorating nurseries, bedrooms and play spaces. Pottery Barn Kids offers exclusive, innovative and high-quality products designed specifically for creating magical spaces where children can play, laugh, learn and grow. West Elm Born in Brooklyn in 2002, West Elm is dedicated to transforming people’s lives and spaces through creativity, style and purpose. West Elm creates unique, modern and affordable home decor and curates a global selection of local, ethically-sourced and Fair Trade Certified products, available online and in our stores worldwide. 3 Pottery Barn Teen Launched in 2003, Pottery Barn Teen is the first home concept to focus exclusively on the teen market. The brand offers a complete line of furniture, bedding, lighting, decorative accents and more for teen bedrooms, dorm rooms, study spaces and lounges. Pottery Barn Teen’s innovative products are specifically designed to help teens create a comfortable and stylish room that reflects their own individual aesthetic. Rejuvenation Rejuvenation, founded in 1977 with a passion for timeless design and quality craftsmanship, was acquired by Williams-Sonoma, Inc. in 2011. With design, manufacturing and distribution facilities in Portland, Oregon, Rejuvenation offers a wide assortment of made-to-order lighting, hardware, furniture and home décor inspired by history, designed for today and made to last for years to come. Mark and Graham Launched in 2012, Mark and Graham is designed to be a premier online destination for personalized gift buying. With over 100 monograms and font types to choose from, a Mark and Graham purchase is uniquely personal. The brand’s product lines include women’s and men’s accessories, small leather goods, jewelry, key item apparel, paper, entertaining and bar, home décor and seasonal items. Outward In 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Headquartered in San Jose, California, Outward’s technology enables scalable applications in product visualization, digital room design and augmented and virtual reality. OPERATIONS As of February 2, 2020, we had the following merchandise strategies: Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, which sell our products through our e-commerce websites, direct-mail catalogs and retail stores. We offer shipping from many of our brands to countries worldwide, while our catalogs reach customers throughout the U.S. The e-commerce business complements the retail business by building brand awareness and acting as an effective advertising vehicle. We believe that our e-commerce websites and our direct-mail catalogs act as a cost-efficient means of testing market acceptance of new products and new brands. Leveraging these insights and our omni- channel positioning, our marketing efforts, including digital advertising and the circulation of catalogs, are targeted toward driving sales to each of our channels. Consistent with our published privacy policies, we send our catalogs to addresses from our proprietary customer list, as well as to addresses from lists of other mail order direct marketers, magazines and companies with which we establish a business relationship. In accordance with prevailing industry practice and our privacy policies, we may also rent our list to select mailers. Our customer mailings are continually updated to include new prospects and to eliminate non-responders. In addition, the retail business complements the e-commerce business by building brand awareness and attracting new customers to our brands. Our retail stores serve as billboards for our brands, which we believe inspires our customers to also shop online and through our catalogs. We operate 614 stores, which include 572 stores in 43 states, Washington, D.C. and Puerto Rico, 20 stores in Canada, 19 stores in Australia and 3 stores in the United Kingdom. We also have multi-year franchise agreements with third parties in the Middle East, the Philippines, Mexico and South Korea that currently operate 129 franchised stores as well as e-commerce websites in certain locations. SUPPLIERS We purchase most of our merchandise from numerous foreign and domestic manufacturers and importers, the largest of which accounted for approximately 2% of our purchases during fiscal 2019. Approximately 65% of our merchandise purchases in fiscal 2019 were sourced from foreign vendors, predominantly in Asia and Europe. Substantially all of these purchases were negotiated and paid for in U.S. dollars. In addition, we manufacture merchandise, primarily upholstered furniture and lighting, at our facilities located in North Carolina, California, Oregon and Mississippi. 4 F o r m 1 0 - K COMPETITION AND SEASONALITY The specialty e-commerce and retail businesses are highly competitive. Our e-commerce websites, direct-mail catalogs and retail stores compete with other retailers, including e-commerce retailers, large department stores, discount retailers, other specialty retailers offering home-centered assortments and other direct-mail catalogs. The substantial sales growth in the direct-to-customer industry within the last decade, particularly in e-commerce, has encouraged the entry of many new competitors, including discount retailers selling similar products at reduced prices, new business models and an increase in competition from established companies. We compete on the basis of our brand authority, the quality of our merchandise, service to our customers, our proprietary customer list, our e-commerce websites and our marketing capabilities, as well as the location and appearance of our stores. We believe that we compare favorably with many of our current competitors with respect to some or all of these factors. Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our net revenues and net earnings have been realized during the period from October through January, and levels of net revenues and net earnings have typically been lower during the period from February through September. We believe this is the general pattern associated with the retail industry. In preparation for and during our holiday selling season, we hire a substantial number of additional temporary employees, primarily in our retail stores, customer care centers and distribution facilities, and incur significant fixed catalog production and mailing costs. EMPLOYEES As of February 2, 2020, we had approximately 27,000 employees, of whom approximately 11,600 were full-time. In preparation for and during our fiscal 2019 holiday selling season, we hired approximately 8,500 temporary employees, primarily in our retail stores, customer care centers and distribution facilities. INTELLECTUAL PROPERTY As of February 2, 2020, we own and/or have applied to register 164 unique trademarks and service marks. We own and/or have applied to register our key brand names as trademarks in the U.S. as well as 121 additional jurisdictions. Generally, exclusive rights to the trademarks and service marks are held by Williams-Sonoma, Inc. and are used by our subsidiaries and franchisees under a license. These marks include our core brand names as well as brand names for selected products and services. The core brand names in particular, including “Williams Sonoma,” “Pottery Barn,” “pottery barn kids,” “Pottery Barn Teen,” “west elm,” “Williams Sonoma Home,” “Rejuvenation” and “Mark and Graham” are of material importance to us. Trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Trademark registrations can generally be renewed indefinitely so long as the marks are in use. We also own numerous copyrights and trade dress rights for our products, product packaging, catalogs, books, house publications, website designs and store designs, among other things, which are used by our subsidiaries and franchisees under a license. As of February 2, 2020, we own and/or have applied to register 277 patents in connection with certain product designs, inventions and proprietary technology. Patents are generally valid for 14 to 20 years as long as their registrations are properly maintained. In addition, we have registered and maintain numerous Internet domain names, including “williams-sonoma.com,” “potterybarn.com,” “potterybarnkids.com,” “potterybarnteen.com,” “westelm.com,” “wshome.com,” “williams-sonomainc.com,” “rejuvenation.com” and “markandgraham.com.” Collectively, the trademarks, patents, copyrights, trade dress rights and domain names that we hold are of material importance to us. AVAILABLE INFORMATION We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding Williams-Sonoma, Inc. and other companies that file materials electronically with the SEC. Our annual reports, Forms 10-K, Forms 10-Q, Forms 8-K and proxy and information statements are also available, free of charge, on our website at www.williams-sonomainc.com. 5 Investors and others should note that we announce material financial and operational information to our investors on our Investor Relations website (http://ir.williams-sonomainc.com), press releases, SEC filings and public conference calls and webcasts. Information on our website is not, and will not be deemed, a part of this report or incorporated into any other filings we make with the SEC. ITEM 1A. RISK FACTORS A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly. The Coronavirus (or COVID-19) outbreak is expected to have a material impact on our results of operations, financial position and liquidity. The outbreak of COVID-19 continues to grow both in the U.S. and globally, and related government and private sector responsive actions are expected to adversely affect our business operations. It is currently impossible to predict the effect and ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving. In March 2020, the President of the United States declared a national emergency as a result of the COVID-19 outbreak in the U.S. The pandemic has caused public health officials to recommend precautions to mitigate the spread of the virus, especially when congregating in heavily populated areas, such as malls and shopping centers. In recent days, there have been mandates from federal, state and local authorities requiring reduction of operating hours and forced temporary closures of non-essential retailers and other businesses, which have adversely affected our stores, further negatively impacting our business. As a result of these developments, to protect our employees, customers and the communities in which we operate, on March 17, 2020, we announced we will be temporarily closing all of our U.S. and Canadian retail stores until at least April 2, 2020 depending upon how the COVID-19 outbreak evolves. This is expected to adversely affect our operations, cash flows and liquidity, as our retail store revenues comprise approximately 44% of our net revenues. Further, after containment of the virus or after some or all of our stores reopen, any significant reduction in consumer willingness to visit malls and shopping centers, levels of consumer spending at our stores, employee willingness to work in our stores, or the prolonged temporary closure of our retail stores or distribution centers, relating to the pandemic or its impact on the economy, consumer sentiment or health concerns, would result in a further loss of revenues, profits, cash flows, and other materially impactful effects on our business and operations. In addition, we have implemented work-from-home policies for certain employees. The effects of shelter-in-place orders and our work-from-home policies may negatively impact productivity and disrupt our business, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. Although we continue to sell products through our e-commerce sites and our distribution centers remain open and operational through the date of filing of this Annual Report, governmental mandates or illness or absence of a substantial number of distribution center employees could require that we temporarily close one or more of our distribution centers, or may prohibit or significantly limit us, or our third party logistics providers from delivering packages to our customers and our stores, which would complicate or prevent our fulfilling e-commerce orders and, once some or all of our stores reopen, would complicate or prevent our ability to supply merchandise to our stores. Further, quarantines, shelter-in-place and similar government orders, like the statewide order issued in California, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases, could also impact our vendors who manufacture or 6 F o r m 1 0 - K deliver our merchandise to us or our customers, which could adversely affect our ability to acquire and sell our merchandise, thus adversely affecting our results of operations, cash flows and liquidity. While the extent of the economic impact of COVID-19 and the duration of that impact may be difficult to assess or predict, the widespread pandemic has resulted in significant disruption of global financial markets, which has significantly impacted the value of our common stock and which may reduce our ability to access further capital, which could in the future negatively affect our liquidity. In addition, a recession or long-term market correction, resulting from the spread of COVID-19 could in the future further materially impact the value of our common stock, impact our access to capital and affect our business in the near and long-term. The global pandemic of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. The extent to which COVID-19 impacts our results, financial position and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions to contain COVID-19 or treat its impact, among others. We are also uncertain the impact this pandemic will have on our overall liquidity levels or on future insurance costs, which may increase in the future in order to cover the costs insurance companies may incur related to this outbreak. Declines in general economic conditions, and the resulting impact on consumer confidence and consumer spending, could adversely impact our results of operations. Our financial performance is subject to declines in general economic conditions and the impact of such economic conditions on levels of consumer confidence and consumer spending. Consumer confidence and consumer spending may deteriorate significantly, and could remain depressed for an extended period of time. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is limited, unemployment rates increase or there is economic uncertainty. An uncertain economic environment could also cause our vendors to go out of business or our banks to discontinue lending to us or our vendors, or it could cause us to undergo restructurings, any of which would adversely impact our business and operating results. We are unable to control many of the factors affecting consumer spending, and declines in consumer spending on home furnishings and kitchen products in general could reduce demand for our products. Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending, including general economic conditions, consumer disposable income, fuel prices, recession and fears of recession, unemployment, war and fears of war, outbreaks of disease (such as the recent COVID-19 outbreak), adverse weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic and political conditions, and consumer perceptions of personal well-being and security. In particular, past economic downturns have led to decreased discretionary spending, which adversely impacted our business. In addition, periods of decreased home purchases typically lead to decreased consumer spending on home products. These factors have affected, and may in the future affect, our various brands and channels differently. Adverse changes in factors affecting discretionary consumer spending have reduced and may in the future reduce consumer demand for our products, thus reducing our sales and harming our business and operating results. We may require funding from external sources, which may not be available at the levels we require, or may cost more than we expect, and, as a consequence, our expenses and operating results could be negatively affected. We regularly review and evaluate our liquidity and capital needs. While we have a growing balance of cash that is held offshore, we currently believe that our available cash, cash equivalents and cash flow from operations will be sufficient to finance our operations and expected capital requirements for at least the next 12 months unless our retail stores and distribution centers are closed for an extended period of time or we experience a material decline in revenue relating to the COVID-19 outbreak. However, we might experience periods during which we encounter additional cash needs, and we might need additional external funding to support our operations. 7 Although our credit facility provides for a $500,000,000 unsecured revolving line of credit and a $300,000,000 unsecured term loan facility, in the event we require additional liquidity from our lenders, such funds may not be available to us on acceptable terms, or at all. In addition, in the event we were to breach any of our financial covenants, including as a result of the impact from the COVID-19 outbreak, our banks would not be required to provide us with additional funding, or they may require us to renegotiate our existing credit facility on less favorable terms. In addition, we may not be able to renew our letters of credit that we use to help pay our suppliers, or our unsecured term loan facility, on terms that are acceptable to us, or at all, as the availability of credit facilities may become limited. Further, the providers of such credit may reallocate the available credit to other borrowers. To maximize our liquidity and increase our available cash on hand in the event of a protracted COVID-19 outbreak, on March 23, 2020 we drew down $488,000,000 on our revolving line of credit, for an outstanding balance of $500,000,000. If we are unable to access additional credit at the levels we require, or the cost of credit is greater than expected, it could adversely affect our operating results. If we are unable to identify and analyze factors affecting our business, anticipate changing consumer preferences and buying trends, and manage our inventory commensurate with customer demand, our sales levels and operating results may decline. Our success depends, in large part, upon our ability to identify and analyze factors affecting our business and to anticipate and respond in a timely manner to changing merchandise trends and customer demands in order to maintain and attract customers. For example, in the specialty home products business, style and color trends are constantly evolving. As a result, consumer preferences cannot be predicted with certainty and may change between selling seasons. We must be able to stay current with preferences and trends in our brands and address the customer tastes for each of our target customer demographics. Additionally, changes in customer preferences and buying trends may also affect our brands differently. We must also be able to identify and adjust the customer offerings in our brands to cater to customer demands. For example, a change in customer preferences for children’s room furnishings may not correlate to a similar change in buying trends for other home furnishings. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our sales may decline significantly or may be delayed while we work to fill related backorders. Alternatively, we may be required to mark down certain products to sell any excess inventory or to sell such inventory through our outlet stores or other liquidation channels at prices which are significantly lower than our retail prices, any of which would negatively impact our business and operating results. In addition, we must manage our inventory effectively and commensurate with customer demand. Much of our inventory is sourced from vendors located outside of the U.S. Thus, we usually must order merchandise, and enter into contracts for the purchase and manufacturing of such merchandise, up to twelve months and generally multiple seasons in advance of the applicable selling season and frequently before trends are known. The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing trends. Our vendors also may not have the capacity to handle our demands or may go out of business or have other delays in production in times of economic crisis. In addition, the seasonal nature of the specialty home products business requires us to carry a significant amount of inventory prior to peak selling season. As a result, we are vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of merchandise purchases. If we do not accurately predict our customers’ preferences and acceptance levels of our products, our inventory levels will not be appropriate, and our business and operating results may be negatively impacted. There is also increased focus, including by governmental and non-governmental organizations, investors, customers, consumers and other stakeholders, on corporate social responsibility and sustainability matters. Our reputation could be damaged if we do not (or are perceived not to) act responsibly with respect to any social or sustainability matters, which could negatively impact our business and results of operations. We may be exposed to cybersecurity risks and costs associated with credit card fraud, identity theft and business interruption that could cause us to incur unexpected expenses and loss of revenue. A significant portion of our customer orders are placed through our e-commerce websites or through our customer care centers. In addition, a significant portion of sales made through our retail channel require the 8 F o r m 1 0 - K collection of certain customer data, such as credit card information. In order for our sales channels to function successfully, we, our banking and authorizations partners, and other parties involved in processing customer transactions must be able to transmit confidential information, including credit card information and other personal information of our customers, securely over public and private networks. Third parties may have or develop the technology or knowledge to breach, disable, disrupt or interfere with our systems or processes or those of our vendors. Although we take the security of our systems and the privacy of our customers’ confidential information seriously, and we believe we take reasonable steps to protect the security and confidentiality of the information we collect, we cannot guarantee that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers’ information. The techniques used to obtain unauthorized access to systems change frequently and are not often recognized until after they have been launched. Any person who circumvents our security measures could destroy or steal valuable information or disrupt our operations. Any security breach could cause consumers to lose confidence in the security of our information systems, including our e-commerce websites or stores, and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation, regulatory investigations and other significant liabilities. Such a breach could also seriously disrupt, slow or hinder our operations and harm our reputation and customer relationships, any of which could harm our business. If we are the target of a cybersecurity attack resulting in unauthorized disclosure of our customer data, we may be required to undertake costly notification procedures. If we fail to implement appropriate safeguards, detect and provide prompt notice of unauthorized access as required by some data privacy laws, or otherwise comply with these laws, we could be subject to potential fines, claims for damages and other remedies, which could be significantly in excess of our insurance coverage and could harm our business. We receive, process, store, use and share data, some of which contains personal information, which subjects us to complex and evolving governmental regulation and other legal obligations related to data privacy, data protection and other matters, which may have differing interpretations or are subject to change. We receive, process, store, use and share data, some of which contains personal information. There are numerous federal, state, local and foreign laws and regulations regarding matters central to our business, data privacy and the collection, storing, sharing, use, processing, disclosure and protection of personal information and other data from customers, employees and business partners, the scope of which are regularly changing, subject to uncertain and differing interpretations and may be inconsistent among countries or conflict with other rules. As our business expands globally, we are subject to data privacy and other similar laws in various foreign jurisdictions, such as GDPR in the European Union. In addition, on January 1, 2020, the California Consumer Privacy Act of 2018 (the “CCPA”) became effective. The application and interpretation of these laws and regulations are often uncertain, and as the focus on data privacy and data protection increases globally and domestically, we are, and will continue to be, subject to varied and evolving data privacy and data protection laws. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. The burdens imposed by these and other laws and regulations that may be enacted, or new interpretations of existing laws and regulations, may require us to modify our data processing practices and policies and to incur substantial costs in order to comply. These laws and regulations may also impact our ability to expand advertising on our platform internationally, as they may impede our ability to deliver targeted advertising and accurately measure our ad performance. Any failure or perceived failure by us to comply with our privacy policies, data privacy-related obligations to customers or other third parties, or our data privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, or other failure to comply with these laws and regulations, or regulatory scrutiny, may result in governmental enforcement actions or litigation that could expose our business to substantial financial penalties, or other monetary or non-monetary relief, negative publicity, loss of confidence in our brands, decline in customer growth or damage to our brands and reputation. The GDPR, CCPA and other such laws and regulations impose new and burdensome obligations, and include substantial uncertainty as to their interpretation, and we may face 9 challenges in addressing their requirements, which could result in fines or penalties, lead us to change our data privacy policies and practices and limit our ability to deliver personalized advertising. Additionally, if third parties that we work with, such as advertisers, service providers or developers, violate applicable laws or our policies, these violations may also put customers’ information at risk, which could, in turn, have an adverse effect on our business, revenue and financial results. If we are unable to effectively manage our e-commerce business and digital marketing efforts, our reputation and operating results may be harmed. Our e-commerce channel has been our fastest growing business over the last several years and represents more than half of our sales and profits. The success of our e-commerce business depends, in part, on third parties and factors over which we have limited control. We must continually respond to changing consumer preferences and buying trends relating to e-commerce usage, including an emphasis on mobile e-commerce. Our success in e-commerce has been strengthened in part by our ability to leverage the information we have on our customers to infer customer interests and affinities such that we can personalize the experience they have with us. We also utilize digital advertising to target internet and mobile users whose behavior indicates they might be interested in our products. Current or future legislation may reduce or restrict our ability to use these techniques, which could reduce the effectiveness of our marketing efforts. We are also vulnerable to certain additional risks and uncertainties associated with our e-commerce and mobile websites and digital marketing efforts, including: changes in required technology interfaces; website downtime and other technical failures; internet connectivity issues; costs and technical issues as we upgrade our website software; computer viruses; vendor reliability; changes in applicable federal and state regulations, such as the CCPA, and related compliance costs; security breaches; and consumer privacy concerns. We must keep up to date with competitive technology trends and opportunities that are emerging throughout the retail environment, including the use of new or improved technology, evolving creative user interfaces, and other e-commerce marketing trends such as paid search, re-targeting, loyalty programs and the proliferation of mobile usage, among others. While we endeavor to predict and invest in technology that is most relevant and beneficial to our company, such as our acquisition of Outward, Inc. in 2017, our initiatives may not prove to be successful, may increase our costs, or may not succeed in driving sales or attracting customers. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales or margin in our e-commerce business, require us to impair certain assets, and damage our reputation and brands. Our dependence on foreign vendors and our increased global operations subject us to a variety of risks and uncertainties that could impact our operations and financial results. Approximately 65% of our merchandise purchases in fiscal 2019 were sourced from foreign vendors predominantly in Asia and Europe. Our dependence on foreign vendors means that we may be affected by changes in the value of the U.S. dollar relative to other foreign currencies. For example, any upward valuation in the Chinese yuan, the euro, or any other foreign currency against the U.S. dollar may result in higher costs to us for those goods. Although substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars, declines in foreign currencies and currency exchange rates might negatively affect the profitability and business prospects of one or more of our foreign vendors. This, in turn, might cause such foreign vendors to demand higher prices for merchandise in their effort to offset any lost profits associated with any currency devaluation, delay merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs. In addition, the rising cost of labor in the countries in which our foreign vendors operate has resulted in increases in our costs of doing business. Any further increases in the cost of living in such countries may result in additional increases in our costs or in our foreign vendors going out of business. We, and our foreign vendors, are also subject to other risks and uncertainties associated with changing economic, political, social, health and environmental conditions and regulations within and outside of the U.S. These risks and uncertainties include import duties and quotas, compliance with anti-dumping regulations, work stoppages, economic uncertainties and adverse economic conditions (including inflation and recession), government 10 F o r m 1 0 - K regulations, trade restrictions, regulations to address climate change, employment and labor matters, wars and fears of war, political unrest, acts of terrorism, natural disasters, adverse weather, climate change, outbreaks of disease (such as the recent COVID-19 outbreak), and other unexpected events. We cannot predict whether any of the countries from which our raw materials or products are sourced, or in which our products are currently manufactured or may be manufactured in the future, will be subject to trade restrictions imposed by the U.S. or foreign governments, such as the tariffs levied by the U.S. against China, or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including labor disputes resulting in work disruption, the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, war, political unrest, acts of terrorism, natural disasters, adverse weather, climate change, outbreaks of disease or other unexpected events, could increase the cost, reduce the supply of merchandise available to us, or result in excess inventory if merchandise is received after the planned or appropriate selling season, all of which could adversely affect our business, financial condition and operating results. Furthermore, some or all of our foreign vendors’ operations may be adversely affected by political and financial instability resulting in the disruption of trade from exporting countries, restrictions on the transfer of funds and/or increased tariffs or quotas, war, political unrest, acts of terrorism, natural disasters, adverse weather, climate change, outbreaks of disease or other trade disruptions. For example, the recent COVID-19 outbreak has the potential to significantly impact our supply chain if the factories that manufacture our merchandise are temporarily closed or experience worker shortages or if international shipping is impacted. In addition, an economic downturn, or failure of foreign markets, may result in financial instabilities for our foreign vendors, which may cause our foreign vendors to decrease production, discontinue selling to us, or cease operations altogether. Our global operations in Asia, Australia and Europe could also be affected by changing economic and political conditions in foreign countries, such as Brexit, which could have a negative effect on our business, financial condition and operating results. Although we continue to be focused on improving our global compliance program, there remains a risk that one or more of our foreign vendors will not adhere to our global compliance standards, such as fair labor standards and the prohibition of child labor. Non-governmental organizations might attempt to create an unfavorable impression of our sourcing practices or the practices of some of our foreign vendors that could harm our image. If either of these events occurs, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business and operating results. We depend on foreign vendors and third-party agents for timely and effective sourcing of our merchandise, and we may not be able to acquire products in sufficient quantities and at acceptable prices to meet our needs, which would impact our operations and financial results. Our performance depends, in part, on our ability to purchase our merchandise in sufficient quantities at competitive prices. We purchase our merchandise from numerous foreign and domestic manufacturers and importers. We generally have no contractual assurances of continued supply, pricing or access to new products, and any vendor could change the terms upon which it sells to us, discontinue selling to us, or go out of business at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us. Better than expected sales demand may also lead to customer backorders and lower in-stock positions of our merchandise, which could negatively affect our business and operating results. In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Any inability to acquire suitable merchandise on acceptable terms or the loss of one or more of our foreign vendors or third-party agents could have a negative effect on our business and operating results because we would be missing products that we felt were important to our assortment, unless and until alternative supply arrangements are secured. We may not be able to develop relationships with new vendors or third-party agents, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those we currently purchase. In addition, we are subject to certain risks that could limit our vendors’ ability to provide us with quality merchandise on a timely basis and at prices that are commercially acceptable to us, including risks related to the availability of raw materials, labor disputes, work disruptions or stoppages, union organizing activities, vendor financial liquidity, adverse weather, natural disasters, political unrest, war, acts of terrorism, 11 outbreaks of disease (such as the recent COVID-19 outbreak), general economic and political conditions and regulations to address climate change. For example, if our vendors suffer prolonged work disruptions or stoppages, or transportation or other restrictions, due to public health conditions such as the recent COVID-19 outbreak, or other unforeseen events, our ability to acquire merchandise could be adversely impacted, which would adversely affect our results of operations. If our vendors fail to adhere to our quality control standards and test protocols, we may delay a product launch or recall a product, which could damage our reputation and negatively affect our operations and financial results. Our vendors might not adhere to our quality control standards, and we might not identify the deficiency before merchandise ships to our stores or customers. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer complaints and litigation against us and an increase in our routine insurance and litigation costs. Further, any merchandise that we receive, even if it meets our quality standards, could become subject to a recall, which could damage our reputation and brands, and harm our business. Additionally, changes to the legislative or regulatory framework regarding product safety or quality may subject companies like ours to more product recalls and result in higher recall-related expenses. Any recalls or other safety issues could harm our brands’ images and negatively affect our business and operating results. Our efforts to expand globally may not be successful and could negatively impact the value of our brands. We are currently growing our business and increasing our global presence by opening new stores outside of the U.S., expanding our franchise and shop-in-shop operations, and offering shipping globally through third-party vendors. Since 2013, as part of our overall global expansion strategy, we have operated company-owned retail stores and e-commerce websites outside of North America. While our global expansion to date has been a small part of our business, we plan to continue to increase the number of stores we open both directly and through our franchise and shop-in-shop arrangements. We have limited experience with global sales, understanding consumer preferences and anticipating buying trends in different countries, and marketing to customers overseas. Moreover, global awareness of our brands and our products may not be high. Consequently, we may not be able to successfully compete with established brands in these markets and our global sales may not result in the revenues we anticipate. Additionally, global economic or political instability, work disruptions or stoppages, or outbreaks of diseases, such as the recent COVID-19 outbreak, may delay or harm our efforts to expand globally. Also, our products may not be accepted, either due to foreign legal requirements or due to different consumer tastes and trends. If our global growth initiatives are not successful, or if we or any of our third-party vendors fail to comply with any applicable regulations or laws, we may be forced to close stores or cease operations in certain countries, which may result in significant financial harm, diminish the value of our brands and negatively affect our future opportunities for global growth. Further, the administration of our global expansion may divert management attention and require more resources than we expect. In addition, we are exposed to foreign currency exchange rate risk with respect to our operations denominated in currencies other than the U.S. dollar. Our retail stores in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe expose us to market risk associated with foreign currency exchange rate fluctuations. Although we use instruments to hedge certain foreign currency risks, such hedges may not succeed in offsetting all of the impact of foreign currency rate volatility and generally only delay such impact on our business and financial results. Further, because we do not hedge against all of our foreign currency exposure, our business will continue to be susceptible to foreign currency fluctuations. Our ultimate realized gain or loss with respect to currency fluctuations will generally depend on the size and type of the transactions that we enter into, the currency exchange rates associated with these exposures, changes in those rates and whether we have entered into foreign currency hedge contracts to offset these exposures. All of these factors could materially impact our results of operations, financial position and cash flows. We have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. Under these agreements, our franchisees operate 12 F o r m 1 0 - K stores and/or e-commerce websites that sell goods purchased from us under our brand names. We continue to expand our franchise operations with our existing franchisees as well as seek to identify new franchise partnerships for select countries. The effect of these franchise arrangements on our business and results of operations is uncertain and will depend upon various factors, including the demand for our products in new global markets. In addition, certain aspects of our franchise arrangements are not directly within our control, such as the ability of each franchisee to meet its projections regarding store openings and sales, and the impact of exchange rate fluctuations on their business. Moreover, while the agreements we have entered into may provide us with certain termination rights, to the extent that our franchisees do not operate their stores in a manner consistent with our requirements regarding our brand identities and customer experience standards, the reputation and value of our brands could be impaired. In addition, in connection with these franchise arrangements, we have and will continue to implement certain new processes that may subject us to additional regulations and laws, such as U.S. export regulations. Failure to comply with any applicable regulations or laws could have an adverse effect on our results of operations. We have limited experience operating on a global basis and our failure to effectively manage the risks and challenges inherent in a global business could adversely affect our business, operating results and financial condition and growth prospects. We operate several retail businesses, subsidiaries and branch offices throughout Asia, Australia and Europe, which includes managing overseas employees, and may expand these overseas operations in the future. We have limited experience operating overseas subsidiaries and managing non-U.S. employees and, as a result, may encounter cultural challenges with local practices and customs that may result in harm to our reputation and the value of our brands. Our global presence exposes us to the laws and regulations of these jurisdictions, including those related to marketing, privacy, data protection, employment and product safety and testing. We may be unable to keep current with government requirements as they change from time to time. Our failure to comply with such laws and regulations may harm our reputation, adversely affect our future opportunities for growth and expansion in these countries, and harm our business and operating results. Moreover, our global operations subject us to a variety of risks and challenges, including: • • • • • • • • • • • • • increased management, infrastructure and legal compliance costs, including the cost of real estate and labor in those markets; increased financial accounting and reporting requirements and complexities; increased operational and tax complexities, including managing our inventory globally; the diversion of management attention away from our core business; general economic conditions, changes in diplomatic and trade relationships, including the imposition of new or increased tariffs, political and social instability, war and acts of terrorism, outbreaks of diseases (such as the recent COVID-19 outbreak) and natural disasters in each country or region; economic uncertainty around the world; compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations; compliance with U.S. laws and regulations for foreign operations; dependence on certain third parties, including vendors and other service providers, with whom we do not have extensive experience; fluctuations in foreign currency exchange rates and the related effect on our financial results, and the use of foreign exchange hedging programs to mitigate such risks; growing cash balances in foreign jurisdictions which may be subject to repatriation restrictions; reduced or varied protection for intellectual property rights in some countries and practical difficulties of enforcing such rights abroad; and compliance with the laws of foreign taxing jurisdictions and the overlapping of different tax regimes. Any of these risks could adversely affect our global operations, reduce our revenues or increase our operating costs, which in turn could adversely affect our business, operating results, financial condition and growth 13 prospects. Some of our vendors and our franchisees also have global operations and are subject to the risks described above. Even if we are able to successfully manage the risks of our global operations, our business may be adversely affected if our vendors and franchisees are not able to successfully manage these risks. In addition, as we continue to expand our global operations, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. We must ensure that our employees and third-party agents comply with these laws. If any of our overseas operations, or our employees or third-party agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results. A number of factors that affect our ability to successfully open new stores or close existing stores are beyond our control, and these factors may harm our ability to expand or contract our retail operations and harm our ability to increase our sales and profits. As noted above, approximately 44% of our net revenues are generated by our retail stores. Our ability to open additional stores or close existing stores successfully will depend upon a number of factors, including: • • • • • • • • general economic conditions; our identification of, and the availability of, suitable store locations; our success in negotiating new leases and amending, subleasing or terminating existing leases on acceptable terms; the success of other retail stores in and around our retail locations; our ability to secure required governmental permits and approvals; our hiring and training of skilled store operating personnel, especially management; the availability of financing on acceptable terms, if at all; and the financial stability of our landlords and potential landlords. Many of these factors are beyond our control. For example, for the purpose of identifying suitable store locations, we rely, in part, on demographic surveys regarding the location of consumers in our target market segments. While we believe that the surveys and other relevant information are helpful indicators of suitable store locations, we recognize that these information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, changes in demographics, in consumer shopping patterns, such as a reduction in mall traffic, in the types of merchandise that we sell and in the pricing of our products, may reduce the number of suitable store locations or cause formerly suitable locations to become less desirable. Further, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays or unexpected cancellations. We may not be able to open new stores or, if opened, operate those stores profitably. Construction and other delays in store openings could have a negative impact on our business and operating results. Additionally, we may not be able to renegotiate the terms of our current leases or close our underperforming stores on terms favorable to us, any of which could negatively impact our operating results. Our sales may be negatively impacted by increasing competition from companies with brands or products similar to ours. The specialty e-commerce and retail businesses are highly competitive. We compete with other retailers that market lines of merchandise similar to ours. We compete with national, regional and local businesses that utilize a similar retail store strategy, as well as traditional furniture stores, department stores, direct-to-consumer businesses and specialty stores. The substantial sales growth in the e-commerce industry within the last decade has encouraged the entry of many new competitors, including discount retailers selling similar products at reduced prices, new business models, and an increase in competition from established companies, many of whom are willing to spend significant funds and/or reduce pricing in order to gain market share. The competitive challenges facing us include: • anticipating and quickly responding to changing consumer demands or preferences better than our competitors; 14 • maintaining favorable brand recognition and achieving customer perception of value; • effectively marketing and competitively pricing our products to consumers in several diverse market segments; effectively managing and controlling our costs; effectively managing increasingly competitive promotional activity; effectively attracting new customers; developing new innovative shopping experiences, like mobile and tablet applications that effectively engage today’s digital customers; developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups, tastes and regions, and in ways that favorably distinguish us from our competitors; and effectively managing our supply chain and distribution strategies in order to provide our products to our consumers on a timely basis and minimize returns, replacements and damaged products. • • • • • • F o r m 1 0 - K In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could reduce our sales and harm our operating results and business. Our business and operating results may be harmed if we are unable to timely and effectively deliver merchandise to our stores and customers. If we are unable to effectively manage our inventory levels and responsiveness of our supply chain, including predicting the appropriate levels and type of inventory to stock within each of our distribution facilities, our business and operating results may be harmed. We continue to insource furniture delivery hubs in certain geographies and continue with the regionalization of our retail and e-commerce fulfillment capabilities. We are subject to risks that may disrupt our supply chain operations or regionalization efforts, such as increasing labor costs, union organizing activity and our ability to effectively locate real estate for our distribution facilities or other supply chain operations. Further, we cannot control all of the various factors that might affect our e-commerce fulfillment rates and timely and effective merchandise delivery to our stores. We rely upon third-party carriers for our merchandise shipments and reliable data regarding the timing of those shipments, including shipments to our customers and to and from our stores. In addition, we are heavily dependent upon two carriers for the delivery of our merchandise to our customers. As a result of our dependence on all of these third-party providers, we are subject to risks, including labor disputes (such as the disruptions at the U.S. West Coast ports in early 2015), union organizing activity, adverse weather, natural disasters, climate change, the closure of such carriers’ offices or a reduction in operational hours due to an economic slowdown or the inability to sufficiently ramp up operational hours during an economic recovery or upturn, availability of adequate trucking or railway providers, possible acts of terrorism, outbreaks of disease (such as the recent COVID-19 outbreak) or other factors affecting such carriers’ ability to provide delivery services to meet our shipping needs, disruptions or increased fuel costs and costs associated with any regulations to address climate change. For example, if our third-party providers suffer prolonged transportation disruptions or restrictions due to public health conditions, such as the current COVID-19 outbreak, or other unforeseen events, our ability to timely deliver merchandise could be adversely impacted. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, fuel costs have been volatile and airline and other transportation companies continue to struggle to operate profitably, which could lead to increased fulfillment expenses. Any rise in fulfillment expenses could negatively affect our business and operating results. Our failure to successfully manage our order-taking and fulfillment operations could have a negative impact on our business and operating results. Our e-commerce business depends, in part, on our ability to maintain efficient and uninterrupted order-taking and fulfillment operations in our distribution facilities, our customer care centers and on our e-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone or network services, power outages, inadequate system capacity, system hardware or software issues, computer viruses, security breaches, human error, changes in programming, union organizing activity, insufficient or inadequate labor to fulfill the 15 orders, disruptions in our third-party labor contracts, inefficiencies due to inventory levels and limited distribution facility space, issues with third-party order fulfillment and drop shipping, natural disasters, adverse weather conditions outbreaks of disease (such as the recent COVID-19 outbreak) or acts of terrorism. Industries that are particularly seasonal, such as the home furnishings business, face a higher risk of harm from operational disruptions during peak sales seasons. These problems could result in a reduction in sales as well as increased expenses. In addition, we face the risk that we cannot hire enough qualified employees to support our e-commerce operations, or that there will be a disruption in the workforce we hire from our third-party providers, especially during our peak season. The need to operate with fewer employees could negatively impact our customer service levels and our operations. Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters, adverse weather conditions, technology issues and other unexpected events, any of which could result in an interruption in our business and harm our operating results. Our retail stores, corporate offices, distribution and manufacturing facilities, infrastructure and e-commerce operations, as well as the operations of our vendors from which we receive goods and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods or other volatile weather, power losses, telecommunications failures, hardware and software failures, computer viruses and similar events. If any of these events result in damage to our facilities or systems, or those of our vendors, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage. Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business. Catalog mailings are an important component of our business. Postal rate increases affect the cost of our catalog mailings. We rely on discounts from the basic postal rate structure, which could be changed or discontinued at any time. Further, the U.S. Postal Service may raise rates in the future, which could negatively impact our business. The cost of paper, printing and catalog distribution also impacts our catalog business. We have consolidated all of our catalog printing work with one printer. Our dependence on one vendor subjects us to various risks if the vendor fails to perform under our agreement. Paper costs have also fluctuated significantly in the past and may continue to fluctuate in the future. We have also recently consolidated all of our paper purchasing through a single broker. Consolidation within the paper industry has reduced the number of potential suppliers capable of meeting our paper requirements, leading to increased costs. Our dependence on a single broker and/or further consolidation in the paper industry could limit our ability in the future to obtain favorable terms including price, custom paper quality, paper quantity and service. Future increases in postal rates, paper costs or printing costs could have a negative impact on our operating results to the extent that we are unable to offset such increases by raising prices, implementing more efficient printing, mailing, delivery and order fulfillment systems, or through the use of alternative direct-mail formats. In addition, if the performance of our catalogs declines, if we misjudge the correlation between our catalog circulation and net sales, or if our catalog strategy overall does not continue to be successful, our results of operations could be negatively impacted. We have historically experienced fluctuations in our customers’ response to our catalogs. Customer response to our catalogs is substantially dependent on merchandise assortment, merchandise availability and creative presentation, as well as the selection of customers to whom the catalogs are mailed, changes in mailing strategies, the size of our mailings, timing of delivery of our mailings, as well as the general retail sales environment and current domestic and global economic conditions. In addition, environmental organizations and other consumer advocacy groups may attempt to create an unfavorable impression of our paper use in catalogs and our distribution of catalogs generally, which may have a negative effect on our sales and our reputation. Further, we depend upon external vendors to print and mail our catalogs. The failure to effectively produce or distribute our catalogs could affect the timing of catalog delivery. The timing of catalog delivery has been and can be affected by postal service delays and may be impacted in the future by changes in the services provided by the post office. Any delays in the timing of catalog delivery could cause customers to forego or defer purchases, negatively impacting our business and operating results. 16 F o r m 1 0 - K Declines in our comparable brand revenues may harm our operating results and cause a decline in the market price of our common stock. Various factors affect comparable brand revenues, including the number, size and location of stores we open, close, remodel or expand in any period, the overall economic and general retail sales environment, consumer preferences and buying trends, changes in sales mix among distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition (including competitive promotional activity and discount retailers), current local and global economic conditions, the timing of our releases of new merchandise and promotional events, the success of marketing programs, the cannibalization of existing store sales by our new stores, changes in catalog circulation and in our e-commerce business and fluctuations in foreign exchange rates. Among other things, weather conditions have affected, and may continue to affect, comparable brand revenues by limiting our ability to deliver our products to our stores, altering consumer behavior, or requiring us to close certain stores temporarily, thus reducing store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused, and may continue to cause, our comparable brand revenue results to differ materially from prior periods and from earnings guidance we have provided. For example, the overall economic and general retail sales environment, as well as local and global economic conditions, has caused a significant decline in our comparable brand revenue results in the past. In addition, public health conditions, such as the recent COVID-19 outbreak, or other unforeseen events, could affect our ability to deliver our products to our stores, alter consumer behavior, or require us to close certain stores temporarily, such as our recent announcement to temporarily close all of our U.S. and Canadian retail stores through April 2, 2020, thus reducing store traffic and materially impacting our comparable brand revenues. Our comparable brand revenues have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable brand revenues will continue to fluctuate in the future. In addition, past comparable brand revenues are not necessarily an indication of future results and comparable brand revenues may decrease in the future. Our ability to improve our comparable brand revenue results depends, in large part, on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, effectively driving traffic to our stores, e-commerce websites and direct-mail catalogs through marketing and various promotional events, providing an appropriate mix of merchandise for our broad and diverse customer base and using effective pricing strategies. Any failure to meet the comparable brand revenue expectations of investors and securities analysts in one or more future periods could significantly reduce the market price of our common stock. Our failure to successfully anticipate merchandise returns might have a negative impact on our business. We record a reserve for merchandise returns based on historical return trends together with current product sales performance in each reporting period. If actual returns are greater than those projected and reserved for by management, additional sales returns might be recorded in the future. In addition, to the extent that returned merchandise is damaged, we often do not receive full retail value from the resale or liquidation of the merchandise. Further, the introduction of new merchandise, changes in merchandise mix, changes in consumer confidence, or other competitive and general economic conditions may cause actual returns to differ from merchandise return reserves. Any significant increase in merchandise returns that exceeds our reserves could harm our business and operating results. If we are unable to successfully manage the complexities associated with an omni-channel and multi-brand business, we may suffer declines in our existing business and our ability to attract new business. With the expansion of our e-commerce business, the development of new brands, acquired brands, and brand extensions, our overall business has become substantially more complex. The changes in our business have forced us to develop new expertise and face new challenges, risks and uncertainties. For example, we face the risk that our e-commerce business, including our catalog circulation, might cannibalize a significant portion of our retail sales or our newer brands, brand extensions and products may result in a decrease in sales of existing brands and products. While we recognize that our e-commerce sales and sales from new brands and products 17 cannot be entirely incremental to sales through our retail channel or from existing brands and products, respectively, we seek to attract as many new customers as possible with the most relevant channels, brands and products to meet customer needs and grow our market share. We continually analyze the business results of our channels, brands and products in an effort to find opportunities to build incremental sales. If we are unable to introduce new brands and brand extensions successfully, or to reposition or close existing brands, our business and operating results may be negatively impacted. We have in the past and may in the future introduce new brands and brand extensions, reposition brands, close existing brands, or acquire new brands, especially as we continue to expand globally. Our newest brands and brand extensions — Williams Sonoma Home and Mark and Graham, and any other new brands, as well as our acquired brand, Rejuvenation, as well as our expansion into new lines of business, including Outward, our new business to business division, which targets commercial businesses across a number of verticals, including commercial furniture and hospitality, our planned subscription-based services, and new businesses within Pottery Barn (Marketplace and Pottery Barn Apartment) may not grow as expected. The work involved with integrating new brands or businesses into our existing systems and operations could be time consuming, require significant amounts of management time and result in the diversion of substantial operational resources. Further, if we devote time and resources to new brands, acquired brands, brand extensions, brand repositioning, or new lines of business and those businesses are not as successful as we planned, then we risk damaging our overall business results or incurring impairment charges to write off any existing goodwill or intangible assets associated with previously acquired brands. As a result, we may not be able to introduce new brands in a manner that improves our overall business and/or operating results and may therefore be forced to close the brands or new lines of business, which may damage our reputation and/or negatively impact our operating results. We must protect and maintain our brand image and reputation. Our brands have wide recognition, and our success has been due in large part to our ability to maintain, enhance and protect our brand image and reputation and our customers’ connection to our brands. Our continued success depends in part on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and online dissemination of advertising campaigns. Even if we react appropriately to negative posts or comments about us and/or our brands on social media and online, our customers’ perception of our brand image and our reputation could be negatively impacted. In addition, customer sentiment could be shaped by our sustainability policies and related design, sourcing and operations decisions. Failure to maintain, enhance and protect our brand image could have a material adverse effect on our results of operations. Any significant changes in tax, trade or other policies in the U.S. or other countries, including policies that restrict imports or increase import tariffs, could have a material adverse effect on our results of operations. A significant portion of our products are manufactured outside of the U.S. While the U.S. Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017, has not had an adverse effect on our results of operations and is not expected to have an adverse effect on our results of operations going forward, significant changes in tax, trade or other polices either in the U.S. or other countries could materially increase our tax burden or costs of goods sold. These changes in policies may also require us to increase our prices, which could adversely affect our sales. Tariffs could result in increased prices and/or costs of goods or delays in product received from our vendors and could adversely affect our results of operations. The U.S. administration has enacted certain tariffs and proposed additional tariffs on many items sourced from China, including certain furniture, accessories, furniture parts, and raw materials for domestic furniture manufacturing products imported into the U.S. While we are executing against an aggressive tariff mitigation plan which includes cost reductions from vendors, moving production out of China to South East Asia and to the United States, cost savings in other areas of the business, as well as select price increases, we may not be able to fully or substantially mitigate the impact of these tariffs, pass price increases on to our customers, or secure 18 F o r m 1 0 - K adequate alternative sources of products or materials. The tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could adversely affect customer sales, including potential delays in product received from our vendors, our cost of goods sold and results of operations. Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results. We are subject to income taxes in many U.S. and certain foreign jurisdictions. Our provision for income taxes is subject to volatility and could be adversely impacted by a number of factors that require significant judgment and estimation. Although we believe our estimates are reasonable, actual results may differ materially from our estimates and adversely affect our financial condition or operating results. We record income tax expense based on our estimates of future payments, which include reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly and annual effective tax rates as taxable events occur and uncertain tax positions are either evaluated or resolved. In addition, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings or losses in countries with differing statutory tax rates or by changes to existing laws or regulations. For example, the Tax Act has not had an adverse effect on our results of operations and is not expected to have an adverse effect on our results of operations going forward, but it has had a material impact on our effective tax rate. Our inability to obtain commercial insurance at acceptable rates or our failure to adequately reserve for self- insured exposures might increase our expenses and have a negative impact on our business. We believe that commercial insurance coverage is prudent in certain areas of our business for risk management. Insurance costs may increase substantially in the future and may be affected by natural disasters, outbreaks of disease (such as the recent COVID-19 outbreak), climate change, fear of terrorism, financial irregularities, cybersecurity breaches and other fraud at publicly-traded companies, intervention by the government, an increase in the number of claims received by the carriers, and a decrease in the number of insurance carriers. In addition, the carriers with which we hold our policies may go out of business or be otherwise unable to fulfill their contractual obligations, or may disagree with our interpretation of the coverage or the amounts owed. In addition, for certain types or levels of risk, such as risks associated with certain natural disasters or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable rates, if at all. Therefore, we may choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. We are primarily self-insured for workers’ compensation, employment practices liability, employee health benefits, product and other general liability claims, among others. If we suffer a substantial loss that is not covered by commercial insurance or our self-insurance reserves, the loss and related expenses could harm our business and operating results. In addition, exposures exist for which no insurance may be available and for which we have not reserved. Our inability or failure to protect our intellectual property would have a negative impact on our brands, reputation and operating results. We may not be able to effectively protect our intellectual property in the U.S. or in foreign jurisdictions, particularly as we continue to expand globally. Our trademarks, service marks, copyrights, trade dress rights, trade secrets, domain names, patents, designs, proprietary technology and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction, theft or other misappropriation of our intellectual property could diminish the value of our brands or reputation and cause a decline in our sales. Protection of our intellectual property and maintenance of distinct branding are particularly important as they distinguish our products and services from our competitors. In addition, the costs of protecting and policing our intellectual property assets may adversely affect our operating results. 19 We may be subject to legal proceedings that could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. There has been a rise in the number of lawsuits against companies like us regarding consumer protection, false advertising, data breach, and e-commerce-related patent infringement. From time to time, we have been subject to these types of lawsuits and are currently the subject of some of these types of lawsuits. The cost of defending against these types of claims or the ultimate resolution of any such claims against us, whether by settlement or adverse court decision, may harm our business and operating results. In addition, the increasingly regulated business environment may result in a greater number of enforcement actions by government agencies and private litigation. This could subject us to increased exposure to stockholder lawsuits. Additionally, in recent years there has been an increase in the number of employment claims and, in particular, discrimination and harassment claims. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Certain companies that have faced employment- or harassment-related lawsuits have had to terminate management or other key personnel, and have suffered reputational harm that has negatively impacted their business. Our operating results may be harmed by unsuccessful management of our employment, occupancy and other operating costs, and the operation and growth of our business may be harmed if we are unable to attract qualified personnel. To be successful, we need to manage our operating costs and continue to look for opportunities to reduce costs. We recognize that we may need to increase the number of our employees, especially during holiday selling seasons, and incur other expenses to support new brands and brand extensions and the growth of our existing brands, including the opening of new stores. In addition, the market for prime real estate is competitive, especially in San Francisco where our corporate offices are headquartered. If we are unable to make substantial adjustments to our cost structure during times of uncertainty, such as an economic downturn or during times of expansion, we may incur unnecessary expense or we may have inadequate resources to properly run our business, and our business and operating results may be negatively impacted. From time to time, we may also experience union organizing activity in currently non-union facilities, including in our stores and distribution facilities. Union organizing activity may result in work slowdowns or stoppages and higher labor costs. In addition, there appears to be a growing number of wage-and-hour lawsuits and other employment-related lawsuits against retail companies, especially in California. State, federal and global laws and regulations regarding employment change frequently and the ultimate cost of compliance cannot be precisely estimated. Further, there have been and may continue to be increases in minimum wage and health care requirements. Any changes in regulations, the imposition of additional regulations, or the enactment of any new or more stringent legislation that impacts employment and labor, trade, or health care, could have an adverse impact on our financial condition and results of operations. We contract with various agencies to provide us with qualified personnel for our workforce. Any negative publicity regarding these agencies, such as in connection with immigration issues or employment practices, could damage our reputation, disrupt our ability to obtain needed labor or result in financial harm to our business, including the potential loss of business-related financial incentives in the jurisdictions where we operate. Although we strive to secure long-term contracts on favorable terms with our service providers and other vendors, we may not be able to avoid unexpected operating cost increases in the future, such as those associated with minimum wage increases, enhanced health care requirements and benefits, or increases in insurance premiums. Further, we incur substantial costs to warehouse and distribute our inventory. We continue to insource furniture delivery hubs in certain geographies and continue to regionalize our retail and e-commerce fulfillment capabilities. Significant increases in our inventory levels may result in increased warehousing and distribution costs, such as costs related to additional distribution facilities, which we may not be able to lease on acceptable terms, if at all. Such increases in inventory levels may also lead to increases in costs associated with inventory 20 F o r m 1 0 - K that is lost, damaged or aged. Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results. In addition, in times of economic uncertainty, these long-term contracts may make it difficult to quickly reduce our fixed operating costs, which could negatively impact our business and operating results. We are undertaking certain systems changes that might disrupt our business operations. Our success depends, in part, on our ability to source, sell and distribute merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems, which involves updating or replacing legacy systems with successor systems over the course of several years. There are inherent risks associated with replacing our core systems, including supply chain and merchandising systems disruptions, that could affect our ability to get the correct products into the appropriate stores and delivered to customers. We may not successfully launch these new systems, or the launch of such systems may result in disruptions to our business operations. In addition, changes to any of our software implementation strategies could result in the impairment of software-related assets. We are also subject to the risks associated with the ability of our vendors to provide information technology solutions to meet our needs. Any disruptions could negatively impact our business and operating results. In addition, we are in the process of replacing our core financial reporting and human capital management systems with new enterprise resource planning systems to standardize our processes worldwide and adopt best-in-class capabilities. During our implementations, and as we utilize the systems going forward, we may experience periodic or prolonged disruption of our core financial and human capital operations, including our ability to complete our financial close and provide accurate financial reporting on a timely basis, and maintain our internal control compliance efforts. We may also experience errors in data and security or technical reliability issues. In order to realize the benefits of our systems, we may be required to change certain business and financial processes, which involves the risk of disruption to our operations or data errors. In addition, we are heavily reliant on third-party vendors for access to our systems and the accuracy of the functionality within the systems. If we encounter implementation or usage problems with these new systems or other related systems and infrastructure, or if the systems do not operate as intended, do not give rise to anticipated benefits, or fail to integrate properly with our other systems or software platforms, then our business, results of operations, and internal controls over financial reporting may be adversely affected. We outsource certain aspects of our business to third-party vendors and are in the process of insourcing certain business functions from third-party vendors, both of which subject us to risks, including disruptions in our business and increased costs. We outsource certain aspects of our business to third-party vendors that subject us to risks of disruptions in our business as well as increased costs. For example, we utilize outside vendors for such things as payroll processing, email and other digital marketing and various distribution facilities and delivery services. In some cases, we rely on a single vendor for such services. Accordingly, we are subject to the risks associated with their ability to successfully provide the necessary services to meet our needs. If our vendors are unable to adequately protect our data and information is lost, our ability to deliver our services is interrupted, our vendors’ fees are higher than expected, or our vendors make mistakes in the execution of operations support, then our business and operating results may be negatively impacted. In addition, we are in the process of insourcing certain aspects of our business, including certain technology services and the management of certain furniture manufacturing and delivery, and have recently completed the insourcing of the management of our global vendors, each of which were previously outsourced to third-party providers. We may also need to continue to insource other aspects of our business in the future in order to control our costs and to stay competitive. This may cause disruptions in our business and result in increased cost to us. In addition, if we are unable to perform these functions better than, or at least as well as, our third-party providers, our business may be harmed. 21 If our operating and financial performance in any given period does not meet the guidance that we have provided to the public or the expectations of our investors and analysts, our stock price may decline. We provide public guidance on our expected operating and financial results for future periods on an annual basis only, as we believe this approach is better aligned with the long-term view we take in managing our business and our focus on long-term stockholder value creation. Although we believe that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided or the expectations of our investors and analysts, especially in times of economic uncertainty. Due to the uncertainty around the scope and the duration of the COVID-19 outbreak, we have delayed issuing guidance for fiscal 2020 until we have better visibility into the effect of the COVID-19 outbreak on our results. In the past, when we have reduced our previously provided guidance, the market price of our common stock has declined. If, in the future, our operating or financial results for a particular period do not meet our guidance or the expectations of our investors and analysts or if we reduce our guidance for future periods, the market price of our common stock may decline. A variety of factors, including seasonality and the economic environment, may cause our quarterly operating results to fluctuate, leading to volatility in our stock price. Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including changes in economic conditions, shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas, as well as timing shifts due to 53-week fiscal years, which occur approximately every five years. Historically, a significant portion of our net revenues and net earnings have typically been realized during the period from October through January each year, our peak selling season. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses prior to and during peak selling seasons, including fixed catalog production and mailing costs and the costs associated with hiring a substantial number of temporary employees to supplement our existing workforce. Disruptions in the financial markets may adversely affect our liquidity and capital resources and our business. Global financial markets can experience extreme volatility, disruption and credit contraction, which adversely affect global economic conditions. Such turmoil in financial and credit markets, including as a result of the COVID-19 outbreak, or other changes in economic conditions could adversely affect sources of liquidity available to us or our costs of capital. For example, each financial institution in the syndicate for our credit facility is responsible for providing a portion of the loans to be made under the facility. If any lender, or group of lenders, with a significant portion of the commitments in our credit facility fails to satisfy its obligations to extend credit under the facility and we are unable to find a replacement for such lender or group of lenders on a timely basis, if at all, our liquidity and our business may be materially adversely affected. Should we need it, we also may not be able to obtain additional credit on terms which are acceptable to us, if at all. Changes in the method of determining the London Interbank Offered Rate, or LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect our financial condition and results of operations. Certain of our financial obligations and instruments, including our credit facility, are or may be made at variable interest rates that use LIBOR (or metrics derived from or related to LIBOR) as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to perform differently than in the past or to disappear entirely. These reforms may also result in new methods of calculating LIBOR to be established, or alternative reference rates to be established. For example, the Federal Reserve Bank of New York has begun publishing a Secured Overnight Funding Rate, or SOFR, which is intended to replace U.S. dollar LIBOR, and central banks in several other jurisdictions have also announced plans for alternative reference rates for other currencies. The potential consequences of these actions cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, 22 F o r m 1 0 - K and other financial obligations or extensions of credit held by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows. In addition, any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. This could materially and adversely affect our results of operations, cash flows, and liquidity. If we are unable to pay quarterly dividends or repurchase our stock at intended levels, our reputation and stock price may be harmed. We had approximately $574,982,000 remaining for future repurchases under our existing stock repurchase program as of February 2, 2020. The stock repurchase program and dividend may require the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures, which could adversely affect our financial performance. Further, our Board of Directors may, at its discretion, decrease or entirely discontinue the payment of dividends at any time. The stock repurchase program does not have an expiration date and may be limited or eliminated at any time. Our ability to pay dividends and repurchase stock will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors, including the impact of the COVID-19 outbreak on our liquidity, that are beyond our control. Any failure to pay dividends or repurchase stock after we have announced our intention to do so may negatively impact our reputation and investor confidence in us, and may negatively impact our stock price. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and our investors’ views of us could be harmed. We have evaluated and tested our internal controls in order to allow management to report on, and our registered independent public accounting firm to attest to, the effectiveness of our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we are not able to continue to meet the requirements of Section 404 in a timely manner, or with adequate compliance, we may be required to disclose material weaknesses if they develop or are uncovered, and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC or the New York Stock Exchange. In addition, our internal controls may not prevent or detect all errors and fraud on a timely basis, if at all. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable assurance that the objectives of the control system will be met. If any of the above were to occur, our business and the perception of us in the financial markets could be negatively impacted. Changes to accounting rules or regulations may adversely affect our operating results. Changes to existing accounting rules or regulations may impact our future operating results. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective. The introduction of new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future, such as the new revenue recognition standard, effective for us in fiscal 2018, and the new lease accounting standard, effective for us in fiscal 2019. Future changes to accounting rules or regulations, or the questioning of current accounting practices, may adversely affect our operating results. In preparing our financial statements we make certain assumptions, judgments and estimates that affect the amounts reported, which, if not accurate, may impact our financial results. We make assumptions, judgments and estimates that impact amounts reported in our consolidated financial statements for a number of items, including merchandise inventories, property and equipment, goodwill, self- insured liabilities, and income taxes, among others. These assumptions, judgments and estimates are derived 23 from historical experience and various other factors that we believe are reasonable under the circumstances as of the date our consolidated financial statements are prepared. Actual results could differ materially from our estimates, and such differences may impact our financial results. Changes to estimates related to our cash flow projections may cause us to incur impairment charges related to our long-lived assets for our retail stores locations and other property and equipment, including information technology systems, as well as goodwill. We make estimates and projections in connection with impairment analyses of our long-lived assets for our retail store locations and other property and equipment, including information technology systems, as well as goodwill. These analyses require us to make a number of estimates and projections of future results. If these estimates or projections change or prove incorrect, we may be, and have been, required to record impairment charges on certain store locations and other property and equipment, including information technology systems. These impairment charges have been significant in the past and may be significant in the future and, as a result of these charges, our operating results have been and may, in the future, be adversely affected. If we fail to attract and retain key personnel, our business and operating results may be harmed. Our future success depends to a significant degree on the skills, experience and efforts of key personnel in our senior management, whose vision for our company, knowledge of our business and expertise would be difficult to replace. If any one of our key employees leaves, is seriously injured or unable to work, or fails to perform and we are unable to find a qualified replacement, we may be unable to execute our business strategy. In addition, our main offices are located in the San Francisco Bay Area, where competition for personnel with retail and technology skills can be intense. In addition, several of our strategic initiatives, including our technology and supply chain initiatives, require that we hire and/or develop employees with appropriate experience. We may not be successful in recruiting, retaining and motivating skilled personnel domestically or globally who have the requisite experience to achieve our global business goals, and failure to do so may harm our business. Further, in the event we need to hire additional personnel, we may experience difficulties in attracting and successfully hiring such individuals due to competition for highly skilled personnel, as well as the significantly higher cost of living expenses in our markets. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We lease store locations, distribution and manufacturing facilities, corporate facilities and customer care centers for our U.S. and foreign operations for original terms generally ranging from 5 to 22 years. Certain leases contain renewal options for periods of up to 20 years. For our store locations, our gross leased store space as of February 2, 2020 totaled approximately 6,558,000 square feet for 614 stores compared to approximately 6,557,000 square feet for 625 stores as of February 3, 2019. 24 Leased Properties The following table summarizes the location and size of our leased facilities occupied by us as of February 2, 2020: Location Distribution and Manufacturing Facilities Occupied Square Footage (Approximate) Mississippi New Jersey California Georgia Texas Tennessee North Carolina Ohio Massachusetts Florida Oregon Colorado Corporate Facilities California New York Oregon Customer Care Centers Nevada Other 2,165,000 2,103,000 2,030,000 1,075,000 1,064,000 603,000 442,000 265,000 140,000 135,000 91,000 80,000 269,000 238,000 49,000 36,000 32,000 F o r m 1 0 - K In addition to the above leased properties, we enter into agreements for other offsite storage needs for our distribution facilities and our retail store locations, as necessary. As of February 2, 2020, the total leased space related to these properties was not material to us and is not included in the occupied square footage reported above. Owned Properties As of February 2, 2020, we owned 471,000 square feet of space, primarily in California, for our corporate headquarters and certain data center operations. We believe that all of our facilities are adequate for our current needs and that suitable additional or substitute space will be available in the future to replace our existing facilities, or to accommodate the expansion of our operations, if necessary. ITEM 3. LEGAL PROCEEDINGS We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our consolidated financial statements taken as a whole. 25 ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 26 F o r m 1 0 - K PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol WSM. The closing price of our common stock on the NYSE on March 22, 2020 was $36.37. STOCKHOLDERS The number of stockholders of record of our common stock as of March 22, 2020 was 305. This number excludes stockholders whose stock is held in nominee or street name by brokers. PERFORMANCE GRAPH This graph compares the cumulative total stockholder return for our common stock with those of the NYSE Composite Index and S&P Retailing, our peer group index. The cumulative total return listed below assumed an initial investment of $100 and reinvestment of dividends. The graph shows historical stock price performance, including reinvestment of dividends, and is not necessarily indicative of future performance. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* Among Williams-Sonoma, Inc., the NYSE Composite Index, and S&P Retailing $300 $250 $200 $150 $100 $50 $0 2/1/15 1/31/16 1/29/17 1/28/18 2/3/19 2/2/20 Williams-Sonoma, Inc. NYSE Composite S&P Retailing * $100 invested on 2/1/15 in stock or index, including reinvestment of dividends. Fiscal year ending February 2, 2020. Williams-Sonoma, Inc. NYSE Composite Index S&P Retailing * Notes: 2/1/15 100.00 100.00 100.00 1/31/16 67.37 93.70 118.07 1/29/17 63.72 112.69 140.98 1/28/18 73.87 139.56 203.43 2/3/19 77.06 129.47 210.40 2/2/20 102.95 146.66 253.71 A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indices are re-weighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. 27 STOCK REPURCHASE PROGRAMS During fiscal 2019, we repurchased 2,341,931 shares of our common stock, of which 16,368 shares were designated as treasury stock, at an average cost of $63.55 per share and a total cost of $148,834,000. During fiscal 2018, we repurchased 5,373,047 shares of our common stock at an average cost of $54.96 per share and a total cost of $295,304,000. During fiscal 2017, we repurchased 4,050,697 shares of our common stock at an average cost of $48.43 per share and a total cost of $196,179,000. The following table summarizes our repurchases of shares of our common stock during the fourth quarter of fiscal 2019 under our stock repurchase program: Fiscal period Total Number of Shares Purchased1 Average Price Paid Per Share Total Number of Shares Purchased as Part of a Publicly Announced Program1 Maximum Dollar Value of Shares That May Yet Be Purchased Under the Program November 4, 2019 – December 1, 2019 December 2, 2019 – December 29, 2019 December 30, 2019 – February 2, 2020 Total 160,918 $ 158,780 $ 183,262 $ 502,960 $ 69.90 70.85 74.33 71.81 1 Excludes shares withheld for employee taxes upon vesting of stock-based awards. 160,918 $ 158,780 $ 183,262 $ 502,960 $ 599,853,000 588,604,000 574,982,000 574,982,000 Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. The stock repurchase program does not have an expiration date and may be limited or terminated at any time without prior notice. 28 ITEM 6. SELECTED FINANCIAL DATA Five-Year Selected Financial Data In thousands, except percentages, per share amounts and retail stores data Fiscal 2019 (52 Weeks) Fiscal 20181 (53 Weeks) Fiscal 2017 (52 Weeks) Fiscal 2016 (52 Weeks) Fiscal 2015 (52 Weeks) Results of Operations Net revenues Net revenue growth Comparable brand revenue growth2 Gross profit Gross margin Operating income Operating margin3 Net earnings Basic earnings per share Diluted earnings per share Shares used in calculation of earnings per share: Basic Diluted Financial Position $5,898,008 4.0% 6.0% $2,139,092 36.3% $ 465,874 7.9% $ 356,062 4.56 $ 4.49 $ $5,671,593 7.2% 3.7% $2,101,013 37.0% $ 435,953 7.7% $ 333,684 4.10 $ 4.05 $ $5,292,359 4.1% 3.2% $1,931,711 36.5% $ 453,811 8.6% $ 259,545 3.03 $ 3.02 $ $5,083,812 2.2% 0.7% $1,883,310 37.0% $ 472,599 9.3% $ 305,387 3.45 $ 3.41 $ $4,976,090 5.9% 3.7% $1,844,214 37.1% $ 488,634 9.8% $ 310,068 3.42 $ 3.37 $ 78,108 79,225 81,420 82,340 85,592 86,080 88,594 89,462 90,787 92,102 Working capital4 Total assets4 Return on assets4 Net cash provided by operating activities Capital expenditures Long-term debt and other long-term liabilities4 Stockholders’ equity Stockholders’ equity per share (book value) Return on equity Annual dividends declared per share Number of stores at year-end Store selling square footage at year-end Store leased square footage at year-end $ 146,080 $4,054,042 10.4% $ 607,294 $ 186,276 $1,180,968 $1,235,860 16.02 $ 29.8% 1.92 $ 614 4,129,000 6,558,000 $ 619,531 $2,812,844 11.9% $ 585,986 $ 190,102 $ 380,944 $1,155,714 14.66 $ 28.3% 1.72 $ 625 4,105,000 6,557,000 $ 628,622 $2,785,749 9.9% $ 499,704 $ 189,712 $ 372,226 $1,203,566 14.37 $ 21.2% 1.56 $ 631 4,019,000 6,451,000 $ 405,924 $2,476,879 12.5% $ 524,709 $ 197,414 71,215 $ $1,248,220 14.29 $ 25.0% 1.48 $ 629 3,951,000 6,359,000 $ 339,673 $2,417,427 13.1% $ 544,026 $ 202,935 49,713 $ $1,198,226 13.38 $ 25.6% 1.40 $ 618 3,827,000 6,163,000 1 In fiscal 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, using the modified retrospective method. Amounts reported for fiscal 2017 and prior years have not been adjusted, and continue to be reported in accordance with previous revenue recognition guidance. See Note A to the Consolidated Financial Statements. 2 Comparable brand revenue is calculated on a 52-week to 52-week basis, with the exception of fiscal 2018 which is calculated on a 53-week to 53-week basis. See definition of comparable brand revenue within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 3 Operating margin is defined as operating income as a percent of net revenues. 4 In fiscal 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, as of the adoption date. Amounts reported for fiscal 2018 and prior years have not been adjusted, and continue to be reported in accordance with previous lease accounting guidance. See Note A to the Consolidated Financial Statements. The information set forth above is not necessarily indicative of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto in this Annual Report on Form 10-K. F o r m 1 0 - K 29 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the 52 weeks ended February 2, 2020 (“fiscal 2019”), and the 53 weeks ended February 3, 2019 (“fiscal 2018”) should be read in conjunction with our Consolidated Financial Statements and notes thereto. Fiscal 2018 was a 53-week year and includes approximately $85,000,000 of net revenues and $0.10 of diluted earnings per share associated with the additional week. All explanations of changes in operational results are discussed in order of magnitude. A discussion and analysis of our financial condition, results of operations, and liquidity and capital resources for the 53-weeks ended February 3, 2019 (“fiscal 2018”), compared to the 52-weeks ended January 28, 2018 (“fiscal 2017”), can be found under Item 7 in our Annual Report on Form 10-K for fiscal 2018, filed with the SEC on April 4, 2019, which is available on the SEC’s website at www.sec.gov and under the Financial Reports section of our Investor Relations website. OVERVIEW Williams-Sonoma, Inc. is a specialty retailer of high-quality sustainable products for the home. These products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed through e-commerce websites, direct-mail catalogs and 614 stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In December 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Fiscal 2019 Financial Results Net revenues in fiscal 2019 increased by $226,415,000 or 4.0%, with comparable brand revenue growth of 6.0%. This increase in net revenues was primarily driven by West Elm and Pottery Barn, partially offset by the loss of the additional week of net revenues in fiscal 2018, a fifty-three week year. Total fiscal 2019 net revenue growth included a 5.4% increase in international revenues primarily related to our franchise operations and strength in our Canadian e-commerce business and company-owned United Kingdom operations. All brands delivered positive comparable brand revenue growth in fiscal 2019. Growth in Pottery Barn accelerated from last year, driven by strength in e-commerce and growth in new businesses: Marketplace and Pottery Barn Apartment, as well as our digital transformation and brand revitalization strategies. The Pottery Barn Kids and Teen business delivered combined comparable brand revenue growth of 4.5% — its strongest performance in recent years. Our expansion across life stages and aesthetics continued to be key drivers of growth and customer acquisition. West Elm had another year of double-digit net revenue growth and comparable brand revenue growth of 14.4%, on top of 9.5% in fiscal 2018, led by furniture, with strength in dining and bedroom categories, as well as new product introductions. The Williams Sonoma brand delivered comparable brand revenue growth of 0.4%. And, our emerging brands, Rejuvenation and Mark and Graham, combined delivered another year of double-digit revenue growth as they continue to scale and attract new customers. Gross profit in fiscal 2019 decreased to 36.3% of revenues versus 37.0% in fiscal 2018, primarily driven by lower year-over-year occupancy leverage resulting from one less week of sales in fiscal 2019, increased shipping costs due to a larger mix of furniture and drop-ship sales that are more expensive to ship, as well as the incremental impact from the China tariffs. We have been executing against an aggressive tariff mitigation plan which includes cost reductions from vendors, moving production out of China to South East Asia and to the United States, cost savings in other areas of the business, as well as select price increases. Our approach towards mitigating the financial impact of these tariffs all year enabled us to deliver operating income growth, operating margin expansion, and diluted earnings per share growth. 30 F o r m 1 0 - K In fiscal 2019, diluted earnings per share was $4.49 (which included a $0.30 impact related to operations and acquisition-related expenses of Outward, Inc., $0.11 related to certain employment-related expenses, and an $0.08 benefit related to a deferred tax liability adjustment) versus $4.05 in fiscal 2018 (which included a $0.25 impact related to Outward, Inc., a $0.12 impact related to impairment and early lease termination charges, a $0.07 impact from employment-related expenses, a $0.05 net tax benefit from the Tax Cuts and Jobs Act and a $0.01 impact of equity accounting rules). During fiscal 2019, our cross-brand programs also continued to scale. Our cross-brand loyalty program, The Key, continues to be an impactful driver of revenues and customer acquisition as total membership continued to grow during the year, while our complimentary design service, Design Crew, continued to be a significant revenue driver of sales in store. Fiscal 2019 was also a strong start for our new cross-brand Business to Business (B2B) division as we delivered several key wins, which establish an important foundation for our future growth and demonstrate the appeal of our differentiated value proposition to B2B clients. Critical to the success of our growth initiatives in fiscal 2019 has been our continued focus on improving the customer experience. We enhanced our digital experience with new functionalities and content that enable us to deliver a faster and more personalized experience for our customers. During the year, we launched a machine- learning search engine that allows us to provide more relevant and personalized search results. We added more storytelling and selling content on our product information pages and further optimized our site navigation. We also improved our mobile site speed within search and product information pages through enhancements to our Progressive Web App platform. In addition, we implemented more functional improvements to our Outward- powered Design Crew room planner. In our supply chain, we continued to drive operational improvements which contributed to another year of strong growth and better customer service. Within our in-home furniture delivery network in fiscal 2019, we migrated our order management and fulfillment capabilities to a new platform, which allows us to enhance our furniture delivery scheduling capabilities. We also made important strides in increasing customer visibility with the installation of an order tracking program, which provides real-time updates on the day of delivery. Our West Elm West Coast distribution center in Fontana, California is now fully operational, facilitating growth for our West Elm brand on the West Coast, and finally, our in-house manufacturing operation continues to be a strategic advantage, attracting demand for our made-to-order upholstered furniture across all our brands, and enabling more domestic production, which helps to mitigate the impact of the China tariffs. Sustainability continues to be a cornerstone of our business and a key differentiator for our brands. During fiscal 2019, we expanded on our commitment to responsibly sourced cotton and wood across our brands and made further progress in our social impact supply chain programs, including Fair Trade, HERproject and VisionSpring. We also transitioned a reporting framework that incorporates environmental, social and governance (ESG) goals to provide greater transparency into our purpose and progress. Furthermore, we were recognized for the third consecutive year as one of Barron’s 100 Most Sustainable Companies. In summary, in fiscal 2019, our strong topline performance, along with the operational efficiencies we drove across the business all year, enabled us to generate operating margin expansion to 7.9% from 7.7% last year. We also delivered another year of robust operating cash flow, which allowed us to return approximately $299,474,000 to our stockholders through dividends and share repurchases. Looking Ahead to 2020 Despite our strong start to fiscal 2020, we have been making changes to our operations as we navigate the challenges in the wake of the coronavirus outbreak. We have been preparing all aspects of our business to continue to support our associates and customers during this time. We believe we have adequate liquidity and strong financial discipline to address the near-term challenges. However, the extent of the recent COVID-19 outbreak and its impact on our operations, including our recently announced temporary closure of our U.S. and Canadian retail stores, and the markets served by us is uncertain. A prolonged outbreak could further interrupt our operations, our vendors’ operations, and impact consumer spending, which would have a material impact on our revenues, results of operations, cash flows and liquidity position. For more information on risks associated with the COVID-19 outbreak, please see “Risk Factors” in Item 1A. 31 NET REVENUES Results of Operations Net revenues consist of sales of merchandise to our customers through our e-commerce websites, direct-mail catalogs, and at our retail stores and include shipping fees received from customers for delivery of merchandise to their homes. Our revenues also include sales to our franchisees and wholesale customers, breakage income related to our store-value cards, and incentives received from credit card issuers in connection with our private label and co-branded credit cards. Net revenues in fiscal 2019 increased by $226,415,000 or 4.0%, with comparable brand revenue growth of 6.0%. This increase in net revenues was primarily driven by West Elm and Pottery Barn, partially offset by the loss of the additional week of net revenues in fiscal 2018, a fifty-three week year. Total fiscal 2019 net revenue growth included a 5.4% increase in international revenues, primarily related to our franchise operations, and strength in our Canadian e-commerce business and company-owned United Kingdom operations. The following table summarizes our net revenues by brand for fiscal 2019 and fiscal 2018: In thousands Pottery Barn West Elm Williams Sonoma Pottery Barn Kids and Teen Other1 Total Fiscal 2019 (52 Weeks) Fiscal 2018 (53 Weeks) $2,214,397 1,466,537 1,032,368 908,561 276,145 $2,177,344 1,292,928 1,056,125 895,762 249,434 $5,898,008 $5,671,593 1 Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham. Comparable Brand Revenue Comparable brand revenue includes comparable store sales and e-commerce sales, including through our direct- mail catalog, as well as shipping fees, sales returns and other discounts associated with current period sales. Comparable stores are defined as permanent stores where gross square footage did not change by more than 20% in the previous 12 months and which have been open for at least 12 consecutive months without closure for seven or more consecutive days. Outlet comparable store net revenues are included in their respective brands. Sales to our international franchisees are excluded from comparable brand revenue as their stores and e-commerce websites are not operated by us. Sales from certain operations are also excluded until such time that we believe those sales are meaningful to evaluating their performance. Additionally, comparable brand revenue growth for newer concepts is not separately disclosed until such time that we believe those sales are meaningful to evaluating the performance of the brand. Comparable brand revenue growth1 Pottery Barn West Elm Williams Sonoma Pottery Barn Kids and Teen Total2 Fiscal 2019 (52 Weeks) Fiscal 2018 (53 Weeks) 4.1% 14.4% 0.4% 4.5% 6.0% 1.2% 9.5% 1.7% 2.8% 3.7% 1 Comparable brand revenue is calculated on a 52-week to 52-week basis for fiscal 2019 and on a 53-week to 53-week basis for fiscal 2018. 2 Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham. 32 RETAIL STORE DATA In thousands Store count – beginning of year Store openings Store closings Store count – end of year Store selling square footage at year-end Store leased square footage (“LSF”) at year-end Williams Sonoma Pottery Barn West Elm Pottery Barn Kids Rejuvenation Total COST OF GOODS SOLD In thousands Cost of goods sold1 Fiscal 2019 (52 Weeks) Fiscal 2018 (53 Weeks) 625 14 (25) 614 4,129,000 6,558,000 631 23 (29) 625 4,105,000 6,557,000 Fiscal 2019 Fiscal 2018 Store Count Avg. LSF Per Store Store Count Avg. LSF Per Store 211 201 118 74 10 614 6,900 14,400 13,100 7,700 8,500 10,700 220 205 112 78 10 625 6,900 14,200 13,100 7,500 8,500 10,500 F o r m 1 0 - K Fiscal 2019 (52 Weeks) % Net Revenues Fiscal 2018 (53 Weeks) % Net Revenues $3,758,916 63.7% $3,570,580 63.0% 1 Includes occupancy expenses of $710,523 and $702,537 in fiscal 2019 and fiscal 2018, respectively. Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials. Our classification of expenses in cost of goods sold may not be comparable to other public companies, as we do not include non-occupancy-related costs associated with our distribution network in cost of goods sold. These costs, which include distribution network employment, third-party warehouse management and other distribution-related administrative expenses, are recorded in selling, general and administrative expenses. Fiscal 2019 vs. Fiscal 2018 Cost of goods sold increased by $188,336,000, or 5.3%, in fiscal 2019 compared to fiscal 2018. Cost of goods sold as a percentage of net revenues increased to 63.7% in fiscal 2019 from 63.0% in fiscal 2018. This increase was primarily driven by lower year-over-year occupancy leverage resulting from one less week of sales in fiscal 2019, increased shipping costs due to a larger mix of furniture and drop-ship sales that are more expensive to ship, as well as the incremental impact from the China tariffs. 33 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES In thousands Fiscal 2019 (52 weeks) % Net Revenues Fiscal 2018 (53 weeks) % Net Revenues Selling, general and administrative expenses $1,673,218 28.4% $1,665,060 29.4% Selling, general and administrative expenses consist of non-occupancy-related costs associated with our retail stores, distribution and manufacturing facilities, customer care centers, supply chain operations (buying, receiving and inspection) and corporate administrative functions. These costs include employment, advertising, third-party credit card processing and other general expenses. Fiscal 2019 vs. Fiscal 2018 Selling, general and administrative expenses increased by $8,158,000, or 0.5%, in fiscal 2019 compared to fiscal 2018. Selling, general and administrative expenses as a percentage of net revenues decreased to 28.4% in fiscal 2019 from 29.4% in fiscal 2018. This decrease as a percentage of net revenues was driven by the leverage of employment and advertising costs from higher sales and the continued cost savings initiatives across the business, as well as our overall expense discipline. INCOME TAXES The effective income tax rate was 22.1% for fiscal 2019 and 22.3% for fiscal 2018. LIQUIDITY AND CAPITAL RESOURCES As of February 2, 2020, we held $432,162,000 in cash and cash equivalents, the majority of which was held in interest-bearing demand deposit accounts and money market funds, and of which $201,909,000 was held by our foreign subsidiaries. As is consistent within our industry, our cash balances are seasonal in nature, with the fourth quarter historically representing a significantly higher level of cash than other periods. Throughout the fiscal year, we utilize our cash balances to build our inventory levels in preparation for our fourth quarter holiday sales. In fiscal 2020, we plan to use our cash resources to fund our inventory and inventory-related purchases, advertising and marketing initiatives, stock repurchases and dividend payments, and property and equipment purchases. In addition to our cash balances on hand, we have a credit facility, which provides for a $500,000,000 unsecured revolving line of credit (“revolver”), and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or to request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders to increase the revolver by up to $250,000,000, at such lenders’ option, to provide for a total of $750,000,000 of unsecured revolving credit. During fiscal 2019, we had borrowings under the revolver of $100,000,000, all of which were repaid in the fourth quarter of fiscal 2019. During fiscal 2018, we had borrowings under the revolver of $60,000,000, all of which were repaid in the fourth quarter of fiscal 2018. As of February 2, 2020, we had $300,000,000 outstanding under our term loan. The term loan matures on January 8, 2021, at which point all outstanding principal and any accrued interest must be repaid. Prior to maturity in fiscal 2020, we intend to renew and extend our $300,000,000 term loan. See Note P: Subsequent Events to our Consolidated Financial Statements. Additionally, as of February 2, 2020, a total of $12,187,000 in issued but undrawn standby letters of credit were outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs. Additionally, we have three unsecured letter of credit reimbursement facilities, which were amended during the year, for a total of $70,000,000, of which an aggregate of $6,462,000 was outstanding as of February 2, 2020. These letter of credit facilities represent only a future commitment to fund inventory purchases to which we had not taken legal title. We are currently in compliance with all of our financial covenants under the credit facility. We believe our cash on hand, in addition to our available credit facilities, will provide adequate liquidity for our business operations over the next 12 months. See “Risk Factors” in Item 1A and Note P: Subsequent Events to our Consolidated Financial Statements. 34 Cash Flows from Operating Activities For fiscal 2019, net cash provided by operating activities was $607,294,000 compared to $585,986,000 in fiscal 2018. For fiscal 2019, net cash provided by operating activities was primarily attributable to net earnings adjusted for non-cash items, a decrease in merchandise inventories, and an increase in accrued expenses and other liabilities, partially offset by a decrease in accounts payable. This represents an increase in net cash provided by operating activities compared to fiscal 2018 primarily due to a decrease in merchandise inventories and a decrease in prepaid expenses, partially offset by an increase in payments for accounts payable and accrued expenses, and a decrease in gift card and other deferred revenue. Cash Flows from Investing Activities For fiscal 2019, net cash used in investing activities was $185,548,000 compared to $187,899,000 in fiscal 2018, and was primarily attributable to purchases of property and equipment. Cash Flows from Financing Activities For fiscal 2019, net cash used in financing activities was $327,226,000 compared to $450,066,000 in fiscal 2018. For fiscal 2019, net cash used in financing activities was primarily attributable to the payment of dividends and repurchases of common stock. Net cash used in financing activities compared to fiscal 2018 decreased primarily due to a decrease in repurchases of common stock. Dividends In fiscal 2019 and fiscal 2018, total cash dividends declared were approximately $156,103,000, or $1.92 per common share, and $144,609,000, or $1.72 per common share, respectively. Our quarterly cash dividend may be limited or terminated at any time. Stock Repurchase Programs See section titled “Stock Repurchase Programs” within Part II, Item 5 of this Annual Report on Form 10-K for further information. Contractual Obligations The following table provides summary information concerning our future contractual obligations as of February 2, 2020: Payments Due by Period1 F o r m 1 0 - K In thousands Current debt 2 Interest Operating leases3 Purchase obligations4 Total Fiscal 2020 $ 300,000 9,634 281,995 857,106 Fiscal 2021 to Fiscal 2023 $ Fiscal 2024 to Fiscal 2025 Thereafter — $ — 637,867 28,420 — $ — 284,461 83 Total — $ 300,000 9,634 — 1,537,736 333,413 885,609 — $ 1,448,735 $ 666,287 $ 284,544 $ 333,413 $2,732,979 1 This table excludes $43.9 million of liabilities for unrecognized tax benefits associated with uncertain tax positions as we are not able to reasonably estimate when and if cash payments for these liabilities will occur. This amount, however, has been recorded as a liability in our accompanying Consolidated Balance Sheet as of February 2, 2020. 2 Current debt consists of term loan borrowings under our credit facility. See Note C to our Consolidated Financial Statements for discussion of our borrowing arrangements. 3 Projected undiscounted payments include only those amounts that are fixed and determinable as of the reporting date. See Note E to our Consolidated Financial Statements for discussion of our operating leases. 4 Represents estimated commitments at year-end to purchase inventory and other goods and services in the normal course of business to meet operational requirements. 35 Other Contractual Obligations We have other liabilities reflected in our Consolidated Balance Sheet. The payment obligations associated with these liabilities are not reflected in the table above due to the absence of scheduled maturities. The timing of these payments cannot be determined, except for amounts estimated to be payable in fiscal 2020, which are included in our current liabilities as of February 2, 2020. In connection with our acquisition of Outward Inc., we have agreed to pay certain additional amounts to former stockholders of Outward, contingent upon their continued service or the achievement of certain financial performance targets. These contingent obligations are not reflected in the table above. See Note O to Our Consolidated Financial Statements. We are party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to commercial matters, operating leases, trademarks, intellectual property and financial matters. Under these contracts, we may provide certain routine indemnification relating to representations and warranties or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations. Commercial Commitments The following table provides summary information concerning our outstanding commercial commitments as of February 2, 2020: Amount of Outstanding Commitment Expiration by Period1 In thousands Standby letters of credit Letter of credit facilities Total Fiscal 2020 12,187 $ 6,462 Fiscal 2021 to Fiscal 2023 $ — $ — $ 18,649 $ — $ Fiscal 2024 to Fiscal 2025 Thereafter — $ — — $ Total — $ 12,187 6,462 — — $ 18,649 1 See Note C to our Consolidated Financial Statements for discussion of our borrowing arrangements. IMPACT OF INFLATION The impact of inflation (or deflation) on our results of operations for the past three fiscal years has not been significant. However, we cannot be certain of the effect inflation (or deflation) may have on our results of operations in the future. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. We believe the following critical accounting policies used in the preparation of our Consolidated Financial Statements include the significant estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. See Note A to our Consolidated Financial Statements for further discussion of each policy. 36 F o r m 1 0 - K Merchandise Inventories Merchandise inventories, net of an allowance for shrinkage and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost, we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends of inventory sold below cost and specific identification. Reserves for shrinkage are estimated and recorded throughout the year as a percentage of net sales based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded at year-end based on the results of our cycle counts and year end physical inventory counts, and can vary from our estimates due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities and off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end, with the exception of a cycle count reserve based on the historical cycle count results in our distribution centers. This reserve was not material to our Consolidated Financial Statements as of February 2, 2020. Historically, actual shrinkage has not differed materially from our estimates. Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We have made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. In addition, we do not believe a 10% change in our inventory reserves would have a material effect on our net earnings. As of February 2, 2020 and February 3, 2019, our inventory obsolescence reserves were $13,424,000 and $13,580,000, respectively. Long-lived Assets Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. The asset group is comprised of both property and equipment and operating lease right-of-use assets. Impairment may result when the carrying value of the asset or asset group exceeds the estimated undiscounted future cash flows over its remaining useful life. For store asset impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. For right-of-use assets, we determine the fair value of the assets by using estimated market rental rates. These estimates can be affected by factors such as future store results, real estate demand, store closure plans, and economic conditions that can be difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the excess of the asset or asset group’s net carrying value over its estimated fair value. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy (see Note M to our Consolidated Financial Statements). We measure right-of- use assets at fair value on a nonrecurring basis using Level 2 inputs, primarily market rental rates, that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk. 37 During fiscal 2019, we recorded an approximate $3,303,000, reduction, net of tax to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of ASU 2016-02, Leases (see Note A to our Consolidated Financial Statements). During fiscal 2018, we recorded asset impairment charges of approximately $9,639,000, related to property and equipment for our retail stores, which is recorded within selling, general and administrative expenses. Leases We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations with initial terms generally ranging from 2 to 22 years. We determine whether an arrangement is or contains a lease at inception by evaluating potential lease agreements, including service and operating agreements, to determine whether an identified asset exists that we control over the term of the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset. Upon lease commencement, we recognize a right-of-use asset and a corresponding lease liability measured at the present value of the fixed future minimum lease payments. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a remeasurement event occurs. Many of our leases contain renewal and early termination options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement, as we do not believe the exercise of these options to be reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal or an early termination option. Our leases generally do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. We use judgment in determining our incremental borrowing rate, which is applied to each lease based on the lease term. An increase or decrease in the incremental borrowing rate applied would impact the value of our right-of-use assets and lease liabilities. We use judgment in determining lease classification, including our determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources. All of our leases are currently classified as operating leases. Business Combinations We account for acquired businesses when we obtain control of the business using the acquisition method of accounting. Assets acquired and liabilities assumed are recorded based upon the estimated fair value as of the acquisition date. Estimated fair values represent the estimated price that would be paid by a third-party market participant based upon the highest and best use of the assets acquired or liabilities assumed. The determination of the fair value of assets acquired and liabilities assumed requires significant judgment and estimates. In making such judgments and estimates, we utilize inputs from independent third-party valuation specialists and other internal sources. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. Acquisition-related expenses are expensed as incurred. During fiscal 2017, we acquired Outward (see Note O to our Consolidated Financial Statements). During the second quarter of fiscal 2018, we finalized the valuation of intangible assets acquired, which primarily represent 3-D imaging data and core intellectual property, which are being amortized over a useful life of four years. Goodwill Goodwill is initially recorded as of the acquisition date, and is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is subject to 38 impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. We first perform a qualitative assessment to evaluate goodwill for potential impairment. If based on that assessment, it is more likely than not that the fair value of the reporting unit is below its carrying value, a quantitative impairment test is necessary. The quantitative impairment test requires determining the fair value of the reporting unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated future cash flows using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future, such as sales growth, gross margins, employment costs, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, exceeds its fair value, impairment is recorded for the excess, not to exceed the total amount of goodwill allocated to the reporting unit. As of February 2, 2020 and February 3, 2019, we had goodwill of $85,343,000 and $85,382,000, respectively, primarily related to our fiscal 2017 acquisition of Outward and our fiscal 2011 acquisition of Rejuvenation, Inc. In fiscal 2019, fiscal 2018, and fiscal 2017, we performed a qualitative assessment of potential goodwill impairment and determined it was more likely than not that the fair value of each of our reporting units exceeded its carrying value. Accordingly, no further impairment testing of goodwill was performed. We did not recognize any goodwill impairment in fiscal 2019, fiscal 2018, or fiscal 2017. Self-Insured Liabilities We are primarily self-insured for workers’ compensation, employee health benefits, product and other general liability claims. We record self-insurance liability reserves based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported, based on an actuarial analysis of historical claims data. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different number of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. Self-insurance reserves for workers’ compensation, employee health benefits, product and other general liability claims were $27,000,000 and $28,542,000 as of February 2, 2020 and February 3, 2019, respectively. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events. In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions or changes in tax law. F o r m 1 0 - K 39 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks, which include significant deterioration of the U.S. and foreign markets, changes in U.S. interest rates, foreign currency exchange rate fluctuations and the effects of economic uncertainty which may affect the prices we pay our vendors in the foreign countries in which we do business. We do not engage in financial transactions for trading or speculative purposes. Interest Rate Risk Our revolver and our term loan each have a variable interest rate which, when drawn upon, subjects us to risks associated with changes in that interest rate. As of February 2, 2020, we had $300,000,000 outstanding under the term loan, and during fiscal 2019 we had borrowings of $100,000,000 under the revolver, all of which were repaid in the fourth quarter of fiscal 2019. A hypothetical increase or decrease of one percentage point on our existing variable rate debt instruments would not materially affect our results of operations or cash flows. See Note P: Subsequent Events to our Consolidated Financial Statements. In addition, we have fixed and variable income investments consisting of short-term investments classified as cash and cash equivalents, which are also affected by changes in market interest rates. As of February 2, 2020, our investments, made primarily in interest bearing demand deposit accounts and money market funds, are stated at cost and approximate their fair values. Foreign Currency Risks We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are denominated in U.S. dollars and, as such, any foreign currency impact related to these international purchase transactions was not significant to us during fiscal 2019 or fiscal 2018. Since we pay for the majority of our international purchases in U.S. dollars, however, a decline in the U.S. dollar relative to other foreign currencies would subject us to risks associated with increased purchasing costs from our vendors in their effort to offset any lost profits associated with any currency devaluation. We cannot predict with certainty the effect these increased costs may have on our financial statements or results of operations. In addition, our retail and e-commerce businesses in Canada, Australia and the United Kingdom, and our operations throughout Asia and Europe, expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. While the impact of foreign currency exchange rate fluctuations was not material to us in fiscal 2019, we have continued to see volatility in the exchange rates in the countries in which we do business. As we continue to expand globally, the foreign currency exchange risk related to our foreign operations may increase. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies (see Note L to our Consolidated Financial Statements). 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Williams-Sonoma, Inc. Consolidated Statements of Earnings In thousands, except per share amounts Net revenues Cost of goods sold Gross profit Selling, general and administrative expenses Operating income Interest (income) expense, net Earnings before income taxes Income taxes Net earnings Basic earnings per share Diluted earnings per share Shares used in calculation of earnings per share: Basic Diluted See Notes to Consolidated Financial Statements. Fiscal 2019 (52 weeks) Fiscal 2018 (53 weeks) Fiscal 2017 (52 weeks) $ 5,898,008 3,758,916 $ 5,671,593 3,570,580 $ 5,292,359 3,360,648 2,139,092 1,673,218 2,101,013 1,665,060 1,931,711 1,477,900 465,874 8,853 457,021 100,959 356,062 4.56 4.49 $ $ $ 435,953 6,706 429,247 95,563 333,684 4.10 4.05 $ $ $ 453,811 1,372 452,439 192,894 259,545 3.03 3.02 $ $ $ 78,108 79,225 81,420 82,340 85,592 86,080 F o r m 1 0 - K Williams-Sonoma, Inc. Consolidated Statements of Comprehensive Income In thousands Net earnings Other comprehensive income (loss): Foreign currency translation adjustments Change in fair value of derivative financial instruments, net of tax (tax benefit) of $195, $390 and $(259) Reclassification adjustment for realized (gain) loss on derivative Fiscal 2019 (52 weeks) Fiscal 2018 (53 weeks) Fiscal 2017 (52 weeks) $ 356,062 $ 333,684 $ 259,545 (3,334) (5,032) 3,730 163 1,098 (715) 106 financial instruments, net of tax (tax benefit) of $261, $122 and $(38) (343) (357) Comprehensive income $ 352,548 $ 329,393 $ 262,666 See Notes to Consolidated Financial Statements. 41 Williams-Sonoma, Inc. Consolidated Balance Sheets In thousands, except per share amounts Feb. 2, 2020 Feb. 3, 2019 ASSETS Current assets Cash and cash equivalents Accounts receivable, net Merchandise inventories, net Prepaid expenses Other current assets Total current assets Property and equipment, net Operating lease right-of-use assets Deferred income taxes, net Goodwill Other long-term assets, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable Accrued expenses Gift card and other deferred revenue Income taxes payable Current debt Operating lease liabilities Other current liabilities Total current liabilities Deferred rent and lease incentives Long-term debt Long-term operating lease liabilities Other long-term liabilities Total liabilities Commitments and contingencies – See Note I Stockholders’ equity Preferred stock: $.01 par value; 7,500 shares authorized; none issued Common stock: $.01 par value; 253,125 shares authorized; 77,137 and 78,813 shares issued and outstanding at February 2, 2020 and February 3, 2019, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Treasury stock – at cost: 14 and 2 shares as of February 2, 2020 and February 3, 2019, respectively Total stockholders’ equity Total liabilities and stockholders’ equity See Notes to Consolidated Financial Statements. 42 $ 432,162 111,737 1,100,544 90,426 20,766 1,755,635 929,038 1,166,383 47,977 85,343 69,666 $ 338,954 107,102 1,124,992 101,356 21,939 1,694,343 929,635 — 44,055 85,382 59,429 $ 4,054,042 $ 2,812,844 $ 521,235 175,003 289,613 22,501 299,818 227,923 73,462 1,609,555 27,659 — 1,094,579 86,389 2,818,182 $ 526,702 163,559 290,445 21,461 — — 72,645 1,074,812 201,374 299,620 — 81,324 1,657,130 — — 772 605,822 644,794 (14,587) 789 581,900 584,333 (11,073) (941) (235) 1,235,860 1,155,714 $ 4,054,042 $ 2,812,844 F o r m 1 0 - K Williams-Sonoma, Inc. Consolidated Statements of Stockholders’ Equity In thousands Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders’ Equity Balance at January 29, 2017 87,325 $ 873 $ 556,928 $ 701,702 $ (9,903) $(1,380) $ 1,248,220 Net earnings Foreign currency translation adjustments Change in fair value of derivative financial instruments, net of tax Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax Conversion/release of stock-based awards1 Repurchases of common stock Reissuance of treasury stock under stock- based compensation plans1 Stock-based compensation expense Dividends declared — — — — 452 (4,051) — — — — — — — 5 (41) — — — — 259,545 — — — — — 3,730 (715) — — — 259,545 3,730 (715) — (17,810) (18,518) — — (177,620) (554) 42,768 (426) — — (135,779) — 106 — (325) — — — — — 980 — — 106 (18,130) (196,179) — 42,768 (135,779) Balance at January 28, 2018 83,726 837 562,814 647,422 (6,782) (725) 1,203,566 Net earnings Foreign currency translation adjustments Change in fair value of derivative financial instruments, net of tax Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax Conversion/release of stock-based awards1 Repurchases of common stock Reissuance of treasury stock under stock- based compensation plans1 Stock-based compensation expense Dividends declared Adoption of accounting pronouncements2 — — — — — — — 333,684 — — — (5,032) — — 1,098 — — — 333,684 (5,032) 1,098 — 460 (5,373) — 5 (53) — (14,149) (25,775) — — (269,476) — — — — — — — — (418) 59,428 (363) — — (144,609) — 17,675 (357) — — (291) — — — — — — 781 — — — (357) (14,435) (295,304) — 59,428 (144,609) 17,675 Balance at February 3, 2019 78,813 789 581,900 584,333 (11,073) (235) 1,155,714 Net earnings Foreign currency translation adjustments Change in fair value of derivative financial instruments, net of tax Reclassification adjustment for realized (gain) loss on derivative financial instruments, net of tax Conversion/release of stock-based awards1 Repurchases of common stock Reissuance of treasury stock under stock- based compensation plans1 Stock-based compensation expense Dividends declared Adoption of accounting pronouncements3 — — — — — — — 356,062 — — — (3,334) — — 163 — — — 356,062 (3,334) 163 — 649 (2,325) — 6 (23) — (27,624) (11,658) — — (136,195) — — — — — — — — (386) 63,590 — — — (156,103) (3,303) — (343) — — (134) — (958) — — — — 386 — — — (343) (27,752) (148,834) — 63,590 (156,103) (3,303) Balance at February 2, 2020 77,137 $ 772 $ 605,822 $ 644,794 $ (14,587) $ (941) $ 1,235,860 1 2 3 Amounts are shown net of shares withheld for employee taxes. Primarily relates to our adoption of ASU 2014-09, Revenue from Contracts with Customers, in fiscal 2018. See Note A. Relates to our adoption of ASU 2016-02, Leases, in fiscal 2019. See Note A. See Notes to Consolidated Financial Statements. 43 Williams-Sonoma, Inc. Consolidated Statements of Cash Flows In thousands Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization Loss on disposal/impairment of assets Amortization of deferred lease incentives Non-cash lease expense Deferred income taxes Stock-based compensation expense Other Changes in: Accounts receivable Merchandise inventories Prepaid catalog expenses Prepaid expenses and other assets Accounts payable Accrued expenses and other liabilities Gift card and other deferred revenue Deferred rent and lease incentives Operating lease liabilities Income taxes payable Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Acquisition of Outward, Inc., net of cash received Other Net cash used in investing activities Cash flows from financing activities: Payment of dividends Repurchases of common stock Borrowings under revolving line of credit Repayments of borrowings under revolving line of credit Tax withholdings related to stock-based awards Proceeds from issuance of long-term debt Debt issuance costs Other Net cash used in financing activities Effect of exchange rates on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Cash paid during the year for interest Cash paid during the year for income taxes, net of refunds Non-cash investing activities: Fiscal 2019 (52 Weeks) Fiscal 2018 (53 Weeks) Fiscal 2017 (52 Weeks) $ 356,062 $ 333,684 $ 259,545 187,759 1,755 (7,714) 215,810 (2,557) 64,163 (26) (5,034) 24,219 — (3,189) (11,051) 13,259 (640) — (226,257) 735 607,294 (186,276) — 728 (185,548) (150,640) (148,834) 100,000 (100,000) (27,752) — — — (327,226) (1,312) 93,208 338,954 $ 432,162 188,808 10,209 (26,199) — 23,639 59,802 (579) (15,329) (70,331) — (54,691) 62,377 45,976 38,899 24,929 — (35,208) 585,986 183,077 1,889 (25,372) — 63,381 42,988 (135) 149 (80,235) (1,019) (15,475) 2,549 9,597 (3,002) 28,226 — 33,541 499,704 (190,102) — 2,203 (187,899) (189,712) (80,528) 480 (269,760) (140,325) (295,304) 60,000 (60,000) (14,437) — — — (450,066) 797 (51,182) 390,136 $ 338,954 (135,010) (196,179) 170,000 (170,000) (18,130) 300,000 (1,191) (1,197) (51,707) (1,814) 176,423 213,713 $ 390,136 $ 12,682 $ 113,344 $ 11,424 $ 107,951 $ 2,915 $ 99,062 Purchases of property and equipment not yet paid for at end of year $ 2,386 $ 2,773 $ 1,257 See Notes to Consolidated Financial Statements. 44 Williams-Sonoma, Inc. Notes to Consolidated Financial Statements Note A: Summary of Significant Accounting Policies We are a specialty retailer of high-quality products for the home. These products, representing distinct merchandise strategies — Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation, and Mark and Graham — are marketed through e-commerce websites, direct-mail catalogs and 614 stores. These brands are also part of The Key Rewards, our free-to-join loyalty program that offers members exclusive benefits across the Williams-Sonoma family of brands. We operate in the U.S., Puerto Rico, Canada, Australia and the United Kingdom, offer international shipping to customers worldwide, and have unaffiliated franchisees that operate stores in the Middle East, the Philippines, Mexico and South Korea, as well as e-commerce websites in certain locations. In 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Consolidation The Consolidated Financial Statements include the accounts of Williams-Sonoma, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated. Fiscal Year Our fiscal year ends on the Sunday closest to January 31, based on a 52 or 53-week year. Fiscal 2019, a 52-week year, ended on February 2, 2020; Fiscal 2018, a 53-week year, ended on February 3, 2019; and Fiscal 2017, a 52-week year, ended on January 28, 2018. F o r m 1 0 - K Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. Cash Equivalents Cash equivalents include highly liquid investments with an original maturity of three months or less. As of February 2, 2020, we were invested primarily in interest-bearing demand deposit accounts and money market funds. Book cash overdrafts issued, but not yet presented to the bank for payment, are reclassified to accounts payable. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at their carrying values, net of an allowance for doubtful accounts. Accounts receivable consist primarily of credit card, franchisee and landlord receivables for which collectability is reasonably assured. Receivables are evaluated for collectability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. Our allowance for doubtful accounts was not material to our financial statements as of February 2, 2020 and February 3, 2019. Merchandise Inventories Merchandise inventories, net of an allowance for shrinkage and obsolescence, are stated at the lower of cost (weighted average method) or market. To determine if the value of our inventory should be reduced below cost, we consider current and anticipated demand, customer preferences and age of the merchandise. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory and lower of cost or market reserves) and estimates of inventory shrinkage. We reserve for obsolescence based on historical trends of inventory sold below cost and specific identification. 45 Reserves for shrinkage are estimated and recorded throughout the year as a percentage of net sales based on historical shrinkage results, cycle count results within our distribution centers, expectations of future shrinkage and current inventory levels. Actual shrinkage is recorded at year-end based on the results of our cycle counts and physical inventory counts and can vary from our estimates due to such factors as changes in operations, the mix of our inventory (which ranges from large furniture to small tabletop items) and execution against loss prevention initiatives in our stores, distribution facilities, off-site storage locations, and with our third-party warehouse and transportation providers. Accordingly, there is no shrinkage reserve at year-end, with the exception of a cycle count reserve based on the historical cycle count results in our distribution centers. This reserve was not material to our Consolidated Financial Statements as of February 2, 2020. Historically, actual shrinkage has not differed materially from our estimates. Our obsolescence and shrinkage reserve calculations contain estimates that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimate, we will adjust our reserves accordingly throughout the year. We made no material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves throughout the year. As of February 2, 2020, and February 3, 2019, our inventory obsolescence reserves were $13,424,000 and $13,580,000, respectively. Long-lived Assets Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the assets: Leasehold improvements Fixtures and equipment Shorter of estimated useful life or lease term (generally 5 – 22 years) 2 – 20 years Buildings and building improvements 10 – 40 years Capitalized software 2 – 10 years We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Our impairment analyses determine whether projected cash flows from operations are sufficient to recover the carrying value of these assets. The asset group is comprised of both property and equipment and operating lease right-of-use assets. Impairment may result when the carrying value of the asset or asset group exceeds the estimated undiscounted future cash flows over its remaining useful life. For store asset impairment, our estimate of undiscounted future cash flows over the store lease term is based upon our experience, the historical operations of the stores and estimates of future store profitability and economic conditions. The estimates of future store profitability and economic conditions require estimating such factors as sales growth, gross margin, employment costs, lease escalations, inflation and the overall economics of the retail industry, and are therefore subject to variability and difficult to predict. For right-of-use assets, we determine the fair value of the assets by using estimated market rental rates. These estimates can be affected by factors such as future store results, real estate demand, store closure plans, and economic conditions that can be difficult to predict. Actual future results may differ from those estimates. If a long-lived asset is found to be impaired, the amount recognized for impairment is equal to the excess of the asset or asset group’s net carrying value over its estimated fair value. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy (see Note M to our Consolidated Financial Statements). We measure right-of-use assets at fair value on a nonrecurring basis using Level 2 inputs, primarily market rental rates, that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk. During fiscal 2019, we recorded an approximate $3,303,000, net of tax, reduction to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of Accounting 46 F o r m 1 0 - K Standards Update (“ASU”) 2016-02, Leases. During fiscal 2018, we recorded asset impairment charges of approximately $9,639,000, related to our retail stores, which is recorded within selling, general and administrative expenses. During fiscal 2017, we did not record any asset impairment charges. Leases We lease store locations, distribution and manufacturing facilities, corporate facilities, customer care centers and certain equipment for our U.S. and foreign operations with initial terms generally ranging from 2 to 22 years. We determine whether an arrangement is or contains a lease at inception by evaluating potential lease agreements including services and operating agreements to determine whether an identified asset exists that we control over the term of the arrangement. Lease commencement is determined to be when the lessor provides us access to, and the right to control, the identified asset. The rental payments for our leases are typically structured as either fixed or variable payments. Our fixed rent payments include: stated minimum rent and stated minimum rent with stated increases. We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable rent payments include: rent increases based on a future index; rent based on a percentage of store sales; payments made for pass-through costs for property taxes, insurance, utilities and common area maintenance; and rent based on a percentage of store sales if a specified store sales threshold or contractual obligation of the landlord has not been met. Upon lease commencement, we recognize a right-of use asset and a corresponding lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a remeasurement event occurs. Many of our leases contain renewal and early termination options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement, as we do not believe the exercise of these options to be reasonably certain. We remeasure the lease liability and right-of-use asset once we are reasonably certain to exercise a renewal or an early termination option. Our leases generally do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. We use judgment in determining our incremental borrowing rate, which is applied to each lease based on the lease term. An increase or decrease in the incremental borrowing rate applied would impact the value of our right-of-use assets and lease liabilities. We use judgment in determining lease classification, including our determination of the economic life and the fair market value of the identified asset. The fair market value of the identified asset is generally estimated based on comparable market data provided by third-party sources. All of our leases are currently classified as operating leases. Goodwill Goodwill is initially recorded as of the acquisition date, and is measured as any excess of the purchase price over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized, but rather is subject to impairment testing annually (on the first day of the fourth quarter), or between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. We first perform a qualitative assessment to evaluate goodwill for potential impairment. If based on that assessment it is more likely than not that the fair value of the reporting unit is below its carrying value, a quantitative impairment test is necessary. The quantitative impairment test requires determining the fair value of the reporting unit. We use the income approach, whereby we calculate the fair value based on the present value of estimated 47 future cash flows, using a discount rate that approximates our weighted average cost of capital. The process of evaluating the potential impairment of goodwill is subjective and requires significant estimates and assumptions about the future such as sales growth, gross margins, employment costs, capital expenditures, inflation and future economic and market conditions. Actual future results may differ from those estimates. If the carrying value of the reporting unit’s assets and liabilities, including goodwill, exceeds its fair value, impairment is recorded for the excess, not to exceed the total amount of goodwill allocated to the reporting unit. As of February 2, 2020 and February 3, 2019, we had goodwill of $85,343,000 and $85,382,000, respectively, primarily related to our fiscal 2017 acquisition of Outward (see Note O) and to our fiscal 2011 acquisition of Rejuvenation, Inc. In fiscal 2019, fiscal 2018 and fiscal 2017, we performed a qualitative assessment of potential goodwill impairment and determined it was more likely than not that the fair value of each of our reporting units exceeded its carrying value. Accordingly, no further impairment testing of goodwill was performed. We did not recognize any goodwill impairment in fiscal 2019, fiscal 2018 or fiscal 2017. Self-Insured Liabilities We are primarily self-insured for workers’ compensation, employee health benefits, product and other general liability claims. We record self-insurance liability reserves based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported, based on an actuarial analysis of historical claims data. Factors affecting these estimates include future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different number of claims occur compared to what was estimated, or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted accordingly. Self-insurance reserves for workers’ compensation, employee health benefits, product and other general liability claims were $27,000,000 and $28,542,000 as of February 2, 2020 and February 3, 2019, respectively. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, accounts receivable, accounts payable and debt approximate their estimated fair values. We use derivative financial instruments to hedge against foreign currency exchange rate fluctuations. The assets or liabilities associated with our derivative financial instruments are recorded at fair value in either other current or long-term assets or other current or long-term liabilities. The fair value of our foreign currency derivative instruments is measured using the income approach, whereby we use observable market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount. These observable inputs include spot rates, forward rates, interest rates and credit derivative market rates (see Notes L and M for additional information). Revenue from Merchandise Sales Revenues from the sale of our merchandise through our e-commerce channel, at our retail stores, as well as to our franchisees and wholesale customers are, in each case, recognized at a point in time when control of merchandise is transferred to the customer. Merchandise can either be picked up in our stores, or delivered to the customer. For merchandise picked up in the store, control is transferred at the time of the sale to the customer. For merchandise delivered to the customer, control is transferred either when delivery has been completed, or when we have a present right to payment which, for certain merchandise, occurs upon conveyance of the merchandise to the carrier for delivery. We exclude from revenue any taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and are concurrent with revenue-generating activities. Our payment terms are primarily at the point of sale for merchandise sales and for most services. We have elected to account for shipping and handling as fulfillment activities, and not as a separate performance obligation. Revenue from the sale of merchandise is reported net of sales returns. We estimate future returns based on historical return trends together with current product sales performance. As of February 2, 2020 and February 3, 2019, we recorded a liability for expected sales returns of approximately $25,456,000 and $26,276,000 within other current liabilities and a corresponding asset for the expected net realizable value of the merchandise inventory to be returned of approximately $9,941,000 and $10,030,000 within other current assets in our Consolidated Balance Sheet. 48 F o r m 1 0 - K Gift Card and Other Deferred Revenue We defer revenue when cash payments are received in advance of satisfying performance obligations, primarily associated with our stored-value cards, merchandise sales, customer loyalty programs, and incentives received from credit card issuers. We issue stored-value cards that may be redeemed on future merchandise purchases at our stores or through our e-commerce channel. Our stored-value cards have no expiration dates. Revenue from stored-value cards is recognized at a point in time upon redemption of the card and as control of the merchandise is transferred to the customer. Revenue from estimated unredeemed stored-value cards (breakage) is recognized in a manner consistent with our historical redemption patterns over the estimated period of redemption of our cards of approximately four years, the majority of which is recognized within one year of the cards issuance. Breakage revenue is not material to our Consolidated Financial Statements. For merchandise sales, we record a liability at each period end where we have not fulfilled our obligation to transfer goods or services to the customer, but for which we have already received consideration or have a right to consideration. We have customer loyalty programs, which allow members to earn points for each qualifying purchase. Points earned enable members to receive certificates that may be redeemed on future merchandise purchases at our stores or through our e-commerce channel. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated consideration for the points earned by our loyalty program members is deferred based on the standalone selling price of the points and recorded within gift card and other deferred revenue within our Consolidated Balance Sheet. The measurement of standalone selling prices takes into consideration the discount the customer would receive in a separate transaction for the delivered item, as well as our estimate of certificates expected to be redeemed, based on historical redemption patterns. This measurement is applied to our portfolio of performance obligations for points earned, as all obligations have similar economic characteristics. We believe the impact to our Consolidated Financial Statements would not be materially different if this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed by the customer. These obligations relate to contracts with terms less than one year, as our certificates generally expire within 6 months from issuance. We enter into agreements with credit card issuers in connection with our private label and co-branded credit cards, whereby we receive cash incentives in exchange for promised services, such as licensing our brand names and marketing the credit card program to customers. Services promised under these agreements are interrelated and are thus considered a single performance obligation. Revenue is recognized over time as we transfer promised services throughout the contract term. As of February 2, 2020 and February 3, 2019, we had recorded $292,550,000 and $298,435,000 for gift card and other deferred revenue in our Consolidated Balance Sheet, substantially all of which is typically recognized into revenue within the next 12 months. Vendor Allowances We receive allowances or credits from certain vendors for volume rebates. We treat such volume rebates as an offset to the cost of the product or services provided at the time the expense is recorded. These allowances and credits received are recorded in both cost of goods sold and in selling, general and administrative expenses. Cost of Goods Sold Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight expenses, freight-to-store expenses and other inventory-related costs such as shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy costs, including common area maintenance, property taxes and utilities. Shipping costs consist of third-party delivery services and shipping materials. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of non-occupancy-related costs associated with our retail stores, distribution facilities, customer care centers, supply chain operations (buying, receiving and inspection) 49 and corporate administrative functions. These costs include employment, advertising, third-party credit card processing and other general expenses. Stock-Based Compensation We account for stock-based compensation arrangements by measuring and recognizing compensation expense for all stock-based awards using a fair value based method. Restricted stock units are valued using the closing price of our stock on the date prior to the date of grant. The fair value of each stock-based award is amortized over the requisite service period. Advertising Expenses Advertising expenses consist of media and production costs related to digital advertising, catalog mailings and other direct marketing activities. All advertising costs are expensed as incurred, or upon the release of the initial advertisement. Prior to the adoption of ASU 2014-09 in fiscal 2018, prepaid advertising costs were capitalized and amortized over their expected period of future benefit of approximately three months. Total advertising expenses (including digital advertising, catalog advertising and other advertising costs) were approximately $388,194,000, $390,115,000 and $382,206,000 in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Foreign Currency Translation Some of our foreign operations have a functional currency other than the U.S. dollar. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded as other comprehensive income within stockholders’ equity. Foreign currency exchange gains and losses are recorded in selling, general and administrative expenses, except for those discussed in Note L. Earnings Per Share Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding plus common stock equivalents for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in our Consolidated Financial Statements. We record reserves for our estimates of the additional income tax liability that is more likely than not to result from the ultimate resolution of foreign and domestic tax examinations. At any one time, many tax years are subject to examination by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax examination, upon expiration of statutes of limitation, or upon occurrence of other events. In order to compute income tax on an interim basis, we estimate what our effective tax rate will be for the full fiscal year and adjust these estimates throughout the year as necessary. Adjustments to our income tax provision due to changes in our estimated effective tax rate are recorded in the interim period in which the change occurs. The tax expense (or benefit) related to items other than ordinary income is individually computed and recognized when the items occur. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of our earnings in various taxing jurisdictions or changes in tax law. New Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset and an operating lease liability for virtually all leases. 50 F o r m 1 0 - K We adopted the ASU, as amended, as of February 4, 2019, the first day of fiscal year 2019. We have elected to apply the provisions of this ASU at the adoption date, instead of to the earliest comparative period presented in the financial statements. We have elected the package of practical expedients upon adoption, which permits us not to reassess whether existing contracts are or contain leases, the lease classification of existing leases, or initial direct costs for existing leases. We have elected not to separate lease and non-lease components for all of our leases and not to recognize a right-of-use asset and a lease liability for all short-term leases. The adoption of this ASU resulted in an increase in total long-term assets and total liabilities of approximately $1.2 billion, which includes an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and deferred lease incentives of approximately $0.2 billion, and an increase in right-of-use assets of approximately $1.2 billion on the first day of fiscal 2019. We also recorded an approximate $3,300,000 reduction, net of tax, to the opening balance of retained earnings resulting from the impairment of certain long-lived assets upon adoption of this ASU. The adoption of this ASU did not materially impact our Consolidated Statement of Earnings. In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815), which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. Entities should apply the guidance to existing cash flow and net investment hedge relationships using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings on the date of adoption. The guidance also provides transition relief to make it easier for entities to apply certain amendments to existing hedges where the hedge documentation needs to be modified. This ASU was effective for us in the first quarter of fiscal 2019. The adoption of this ASU did not have a material impact on our financial condition, results of operations or cash flows. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Accordingly, the amendments require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU is effective for us in the first quarter of fiscal 2020. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, and early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flow. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. This standard is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2019. We do not expect the adoption of this ASU to have a material impact on our financial condition, results of operations or cash flows. 51 Note B: Property and Equipment Property and equipment consists of the following: In thousands Leasehold improvements Fixtures and equipment Capitalized software Land and buildings Corporate systems projects in progress Construction in progress 1 Total Accumulated depreciation Property and equipment, net Feb. 2, 2020 Feb. 3, 2019 $ $ 946,880 830,650 788,635 177,088 62,059 7,076 950,259 836,400 733,941 175,181 39,416 7,205 2,812,388 2,742,402 (1,883,350) (1,812,767) $ 929,038 $ 929,635 1 Construction in progress primarily consists of leasehold improvements and furniture and fixtures related to new, expanded or remodeled retail stores where construction had not been completed as of year-end. Note C: Borrowing Arrangements Credit Facility We have a credit facility which provides for a $500,000,000 unsecured revolving line of credit (“revolver”) and a $300,000,000 unsecured term loan facility (“term loan”). The revolver may be used to borrow revolving loans or request the issuance of letters of credit. We may, upon notice to the administrative agent, request existing or new lenders, at such lenders’ option, to increase the revolver by up to $250,000,000 to provide for a total of $750,000,000 of unsecured revolving credit. The revolver matures on January 8, 2023, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized. We may, prior to the first and second anniversaries of the closing date of the amendment of the credit facility, elect to extend the maturity date for an additional year, subject to lender approval. See Note P. During fiscal 2019, we had borrowings of $100,000,000 under the revolver (at a weighted average interest rate of 3.04%), all of which were repaid in the fourth quarter of fiscal 2019, and no amounts were outstanding as of February 2, 2020. During fiscal 2018, we had borrowings of $60,000,000 under the revolver (at a weighted average interest rate of 3.20%), all of which were repaid in the fourth quarter of fiscal 2018, and no amounts were outstanding as of February 3, 2019. Additionally, as of February 2, 2020, $12,187,000 in issued but undrawn standby letters of credit were outstanding under the revolver. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation and other insurance programs. As of February 2, 2020, we had $300,000,000 outstanding under our term loan (at a weighted average interest rate of 3.32%). The term loan matures on January 8, 2021, at which time all outstanding principal and any accrued interest must be repaid. Costs incurred in connection with the issuance of the term loan are presented as a reduction to the carrying value of the debt in our Consolidated Balance Sheet. Prior to maturity in fiscal 2020, we intend to renew and extend our $300,000,000 term loan. The interest rate under the credit facility is variable, and may be elected by us as: (i) the London Interbank Offer Rate (“LIBOR”) plus an applicable margin based on our leverage ratio ranging from 0.91% to 1.775% for a revolver borrowing, and 1.0% to 2.0% for the term loan; or (ii) a base rate as defined in the credit facility, plus an applicable margin ranging from 0% to 0.775% for a revolver borrowing, and 0% to 1.0% for the term loan. See “Risk Factors” in Item 1A. As of February 2, 2020, we were in compliance with our covenants under the credit facility. See “Risk Factors” in Item 1A and Note P: Subsequent Events. 52 Letter of Credit Facilities We have three unsecured letter of credit reimbursement facilities for a total of $70,000,000, each of which matures on August 23, 2020. The letter of credit facilities contain covenants that are consistent with our credit facility. Interest on unreimbursed amounts under the letter of credit facilities accrues at a base rate as defined in the credit facility, plus an applicable margin based on our leverage ratio. As of February 2, 2020, an aggregate of $6,462,000 was outstanding under the letter of credit facilities, which represents only a future commitment to fund inventory purchases to which we had not taken legal title. The latest expiration possible for any future letters of credit issued under the facilities is January 21, 2021. Note D: Income Taxes The components of earnings before income taxes, by tax jurisdiction, are as follows: Dollars in thousands United States Foreign Total Fiscal 2019 Fiscal 2018 Fiscal 2017 $ $ 353,215 103,806 457,021 $ $ 333,594 95,653 429,247 $ $ 379,000 73,439 452,439 The provision for income taxes consists of the following: Dollars in thousands Fiscal 2019 Fiscal 2018 Fiscal 2017 F o r m 1 0 - K Current Federal State Foreign Total Current Deferred Federal State Foreign Total Deferred Total provision $ $ $ $ $ $ 76,873 14,205 12,438 103,516 $ (606) $ (870) (1,081) (2,557) $ 100,959 $ 43,745 15,357 12,822 71,924 23,507 1,562 (1,430) 23,639 95,563 $ $ $ $ $ 97,202 19,552 12,759 129,513 62,893 460 28 63,381 192,894 We have historically elected not to provide for U.S. income taxes with respect to the undistributed earnings of our foreign subsidiaries as we intended to utilize those earnings in our foreign operations for an indefinite period of time. Under Internal Revenue Code section 965 of U.S. Tax Reform, we are deemed to have distributed all the post-1986 accumulated earnings of our foreign subsidiaries to the U.S. as of December 31, 2017. In light of the U.S. Tax Cuts and Jobs Act, the Company re-evaluated its permanent reinvestment assertion with respect to unremitted foreign earnings. As a result, we are now permanently reinvested with respect to our foreign earnings in Canada beginning in fiscal 2018. 53 A reconciliation of income taxes at the federal statutory corporate rate to the effective rate is as follows: Federal income taxes at the statutory rate Re-measurement of deferred tax assets and liabilities Transition tax State income tax rate Officer’s compensation under Sec.162(m) Deferred true up Change in uncertain tax positions Rate differential Research and development credits Other Total Fiscal 2019 Fiscal 2018 Fiscal 2017 21.0% — — 2.9% 1.0% (1.3%) 0.5% (1.8%) (0.7%) 0.5% 22.1% 21.0% (2.2%) (0.6%) 3.8% — — 4.1% (2.3%) (2.1%) 0.6% 22.3% 33.9% 6.7% 2.9% 2.5% — — (1.6%) (2.9%) — 1.1% 42.6% Significant components of our deferred income tax accounts are as follows: Deferred tax asset (liabilities), Dollars in thousands Fiscal 2019 Fiscal 2018 Operating lease liabilities Merchandise inventories Customer deposits Compensation Stock-based compensation Accrued liabilities State taxes Executive deferred compensation Federal and state net operating loss Deferred rent Operating lease right-of-use assets Deferred lease incentives Property and equipment Prepaid catalog expenses Other Valuation allowance Total deferred tax assets, net $ $ 347,693 22,311 19,520 14,350 9,860 8,440 7,546 7,543 3,443 — (309,801) (46,701) (37,309) (394) 2,369 (3,648) — 18,703 14,345 11,251 14,281 13,470 7,435 5,739 4,223 18,942 — (26,032) (31,557) (936) (4,797) (3,542) $ 45,222 $ 41,525 As a result of the acquisition of Outward, Inc., we had net state operating loss carry-forwards as of February 2, 2020. A valuation allowance has been provided against certain state net operating carry-forwards, as we do not expect to fully utilize the losses in future years. The following table summarizes the activity related to our gross unrecognized tax benefits: Dollars in thousands Beginning Balance Increases related to current year tax positions Increases for tax positions for prior years Decrease for tax positions for prior years Settlements Lapse in statute of limitations Ending Balance 54 Fiscal 2019 Fiscal 2018 Fiscal 2017 $ 35,209 3,438 1,405 (308) — (3,106) $ 18,051 4,694 14,905 (1,279) (376) (786) $ 25,864 3,345 808 (10,610) — (1,356) $ 36,638 $ 35,209 $ 18,051 As of February 2, 2020, we had $36,638,000 of gross unrecognized tax benefits, of which $32,421,000 would, if recognized, affect the effective tax rate. We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of February 2, 2020 and February 3, 2019, our accruals for the payment of interest and penalties totaled $7,251,000 and $5,437,000 respectively. Due to the potential resolution of tax issues, it is reasonably possible that the balance of our gross unrecognized tax benefits could decrease within the next twelve months by a range of $0 to $11,757,000. We file income tax returns in the U.S. and foreign jurisdictions. We are subject to examination by the tax authorities in these jurisdictions. Our U.S. federal taxable years for which the statute of limitations has not expired are fiscal years 2016 to 2019. Substantially all material states, local and foreign jurisdictions’ statutes of limitations are closed for taxable years prior to 2016. Note E: Leases The components of our lease costs are as follows: In thousands Operating lease costs Variable lease costs Total lease costs Sublease income and short-term lease costs were not material to us for fiscal 2019. Supplemental cash flow information related to our leases are as follows: In thousands Cash paid for amounts included in the measurement of operating lease liabilities Net additions to right-of-use assets As of February 2, 2020, additional information related to our leases is as follows: Weighted average remaining lease term (years) Weighted average incremental borrowing rate F o r m 1 0 - K Fiscal 2019 (52 Weeks) $ $ 267,883 129,018 396,901 Fiscal 2019 (52 Weeks) $ $ 285,678 150,401 7.3 3.8% As of February 2, 2020, the future minimum lease payments under our operating lease liabilities are as follows: In thousands Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 and thereafter Total lease payments Less interest Total operating lease liabilities Less current operating lease liabilities Total non-current operating lease liabilities 55 $ 281,995 246,588 212,629 178,650 154,594 463,280 1,537,736 (215,234) 1,322,502 (227,923) $ 1,094,579 As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments under non-cancellable operating leases as of February 3, 2019 were as follows: In thousands Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter Total $ 292,387 262,429 225,755 190,263 160,308 559,802 $ 1,690,944 Memphis-Based Distribution Facility In fiscal 2015, we entered into an agreement with a partnership comprised of the estate of W. Howard Lester, our former Chairman of the Board and Chief Executive Officer, and the estate of James A. McMahan, a former Director Emeritus and significant stockholder and two unrelated parties to lease a distribution facility in Memphis, Tennessee through July 2017. In fiscal 2017, we amended the lease to further extend the term through July 2020. The amended lease provides for two additional one-year renewal options. We made annual rental payments of approximately $1,765,000, $1,689,000, and $1,629,000 plus applicable taxes, insurance and maintenance expenses in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Note F: Earnings Per Share Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding and common stock equivalents outstanding for the period. Common stock equivalents consist of shares subject to stock-based awards with exercise prices less than or equal to the average market price of our common stock for the period, to the extent their inclusion would be dilutive. The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations: In thousands, except per share amounts Fiscal 2019 (52 Weeks) Basic Effect of dilutive stock-based awards Diluted Fiscal 2018 (53 Weeks) Basic Effect of dilutive stock-based awards Diluted Fiscal 2017 (52 Weeks) Basic Effect of dilutive stock-based awards Diluted Net Earnings Weighted Average Shares Earnings Per Share $ $ $ $ $ $ 356,062 356,062 333,684 333,684 259,545 259,545 78,108 1,117 79,225 81,420 920 82,340 85,592 488 86,080 $ $ $ $ $ $ 4.56 4.49 4.10 4.05 3.03 3.02 Stock-based awards of 46,000, 31,000, and 577,000 were excluded from the computation of diluted earnings per share in fiscal 2019, fiscal 2018 and fiscal 2017, respectively, as their inclusion would be anti-dilutive. 56 Note G: Stock-Based Compensation Equity Award Programs Our Amended and Restated 2001 Long-Term Incentive Plan (the “Plan”) provides for grants of incentive stock options, nonqualified stock options, stock-settled stock appreciation rights (collectively, “option awards”), restricted stock awards, restricted stock units (including those that are performance-based), deferred stock awards (collectively, “stock awards”) and dividend equivalents up to an aggregate of approximately 36,570,000 shares. As of February 2, 2020, there were approximately 5,430,000 shares available for future grant. Awards may be granted under the Plan to officers, employees and non-employee members of the Board of Directors of the company (the “Board”) or any parent or subsidiary. Shares issued as a result of award exercises or releases are primarily funded with the issuance of new shares. Option Awards Annual grants of option awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. The exercise price of these option awards must not be less than 100% of the closing price of our stock on the day prior to the grant date. Option awards granted to employees generally vest evenly over a period of four years for service-based awards. Certain option awards contain vesting acceleration clauses resulting from events including, but not limited to, retirement, merger or a similar corporate event. Stock Awards Annual grants of stock awards are limited to 1,000,000 shares on a per person basis and have a maximum term of seven years. Stock awards granted to employees generally vest evenly over a period of four years for service- based awards. Certain performance-based awards, which have variable payout conditions based on predetermined financial targets, generally vest three years from the date of grant. Certain stock awards and other agreements contain vesting acceleration clauses resulting from events including, but not limited to, retirement, disability, death, merger or a similar corporate event. Stock awards granted to non-employee Board members generally vest in one year. Non-employee Board members automatically receive stock awards on the date of their initial election to the Board and annually thereafter on the date of the annual meeting of stockholders (so long as they continue to serve as a non-employee Board member). Stock-Based Compensation Expense During fiscal 2019, fiscal 2018 and fiscal 2017, we recognized total stock-based compensation expense, as a component of selling, general and administrative expenses, of $64,163,000, $59,802,000 and $42,988,000, respectively. As of February 2, 2020, there was $83,444,000 of unrecognized stock-based compensation expense (net of estimated forfeitures), which we expect to recognize on a straight-line basis over a weighted average remaining service period of approximately two years. At each reporting period, all compensation expense attributable to vested awards has been fully recognized. F o r m 1 0 - K 57 Restricted Stock Units The following table summarizes our restricted stock unit activity during fiscal 2019: Weighted Average Grant Date Fair Value Weighted Average Contractual Term Remaining (Years) Shares Intrinsic Value1 Balance at February 3, 2019 3,012,923 $ Granted Granted, with vesting subject to performance conditions Released2 Cancelled Balance at February 2, 2020 Vested plus expected to vest at February 2, 2020 1,066,337 240,515 (1,029,288) (406,293) 2,884,194 2,335,826 $ $ 52.88 58.27 57.77 55.94 53.89 54.09 54.04 3.00 3.16 $ $ 202,124,000 163,695,000 1 Intrinsic value for outstanding and unvested restricted stock units is based on the market value of our common stock on the last business day of the fiscal year (or $70.08). 2 Excludes 105,436 incremental shares released due to achievement of performance conditions above target. The following table summarizes additional information about restricted stock units: Fiscal 2019 (52 weeks) Fiscal 2018 (53 weeks) Fiscal 2017 (52 weeks) Weighted average grant date fair value per share of awards granted Intrinsic value of awards released1 58.18 $ $ 65,403,000 49.57 $ $ 34,213,000 52.76 $ $ 35,508,000 1 Intrinsic value for releases is based on the market value on the date of release. Tax Benefit We record excess tax benefits and deficiencies resulting from the settlement of stock-based awards as a benefit or expense within income taxes in the period in which they occur. During fiscal 2019, fiscal 2018, and fiscal 2017, the current tax benefit related to stock-based awards totaled $13,793,000, $9,927,000, and $16,066,000, respectively. Note H: Williams-Sonoma, Inc. 401(k) Plan and Other Employee Benefits We have a defined contribution retirement plan, the Williams-Sonoma, Inc. 401(k) Plan (the “401(k) Plan”), which is intended to be qualified under Internal Revenue Code sections 401(a), 401(k), 401(m) and 4975(e)(7). The 401(k) Plan permits eligible employees to make salary deferral contributions up to 75% of their eligible compensation each pay period (7% for highly-compensated employees prior to February 3, 2020). Employees designate the funds in which their contributions are invested. Each participant may choose to have his or her salary deferral contributions and earnings thereon invested in one or more investment funds, including our company stock fund. Our matching contribution is equal to 50% of each participant’s salary deferral contribution, taking into account only those contributions that do not exceed 6% of the participant’s eligible pay for the pay period. Each participant’s matching contribution is earned on a semi-annual basis with respect to eligible salary deferrals for those participants that are employed with the company on June 30th or December 31st of the year in which the deferrals are made. Each associate must complete one year of service prior to receiving company matching contributions. For the first five years of the participant’s employment, all matching contributions vest at the rate of 20% per year of service, measuring service from the participant’s hire date. Thereafter, all matching contributions vest immediately. Our contributions to the plan were $9,544,000, $9,036,000 and $8,224,000 in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. 58 F o r m 1 0 - K The 401(k) Plan consists of two parts: a profit sharing plan portion and a stock bonus plan/employee stock ownership plan (the “ESOP”). The ESOP portion is the portion that is invested in the Williams-Sonoma, Inc. Stock Fund. The profit sharing and ESOP components of the 401(k) Plan are considered a single plan under Internal Revenue Code section 414(l). We also have a nonqualified executive deferred compensation plan that provides supplemental retirement income benefits for a select group of management. This plan permits eligible employees to make salary and bonus deferrals that are 100% vested. We have an unsecured obligation to pay in the future the value of the deferred compensation adjusted to reflect the performance, whether positive or negative, of selected investment measurement options chosen by each participant during the deferral period. As of February 2, 2020 and February 3, 2019, $30,534,000 and $23,319,000, respectively, is included in other long-term liabilities related to these deferred compensation obligations. Additionally, we have purchased life insurance policies on certain participants to potentially offset these unsecured obligations. The cash surrender value of these policies was $31,886,000 and $25,390,000 as of February 2, 2020 and February 3, 2019, respectively, and is included in other long-term assets, net. Note I: Commitments and Contingencies We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. These disputes, which are not currently material, are increasing in number as our business expands and our company grows. We review the need for any loss contingency reserves and establish reserves when, in the opinion of management, it is probable that a matter would result in liability, and the amount of loss, if any, can be reasonably estimated. In view of the inherent difficulty of predicting the outcome of these matters, it may not be possible to determine whether any loss is probable or to reasonably estimate the amount of the loss until the case is close to resolution, in which case no reserve is established until that time. Any claims against us, whether meritorious or not, could result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, we believe that the ultimate resolution of these current matters will not have a material adverse effect on our Consolidated Financial Statements taken as a whole. Note J: Stock Repurchase Program and Dividends During fiscal 2019, we repurchased 2,341,931 shares of our common stock, of which 16,368 shares were designated as treasury stock, at an average cost of $63.55 per share and a total cost of approximately $148,834,000 under our stock repurchase program. As of February 2, 2020, there was approximately $574,982,000 remaining under our current stock repurchase program. As of February 2, 2020, we held treasury stock of $941,000 that represents the cost of shares available for issuance intended to satisfy future stock-based award settlements in certain foreign jurisdictions. During fiscal 2018, we repurchased 5,373,047 shares of our common stock at an average cost of $54.96 per share and a total cost of approximately $295,304,000. During fiscal 2017, we repurchased 4,050,697 shares of our common stock at an average cost of $48.43 per share and a total cost of approximately $196,179,000. Stock repurchases under our program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability and other market conditions. Total cash dividends declared in fiscal 2019, fiscal 2018 and fiscal 2017, were approximately $156,103,000, or $1.92 per common share, $144,609,000, or $1.72 per common share and $135,779,000, or $1.56 per common share, respectively. Note K: Segment Reporting We identify our operating segments according to how our business activities are managed and evaluated. 59 Prior to fiscal 2019, we managed e-commerce merchandise strategies, which included the results of Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Pottery Barn Teen, Williams Sonoma Home, Rejuvenation and Mark and Graham, separately from our retail business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the e-commerce reportable segment. Also, prior to fiscal 2019, we managed retail merchandise strategies, which included the results of our retail stores for Williams Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Rejuvenation, separately from our e-commerce business. Because these merchandising strategies shared similar economic and other qualitative characteristics, they had been aggregated into the retail reportable segment. Beginning in fiscal 2019, due to the convergence of our e-commerce and retail businesses and to better align with how we manage our omni-channel business, we have combined the results of our e-commerce and retail merchandise strategies at the overall brand level. Each of our brands are operating segments. Because they share similar economic and other qualitative characteristics, we have aggregated our operating segments into a single reportable segment. The following table summarizes our net revenues by brand for fiscal 2019, fiscal 2018 and fiscal 2017. We have updated fiscal 2018 and fiscal 2017 results to conform with the current year presentation. In thousands Pottery Barn West Elm Williams Sonoma Pottery Barn Kids and Teen Other1 Total2 Fiscal 2019 (52 weeks) Fiscal 2018 (53 weeks) Fiscal 2017 (52 weeks) $ 2,214,397 1,466,537 1,032,368 908,561 276,145 $ $ 2,177,344 1,292,928 1,056,125 895,762 249,434 2,066,302 1,114,339 1,022,434 860,468 228,816 $ 5,898,008 $ 5,671,593 $ 5,292,359 1 Primarily consists of net revenues from our international franchise operations, Rejuvenation and Mark and Graham. 2 Includes net revenues related to our international operations (including our operations in Canada, Australia, the United Kingdom and our franchise businesses) of approximately $365.6 million, $346.8 million and $328.2 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Long-lived assets by geographic location are as follows: In thousands U.S. International Total Feb. 2, 20201 Feb. 3, 20191 $ $ 2,132,635 165,772 2,298,407 $ $ 1,068,196 50,305 1,118,501 1 In fiscal 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, as of the adoption date. Amounts reported for fiscal 2018 and prior years have not been adjusted, and continue to be reported in accordance with previous lease accounting guidance. See Note A to the Consolidated Financial Statements. Note L: Derivative Financial Instruments We have retail and e-commerce businesses in Canada, Australia and the United Kingdom, and operations throughout Asia and Europe, which expose us to market risk associated with foreign currency exchange rate fluctuations. Substantially all of our purchases and sales are denominated in U.S. dollars, which limits our exposure to this risk. However, some of our foreign operations have a functional currency other than the U.S. dollar. To mitigate this risk, we hedge a portion of our foreign currency exposure with foreign currency forward contracts in accordance with our risk management policies. We do not enter into such contracts for speculative purposes. The assets or liabilities associated with the derivative financial instruments are measured at fair value and recorded in either other current or long-term assets or other current or long-term liabilities. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on whether the derivative financial instrument is designated as a hedge and qualifies for hedge accounting in accordance with the Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. 60 F o r m 1 0 - K Cash Flow Hedges We enter into foreign currency forward contracts designated as cash flow hedges (to sell Canadian dollars and purchase U.S. dollars) for forecasted inventory purchases in U.S. dollars by our Canadian subsidiary. These hedges have terms of up to 18 months. All hedging relationships are formally documented, and the forward contracts are designed to mitigate foreign currency exchange risk on hedged transactions. We record the effective portion of changes in the fair value of our cash flow hedges in other comprehensive income (“OCI”) until the earlier of when the hedged forecasted inventory purchase occurs or the respective contract reaches maturity. Subsequently, as the inventory is sold to the customer, we reclassify amounts previously recorded in OCI to cost of goods sold. Changes in the fair value of the forward contract related to interest charges (or forward points) are excluded from the assessment and measurement of hedge effectiveness and are recorded in cost of goods sold. Based on the rates in effect as of February 2, 2020, we expect to reclassify a net pre-tax gain of approximately $7,000 from OCI to cost of goods sold over the next 12 months. We also enter into non-designated foreign currency forward contracts (to sell Australian dollars and British pounds and purchase U.S. dollars) to reduce the exchange risk associated with our assets and liabilities denominated in a foreign currency. Any foreign exchange gains or losses related to these contracts are recognized in selling, general and administrative expenses. As of February 2, 2020, and February 3, 2019, we had foreign currency forward contracts outstanding (in U.S. dollars) with notional values as follows: In thousands Contracts designated as cash flow hedges Contracts not designated as cash flow hedges Feb. 2, 2020 Feb. 3, 2019 $ $ 17,200 $ — $ 16,600 5,300 Hedge effectiveness is evaluated prospectively at inception, on an ongoing basis, as well as retrospectively using regression analysis. Any measurable ineffectiveness of the hedge is recorded in selling, general and administrative expenses. No gain or loss was recognized for cash flow hedges due to hedge ineffectiveness and all hedges were deemed effective for assessment purposes for fiscal 2019, fiscal 2018 and fiscal 2017. The effect of derivative instruments in our Consolidated Financial Statements, pre-tax, was as follows: Fiscal 2019 Fiscal 2018 Fiscal 2017 Cost of goods sold Selling, general and administrative expenses Cost of goods sold Selling, general and administrative expenses Cost of goods sold Selling, general and administrative expenses $ 3,758,916 $ 1,673,218 $ 3,570,580 $ 1,665,060 $ 3,360,648 $ 1,477,900 In thousands Line items presented in the Condensed Consolidated Statement of Earnings in which the effects of derivatives are recorded Gain (loss) recognized in income Derivatives designated as cash flow hedges Derivatives not designated as hedging instruments $ $ 604 $ — $ 478 $ 57 — $ 28 $ — $ 3,967 $ $ (144) $ 88 — $ (3,286) The fair values of our derivative financial instruments are presented below according to their classification in our Consolidated Balance Sheets. All fair values were measured using Level 2 inputs as defined by the fair value hierarchy described in Note M. In thousands Derivatives designated as cash flow hedges: Other current assets Derivatives not designated as hedging instruments: Other current assets 61 Feb. 2, 2020 Feb. 3, 2019 $ $ 138 $ 358 — $ 4 We record all derivative assets and liabilities on a gross basis. They do not meet the balance sheet netting criteria as discussed in ASC 210, Balance Sheet, because we do not have master netting agreements established with our derivative counterparties that would allow for net settlement. Note M: Fair Value Measurements Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy established by ASC 820, Fair Value Measurement, which defines three levels of inputs that may be used to measure fair value, as follows: • • • Level 1: inputs which include quoted prices in active markets for identical assets or liabilities; Level 2: inputs which include observable inputs other than Level 1 inputs, such as quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and Level 3: inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. The fair values of our cash and cash equivalents are based on Level 1 inputs, which include quoted prices in active markets for identical assets. Current debt As of February 2, 2020, the fair value of our current debt, which consists of outstanding borrowings under our term loan, approximates its carrying value, as the instrument is relatively short-term in nature and the interest rate under the term loan is based on observable Level 2 inputs, primarily quoted market interest rates for instruments with similar maturities. Foreign Currency Derivatives and Hedging Instruments We use the income approach to value our derivatives using observable Level 2 market data at the measurement date and standard valuation techniques to convert future amounts to a single present value amount, assuming that participants are motivated but not compelled to transact. Level 2 inputs are limited to quoted prices that are observable for the assets and liabilities, which include interest rates and credit risk ratings. We use mid-market pricing as a practical expedient for fair value measurements. Key inputs for foreign currency derivatives are the spot rates, forward rates, interest rates and credit derivative market rates. The counterparties associated with our foreign currency forward contracts are large credit-worthy financial institutions, and the derivatives transacted with these entities are relatively short in duration, therefore, we do not consider counterparty concentration and non-performance to be material risks at this time. Both we and our counterparties are expected to perform under the contractual terms of the instruments. None of the derivative contracts entered into are subject to credit risk-related contingent features or collateral requirements. Long-lived Assets We review the carrying value of all long-lived assets for impairment, primarily at an individual store level, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure property and equipment at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. We measure right-of-use assets on a nonrecurring basis using Level 2 inputs that are corroborated by market data. Where Level 2 inputs are not readily available, we use Level 3 inputs. Fair value of these long-lived assets is based on the present value of estimated future cash flows using a discount rate commensurate with the risk. There were no transfers between Level 1, 2 or 3 categories during fiscal 2019 or fiscal 2018. 62 Note N: Accumulated Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) by component, net of tax, are as follows: In thousands Foreign Currency Translation Cash Flow Hedges Accumulated Other Comprehensive Income (Loss) Balance at January 29, 2017 $ (9,957) $ 54 $ Foreign currency translation adjustments Change in fair value of derivative financial instruments Reclassification adjustment for realized (gain) loss on derivative financial instruments1 Other comprehensive income (loss) Balance at January 28, 2018 Foreign currency translation adjustments Change in fair value of derivative financial instruments Reclassification adjustment for realized (gain) loss on derivative financial instruments1 Other comprehensive income (loss) Balance at February 3, 2019 Foreign currency translation adjustments Change in fair value of derivative financial instruments Reclassification adjustment for realized (gain) loss on derivative financial instruments1 Other comprehensive income (loss) 3,730 — — 3,730 (6,227) (5,032) — — (715) 106 (609) (555) — 1,098 — (357) (5,032) (11,259) (3,334) — — (3,334) 741 186 — 163 (343) (180) Balance at February 2, 2020 $ (14,593) $ 6 $ (9,903) 3,730 (715) 106 3,121 (6,782) (5,032) 1,098 (357) (4,291) (11,073) (3,334) 163 (343) (3,514) (14,587) F o r m 1 0 - K 1 Refer to Note L for additional disclosures about reclassifications out of accumulated other comprehensive income and their corresponding effects on the respective line items in the Consolidated Statements of Earnings. Note O: Acquisition of Outward, Inc. On December 1, 2017, we acquired Outward, Inc., a 3-D imaging and augmented reality platform for the home furnishings and décor industry. Outward’s technology enables applications in product visualization, digital room design and augmented and virtual reality. Of the $112,000,000 contractual purchase price, approximately $80,812,000 was deemed to be purchase consideration, $26,690,000 is payable to former stockholders of Outward over a period of four years from the acquisition date, contingent upon their continued service during that time, and $4,498,000 primarily represents settlement of pre-existing obligations of Outward with third parties on the acquisition date. Certain key employees of Outward may also collectively earn up to an additional $20,000,000, contingent upon achievement of certain financial performance targets, and subject to their continued service over the performance period. Both of these contingent amounts will be recognized as post- combination compensation expense as they are earned. 63 The purchase consideration has been allocated based on estimates of the fair value of identifiable assets acquired and liabilities assumed, as set forth in the table below. In thousands Working capital and other assets Property and equipment, net Intangible assets Liabilities Total identifiable net assets acquired Goodwill Total purchase consideration $ 718 2,049 18,300 (6,886) $14,181 66,631 $80,812 Intangible assets acquired primarily represent 3-D imaging data and core intellectual property, which are being amortized over a useful life of four years. Goodwill is primarily attributable to expected synergies as a result of the acquisition, which include the leverage of acquired technology and talent to drive improved conversion, cost savings and operating efficiencies. None of the goodwill will be deductible for income tax purposes. Outward, Inc. is a wholly-owned subsidiary of Williams-Sonoma, Inc. Results of operations for Outward have been included in our Condensed Consolidated Financial Statements from the acquisition date. Note P: Subsequent Events On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. On March 17, 2020, we announced the temporary closures of our retail store operations in the United States and Canada to protect our employees, customers and the communities in which we operate and to help contain the COVID-19 coronavirus outbreak. Our retail stores are expected to remain closed until at least April 2, 2020 depending upon how the COVID-19 outbreak evolves. Our retail store revenue comprises approximately 44% of our net revenues. At this time, we continue to operate our e-commerce sites and distribution centers and continue to deliver products to our customers. As of the date of this filing, we cannot reasonably estimate the impact on our business from this pandemic, but we currently anticipate a material impact on our consolidated statements of earnings, consolidated balance sheet, consolidated cash flows and liquidity in fiscal 2020. On March 23, 2020, as a precautionary measure to maximize our liquidity and to increase our available cash on hand in the event of a protracted COVID-19 outbreak, we drew down $488,000,000 on our revolving line of credit, for an outstanding balance on our revolver of $500,000,000. 64 F o r m 1 0 - K REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Williams-Sonoma, Inc.: Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Williams-Sonoma, Inc. and subsidiaries (the “Company”) as of February 2, 2020 and February 3, 2019, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended February 2, 2020, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of February 2, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2020 and February 3, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. Change in Accounting Principle As discussed in Note A to the financial statements, effective February 4, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases, (“ASC 842”), using the modified retrospective approach. This change in accounting principle is also communicated as a critical audit matter below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 65 Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Property and Equipment — Refer to Note A and M to the financial statements. Critical Audit Matter Description The Company performs an analysis of the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the long-lived assets may not be recoverable. Events that result in an impairment review may include a significant decrease in the operating performance of the long-lived asset, or the decision to close a store, corporate facility, or distribution center. The majority of the Company’s evaluation of long-lived asset is at the individual store level and involves the comparison of a store’s estimated future undiscounted cash flows over its remaining useful life to its carrying value. As of February 2, 2020, the Company had $830.6 million in fixtures and equipment, $946.9 million in leasehold improvements, and $1.2 billion in lease right-of-use assets, the majority of which relates to the Company’s stores. Impairment may result when the carrying value of a store’s assets exceeds the store’s estimated undiscounted future cash flows. We identified this as a critical audit matter because the Company’s estimate of future store cash flows involves significant estimates and assumptions related to revenue growth rates and gross margin. Additionally, the measurement of any impairment loss also includes estimation of the fair value of the Company’s lease right-of- use asset included within the asset group, which includes estimates of market rental rates. Changes in these assumptions could have a significant impact on management’s conclusion on whether a store could be impaired and the impairment loss that is recorded. Performing audit procedures to evaluate the appropriateness of the Company’s judgments used in these significant assumptions therefore involved a high degree of subjectivity and complexity. 66 F o r m 1 0 - K How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s judgments regarding the forecasts of revenue growth and gross margin, as well as the fair value of the lease right-of-use asset, included the following, among others: • We tested the operating effectiveness of controls over management’s forecasts of future revenue growth, gross margin, and market rental rates. • We evaluated management’s ability to accurately forecast future sales and gross margin growth by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue and operating forecast by comparing the forecasts to (1) historical revenues and gross margins, (2) internal communications to management and the Board of Directors, (3) external communications made by management to analysts and investors, and (4) trends in the industry and geographical region. Evaluated the methods and inputs used by management to determine the fair value of the lease right-of-use asset, including assessing comparable market rents and broker quotes. • Leases — Refer to Notes A and E to the financial statements (also see ASC 842 adoption explanatory paragraph above) Critical Audit Matter Description The Company adopted ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset and lease liability for virtually all leases. The adoption of this new accounting standard resulted in an increase in total long-term assets and total liabilities of approximately $1.2 billion, which included an increase in liabilities for lease obligations of approximately $1.4 billion, a decrease in deferred rent and deferred lease incentives of approximately $0.2 billion, and an increase in right-of-use assets of approximately $1.2 billion on the first day of fiscal 2019. In order to determine the fair value of the lease liability at lease commencement, an incremental borrowing rate (IBR) was used to discount and determine the fair value of its lease payments. The determination of an IBR requires management to use significant estimates and assumptions as to its credit ratings, credit spreads, lease tenors, and adjustments for the effects of collateral. Given the significant estimates management makes to determine the IBR to apply to each lease, as well as the large population of leases that were discounted during the initial adoption of ASU 2016-02, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the IBR requires a high degree of auditor judgment and necessitates the involvement of a fair value specialist. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the determination of the rate included the following, among others: • We tested the operating effectiveness of management’s controls over the determination and appropriateness of the IBR • With the assistance of our fair value specialists, we: o o o Evaluated that the methodology used by management was reasonable to approximate the Company’s incremental borrowing rate Assessed the reasonableness of the credit rating, base rate, spreads and adjustments for the effects of collateral applied in determining the IBR by comparing to Company specific benchmarks, comparable companies, and other market information. Evaluated the accuracy of the models and calculations used to estimate the IBR, including validating the inputs used. /s/ Deloitte & Touche LLP San Francisco, California March 27, 2020 We have served as the Company’s auditor since 1980. 67 Quarterly Financial Information (Unaudited) In thousands, except per share amounts Fiscal 2019 (52 Weeks) Net revenues Gross profit Operating income,2,3 Net earnings6 Basic earnings per share7 Diluted earnings per share7 Fiscal 2018 (53 Weeks) Net revenues Gross profit Operating income,2,3,4 Net earnings5,6 Basic earnings per share7 Diluted earnings per share7 First Quarter Second Quarter Third Quarter Fourth Quarter1 Full Year $1,241,132 444,331 74,132 52,656 0.67 0.66 $ $ $1,370,814 483,861 86,165 62,648 0.80 0.79 $ $ $1,442,472 518,172 101,891 74,713 0.96 0.94 $ $ $1,843,590 692,728 203,686 166,045 2.15 2.10 $ $ $5,898,008 2,139,092 465,874 356,062 4.56 4.49 $ $ First Quarter Second Quarter Third Quarter Fourth Quarter1 Full Year $1,203,000 432,164 66,550 45,168 0.54 0.54 $ $ $1,275,174 463,942 74,166 51,713 0.63 0.62 $ $ $1,356,983 494,984 94,384 81,465 1.01 1.00 $ $ $1,836,436 709,923 200,853 155,338 1.95 1.93 $ $ $5,671,593 2,101,013 435,953 333,684 4.10 4.05 $ $ 1 Our fourth quarter of fiscal 2018 included 14 weeks as compared to 13 weeks in fiscal 2019. 2 Fiscal 2019 includes approximately $6.4 million in the first quarter, $7.2 million in the second quarter, $7.4 million in the third quarter and $9.1 million in the fourth quarter of expenses related to the acquisition of Outward and its ongoing operations. Fiscal 2018 includes approximately $6.9 million in the first quarter, $5.0 million in the second quarter, $6.0 million in the third quarter and $7.2 million in the fourth quarter of expenses related to the acquisition of Outward and its ongoing operations. 3 Fiscal 2019 includes approximately $6.5 million in the first quarter for employment-related expenses. Fiscal 2018 includes approximately $1.7 million in the first quarter, $1.9 million in the second quarter, $1.9 million in the third quarter and $2.5 million in the fourth quarter for employment-related expenses. Includes $5.3 million in the second quarter, $1.1 million in the third quarter and $6.8 million in the fourth quarter of fiscal 2018 associated with impairment and early lease termination charges. Includes tax expense of approximately $1.1 million in the first quarter of fiscal 2018 associated with the adoption of new accounting rules related to stock-based compensation. 4 5 6 Fiscal 2019 includes a tax expense of $0.1 million in the third quarter resulting from tax legislation changes, and a tax benefit of $6.0 million in the fourth quarter resulting from a deferred tax liability adjustment. Fiscal 2018 includes tax expense of $3.3 million in the first quarter, tax expense of $2.9 million in the second quarter, a tax benefit of $10.6 million in the third quarter and tax expense of $0.3 million in the fourth quarter, resulting from the enactment of the Tax Cuts and Jobs Act. 7 Due to differences between quarterly and full year weighted average share count calculations, and the effect of quarterly rounding to the nearest cent per share, full year earnings per share may not equal the sum of the quarters. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of February 2, 2020, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for timely discussions regarding required 68 disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over the company’s financial reporting. These internal controls are designed to provide reasonable assurance that the reported information is fairly presented, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of any internal control may vary over time. Our management assessed the effectiveness of the company’s internal control over financial reporting as of February 2, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment using those criteria, our management concluded that, as of February 2, 2020, our internal control over financial reporting is effective. Our independent registered public accounting firm audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and the company’s internal control over financial reporting. Their audit report appears on pages 65 through 67 of this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. F o r m 1 0 - K 69 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required by this Item is incorporated by reference herein to information under the headings “Election of Directors,” “Information Concerning Executive Officers,” “Audit and Finance Committee Report,” “Corporate Governance — Corporate Governance Guidelines and Code of Business Conduct and Ethics,” and “Corporate Governance — Audit and Finance Committee” in our Proxy Statement for the 2020 Annual Meeting of Stockholders (the “Proxy Statement”). With regard to the information required by this item regarding compliance with Section 16(a) of the Exchange Act, we will provide disclosure of delinquent Section 16(a) reports, if any, in our Proxy Statement, and such disclosure, if any, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference herein to information under the headings “Corporate Governance — Compensation Committee,” “Corporate Governance — Director Compensation,” and “Executive Compensation” in our Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this Item is incorporated by reference herein to information under the heading “Security Ownership of Principal Stockholders and Management” in our Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by this Item is incorporated by reference herein to information under the heading “Certain Relationships and Related Transactions” in our Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this Item is incorporated by reference herein to information under the headings “Audit and Finance Committee Report” and “Proposal 3 — Ratification of Selection of Independent Registered Public Accounting Firm — Deloitte Fees and Services” in our Proxy Statement. 70 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a)(1) Financial Statements: The following Consolidated Financial Statements of Williams-Sonoma, Inc. and subsidiaries and the related notes are filed as part of this report pursuant to Item 8: Consolidated Statements of Earnings Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Quarterly Financial Information PAGE 41 41 42 43 44 45 65 68 F o r m 1 0 - K (a)(2) Financial Statement Schedules: Schedules have been omitted because they are not required, are not applicable, or because the required information, where material, is included in the financial statements, notes, or supplementary financial information. (a)(3) Exhibits: The exhibits listed in the below Exhibit Index are filed or incorporated by reference as part of this Form 10-K (b) (c) Exhibits: The exhibits listed in the below Exhibit Index are filed or incorporated by reference as part of this Form 10-K Financial Statement Schedules: Schedules have been omitted because they are not required or are not applicable. 71 Exhibit Index CERTIFICATE OF INCORPORATION AND BYLAWS 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the Commission on May 25, 2011, File No. 001-14077) 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed with the Commission on June 2, 2017, File No. 001-14077) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K as filed with the Commission on May 25, 2011, File No. 001-14077) 4.2* Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 FINANCING AGREEMENTS 10.1 Seventh Amended and Restated Credit Agreement, dated January 8, 2018, between the Company and Bank of America, N.A., as administrative agent, letter of credit issuer and swingline lender, Wells Fargo Bank, National Association, as syndication agent and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2018 as filed with the Commission on March 29, 2018, File No. 001-14077) 10.2 Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd. and Bank of America, N.A., dated as of August 30, 2013 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 3, 2013 as filed with the Commission on December 12, 2013, File No. 001-14077) 10.3 First Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 29, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2014 as filed with the Commission on December 5, 2014, File No. 001-14077) 10.4 Second Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 28, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 1, 2015 as filed with the Commission on December 11, 2015, File No. 001-14077) 10.5 Third Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 26, 2016 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2016 as filed with the Commission on December 7, 2016, File No. 001-14077) 10.6 Fourth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 25, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 2017 as filed with the Commission on December 6, 2017, File No. 001-14077) 10.7 Fifth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 24, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2018 as filed with the Commission on December 7, 2018, File No. 001-12077) 72 F o r m 1 0 - K 10.8 10.9 Sixth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Bank of America, N.A., dated as of August 23, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended November 3, 2019 as filed with the Commission on December 12, 2019, File No. 001-14077) Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 30, 2013 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended November 3, 2013 as filed with the Commission on December 12, 2013, File No. 001-14077) 10.10 First Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 29, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended November 2, 2014 as filed with the Commission on December 5, 2014, File No. 001-14077) 10.11 Second Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 28, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended November 1, 2015 as filed with the Commission on December 11, 2015, File No. 001-14077) 10.12 Third Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 26, 2016 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2016 as filed with the Commission on December 7, 2016, File No. 001-14077) 10.13 Fourth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 25, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 2017 as filed with the Commission on December 6, 2017, File No. 001-14077) 10.14 Fifth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 24, 2018 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2018 as filed with the Commission on December 7, 2018, File No.001-14077) 10.15 Sixth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and Wells Fargo Bank, N.A., dated as of August 23, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended November 3, 2019 as filed with the Commission on December 12, 2019, File No. 001-14077) 10.16 Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 30, 2013 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 3, 2013 as filed with the Commission on December 12, 2013, File No. 001-14077) 10.17 First Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 29, 2014 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 2014 as filed with the Commission on December 5, 2014, File No. 001-14077) 10.18 Second Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 28, 2015 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended November 1, 2015 as filed with the Commission on December 11, 2015, File No. 001-14077) 73 10.19 10.20 10.21 10.22 Third Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 26, 2016 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended October 30, 2016 as filed with the Commission on December 7, 2016, File No. 001-14077) Fourth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 25, 2017 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended October 29, 2017 as filed with the Commission on December 6, 2017, File No. 001-14077) Fifth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 24, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on the Form 10-Q for the period ended October 28, 2018 as filed with the Commission on December 7, 2018, File No. 001-14077) Sixth Amendment to Reimbursement Agreement between the Company, Williams-Sonoma Singapore Pte. Ltd., and U.S. Bank National Association, dated as of August 23, 2019 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the period ended November 3, 2019 as filed with the Commission on December 12, 2019, File No. 001-14077) STOCK PLANS 10.23+ Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit A to the Company’s definitive proxy statement as filed on April 13, 2018, File No. 001-14077) 10.24+ Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants to Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended May 5, 2019 as filed with the Commission on June 14, 2019, File No. 001-14077) 10.25+ Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Grants to Employees (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended August 4, 2019 as filed with the Commission on September 12, 2019, File No. 001-14077) 10.26+ Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Performance Stock Unit Award Agreement for Grants to Employees (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2014 as filed with the Commission on April 3, 2014, File No. 001-14077) 10.27+ Form of Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan Retention Restricted Stock Unit Award Agreement for Grants to Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended July 30, 2017 as filed with the Commission on September 8, 2017, File No. 001-14077) OTHER INCENTIVE PLANS 10.28+ Williams-Sonoma, Inc. 2001 Incentive Bonus Plan, as amended (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement on Schedule 14A as filed with the Commission on April 15, 2016, File No. 001-14077) 10.29+ Williams-Sonoma, Inc. Pre-2005 Executive Deferral Plan (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 1, 2009 as filed with the Commission on April 2, 2009, File No. 001-14077) 10.30+ Williams-Sonoma, Inc. Amended and Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended April 29, 2018 as filed with the Commission on June 8, 2018, File No. 001-14077) 74 F o r m 1 0 - K PROPERTIES 10.31 Memorandum of Understanding between the Company and the State of Mississippi, Mississippi Business Finance Corporation, Desoto County, Mississippi, the City of Olive Branch, Mississippi and Hewson Properties, Inc., dated August 24, 1998 (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the period ended August 2, 1998 as filed with the Commission on September 14, 1998, File No. 001-14077) 10.32 10.33 10.34 10.35 Olive Branch Distribution Facility Lease, dated December 1, 1998, between the Company as lessee and WSDC, LLC (the successor-in-interest to Hewson/Desoto Phase I, L.L.C.) as lessor (incorporated by reference to Exhibit 10.3D to the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999 as filed with the Commission on April 30, 1999, File No. 001-14077) First Amendment, dated September 1, 1999, to the Olive Branch Distribution Facility Lease between the Company as lessee and WSDC, LLC (the successor-in-interest to Hewson/Desoto Phase I, L.L.C.) as lessor, dated December 1, 1998 (incorporated by reference to Exhibit 10.3B to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2000 as filed with the Commission on May 1, 2000, File No. 001-14077) Second Amendment, dated March 1, 2018, to the Olive Branch Distribution Facility Lease between the Company as lessee and WSDC, LLC (the successor-in-interest to Hewson/Desoto Phase I, L.L.C.) as lessor, dated December 1, 1998 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended April 29, 2018 as filed with the Commission on June 8, 2018, File No. 001-14077) Lease for an additional Company distribution facility located in Olive Branch, Mississippi between Williams-Sonoma Retail Services, Inc. as lessee and SPI WS II, LLC (the successor-in-interest to Hewson/Desoto Partners, L.L.C.) as lessor, dated November 15, 1999 (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2000 as filed with the Commission on May 1, 2000, File No. 001-14077) EMPLOYMENT AGREEMENTS 10.36+ Amended and Restated Employment Agreement with Laura Alber, dated September 6, 2012 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2012 as filed with the Commission December 7, 2012, File No. 001-14077) 10.37+ Amended and Restated Management Retention Agreement with Laura Alber, dated September 6, 2012 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the period ended October 28, 2012 as filed with the Commission December 7, 2012, File No. 001-14077) 10.38+ Amended and Restated 2012 EVP Level Management Retention Plan (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2019 as filed with the Commission on April 4, 2019, File No. 001-14077) OTHER AGREEMENTS 10.39+ Form of Williams-Sonoma, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2011 as filed with the Commission on September 9, 2011, File No. 001-14077) OTHER EXHIBITS 21.1 * Subsidiaries 23.1 * Consent of Independent Registered Public Accounting Firm 75 CERTIFICATIONS 31.1* Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended 31.2* Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended 32.1* Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2* Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 XBRL 101 * The following financial statements from the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags 104 * Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted under Exhibit 101). Filed herewith. Indicates a management contract or compensatory plan or arrangement. * + ITEM 16. FORM 10-K SUMMARY None. 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 2020 WILLIAMS-SONOMA, INC. By /s/ LAURA ALBER Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 2020 /s/ ADRIAN BELLAMY Adrian Bellamy Chairman of the Board of Directors Date: March 27, 2020 /s/ LAURA ALBER Laura Alber Chief Executive Officer and Director (principal executive officer) Date: March 27, 2020 /s/ JULIE WHALEN Julie Whalen Chief Financial Officer (principal financial officer and principal accounting officer) F o r m 1 0 - K Date: March 27, 2020 /s/ SCOTT DAHNKE Scott Dahnke Director Date: March 27, 2020 /s/ ANNE MULCAHY Anne Mulcahy Director Date: March 27, 2020 /s/ GRACE PUMA Grace Puma Director Date: March 27, 2020 /s/ WILLIAM READY William Ready Director Date: March 27, 2020 /s/ SABRINA SIMMONS Sabrina Simmons Director Date: March 27, 2020 /s/ FRITS VAN PAASSCHEN Frits van Paasschen Director 77 [THIS PAGE INTENTIONALLY LEFT BLANK] NOTICE OF 2020 ANNUAL MEETING OF STOCKHOLDERS — PROXY STATEMENT 2019 ANNUAL REPORT POTTERY BARN POTTERY BARN KIDS POTTERY BARN TEEN WEST ELM WILLIAMS SONOMA WILLIAMS SONOMA HOME MARK AND GRAHAM REJUVENATION OUTWARD [THIS PAGE INTENTIONALLY LEFT BLANK] 3250 Van Ness Avenue San Francisco, California 94109 www.williams-sonomainc.com NOTICE OF 2020 ANNUAL MEETING OF STOCKHOLDERS MEETING DATE: June 3, 2020 TIME: PLACE: 9:00 a.m. Pacific Time Williams-Sonoma, Inc. 3250 Van Ness Avenue San Francisco, California 94109* ITEMS OF BUSINESS: 1) The election of our Board of Directors; RECORD DATE: MEETING ADMISSION: 2) An advisory vote on executive compensation; 3) The ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2021; and 4) Such other business as may properly come before the meeting or any adjournment or postponement of the meeting. You may vote if you were a stockholder of record as of the close of business on April 6, 2020. You are entitled to attend the Annual Meeting only if you were a stockholder of record as of the close of business on April 6, 2020. Photo identification and proof of ownership on the record date is required for admittance. Proof of ownership can be a brokerage or account statement indicating ownership on April 6, 2020, the Notice of Internet Availability of Proxy Materials, a proxy card, or a legal proxy or voting instruction card provided by your broker, bank or nominee. By Order of the Board of Directors David King Secretary April 17, 2020 P r o x y *As part of our precautions regarding the COVID-19 outbreak, we are planning for the possibility that the meeting may be held solely by means of remote communications. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be posted on our website and filed with the U.S. Securities and Exchange Commission as additional proxy materials. YOUR VOTE IS IMPORTANT Instructions for submitting your proxy are provided in the Notice of Internet Availability of Proxy Materials, the Proxy Statement and your proxy card. It is important that your shares be represented and voted at the Annual Meeting. Please submit your proxy through the Internet, by telephone, or by completing the enclosed proxy card and returning it in the enclosed envelope. You may revoke your proxy at any time prior to its exercise at the Annual Meeting. [THIS PAGE INTENTIONALLY LEFT BLANK] TABLE OF CONTENTS GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPOSAL 1—ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPOSAL 2—ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . PROPOSAL 3—RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AUDIT AND FINANCE COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INFORMATION CONCERNING EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Message from the Compensation Committee of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Compensation Table for Fiscal 2019, Fiscal 2018 and Fiscal 2017 . . . . . . . . . . . . . . . . . . . . Other Annual Compensation from Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grants of Plan-Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding Equity Awards at Fiscal Year-End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option Exercises and Stock Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment Contracts and Termination of Employment and Change-of-Control Arrangements . . . . . CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT . . . . . . . . . . . . . . STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOTE ABOUT FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AVAILABILITY OF PROXY STATEMENT AND ANNUAL REPORT ON FORM 10-K . . . . . . . . . . . . Page 1 6 17 21 23 25 27 28 28 29 53 54 55 56 59 59 59 60 65 67 68 71 72 73 P r o x y i [THIS PAGE INTENTIONALLY LEFT BLANK] 3250 Van Ness Avenue San Francisco, California 94109 www.williams-sonomainc.com PROXY STATEMENT FOR THE 2020 ANNUAL MEETING OF STOCKHOLDERS GENERAL INFORMATION Our Board of Directors is soliciting your proxy to vote your shares at our 2020 Annual Meeting of Stockholders, or the Annual Meeting, to be held on Wednesday, June 3, 2020 at 9:00 a.m. Pacific Time, and for any adjournment or postponement of the meeting. Our Annual Meeting will be held at our corporate headquarters located at 3250 Van Ness Avenue, San Francisco, California 94109. As part of our precautions regarding the COVID-19 outbreak, we are planning for the possibility that the meeting may be held solely by means of remote communications. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be posted on our website and filed with the U.S. Securities and Exchange Commission, or the SEC, as additional proxy materials. Our Annual Report to Stockholders for the fiscal year ended February 2, 2020, or fiscal 2019, including our financial statements for fiscal 2019, is also included with this Proxy Statement and posted on our website at ir.williams-sonomainc.com/financial-reports-page. The Annual Report, Notice of Internet Availability of Proxy Materials, or the Notice, and the Proxy Statement were first made available to stockholders and posted on our website on or about April 17, 2020. What is the purpose of the Annual Meeting? Stockholders will be asked to vote on the following matters: 1) The election of our Board of Directors; 2) An advisory vote to approve executive compensation; 3) The ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2021; and 4) Such other business as may properly come before the meeting or any adjournment or postponement of the meeting, including stockholder proposals. At this time, we do not know of any other matters to be brought before the Annual Meeting. P r o x y What is the Notice of Internet Availability of Proxy Materials? In accordance with rules and regulations adopted by the SEC, instead of mailing a printed copy of our proxy materials to all stockholders entitled to vote at the Annual Meeting, we are furnishing the proxy materials to certain of our stockholders over the Internet. If you received the Notice, by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice will instruct you as to how you may access and review the proxy materials and submit your vote on the Internet or by telephone. If you received a Notice by mail and would like to receive a printed copy of the proxy materials, please follow the instructions for requesting such materials included in the Notice. On the date of mailing of the Notice, all stockholders will have the ability to access all of our proxy materials on a website referred to in the Notice. These proxy materials will be available free of charge. 1 Can I receive future proxy materials by e-mail? Yes. You may choose to receive future proxy materials by e-mail by following the instructions provided on the website referred to in the Notice. Choosing to receive your future proxy materials by e-mail will save us the cost of printing and mailing documents to you and will reduce the impact of our Annual Meeting on the environment. If you choose to receive future proxy materials by e-mail, you will receive an e-mail next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by e-mail will remain in effect until you terminate it. Who may vote? Only stockholders of record at the close of business on April 6, 2020, the record date, are entitled to receive notice of and to vote at the Annual Meeting. Each holder of our common stock will be entitled to one vote for each share of our common stock owned as of the record date. As of the record date, there were 77,213,492 shares of our common stock outstanding and entitled to vote, and there were 306 stockholders of record, which number does not include beneficial owners of shares held in the name of a bank or brokerage firm. We do not have any outstanding shares of preferred stock. How do I vote? You may vote in person at the Annual Meeting, electronically by submitting your proxy through the Internet, by telephone or by returning a hard copy of the proxy card before the Annual Meeting. Proxies properly executed, returned to us on a timely basis and not revoked will be voted in accordance with the instructions contained in the proxy. If any matter not described in this Proxy Statement is properly presented for action at the meeting, the persons named in the enclosed proxy will have discretionary authority to vote according to their best judgment. How do I vote electronically or by telephone? You may vote by submitting your proxy through the Internet or by telephone. The Internet and telephone voting procedures are designed to authenticate your identity as a Williams-Sonoma, Inc. stockholder, to allow you to vote your shares and to confirm that your instructions have been properly recorded. Specific instructions to be followed for voting on the Internet or by telephone are provided below in this Proxy Statement, in the Notice and on the proxy card. Shares Registered Directly in the Name of the Stockholder If your shares are registered directly in your name in our stock records maintained by our transfer agent, EQ Shareowner Services, then you may vote your shares: • on the Internet at www.proxypush.com/wsm; or • by calling EQ Shareowner Services from within the United States at 866-883-3382. Proxies for shares registered directly in your name that are submitted on the Internet or by telephone must be received before noon Pacific Time on Tuesday, June 2, 2020. Shares Registered in the Name of a Brokerage Firm or Bank If your shares are held in an account at a brokerage firm or bank, you should follow the voting instructions on the Notice or the voting instruction card provided by your brokerage firm or bank. Can I vote my shares by filling out and returning the Notice? No. The Notice identifies the items to be voted on at the Annual Meeting, but you cannot vote by marking the Notice and returning it. The Notice provides instructions on how to vote on the Internet or by telephone and how to request paper copies of the proxy materials. 2 What if I return my proxy card directly to the company, but do not provide voting instructions? If a signed proxy card is returned to us without any indication of how your shares should be voted, votes will be cast “FOR” the election of the directors named in this Proxy Statement, “FOR” the approval, on an advisory basis, of the compensation of our Named Executive Officers, and “FOR” the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending January 31, 2021. May I attend the Annual Meeting? Only stockholders of record at the close of business on April 6, 2020, the record date, are entitled to attend the Annual Meeting. Stockholders planning to attend the Annual Meeting must present photo identification and proof of ownership on the record date in order to be admitted. Proof of ownership can be a brokerage or account statement indicating ownership on April 6, 2020, the Notice of Internet Availability of Proxy Materials, a proxy card, or a legal proxy or voting instruction card provided by your broker, bank or nominee. We reserve the right to deny admittance to anyone who cannot adequately show proof of share ownership as of the record date. As part of our precautions regarding the COVID-19 outbreak, we are planning for the possibility that the meeting may be held solely by means of remote communications. If we take this step, we will announce the decision to do so in advance, and details on how to participate will be posted on our website and filed with the SEC as additional proxy materials. What are the directions to attend the Annual Meeting? The following are directions to attend the Annual Meeting from various locations around the San Francisco Bay Area: From the South Bay Take US-101 Northbound toward San Francisco Take the US-101 exit on the left Keep left at the fork to continue on US-101 North Take exit 434A to merge onto Mission Street/US-101 Turn left at US-101/South Van Ness Avenue Continue North on Van Ness Avenue Destination will be on the right From the East Bay Take I-80 Westbound across the Bay Bridge toward San Francisco Take exit 1B to merge onto US-101 North Take exit 434A to merge onto Mission Street/US-101 Turn left at US-101/South Van Ness Avenue Continue North on Van Ness Avenue Destination will be on the right From the North Bay Take US-101 Southbound across the Golden Gate Bridge toward San Francisco Exit onto Richardson Avenue/US-101 toward Lombard Street Continue to follow US-101 Turn left at US-101/Van Ness Avenue Continue North on Van Ness Avenue Destination will be on the right 3 P r o x y How many shares must be present to transact business at the Annual Meeting? Stockholders holding a majority of our outstanding shares as of the record date must be present in person or by proxy at the Annual Meeting so that we may transact business. This is known as a quorum. Shares that are voted in person, on the Internet, by telephone or by signed proxy card, and abstentions and broker non-votes, will be included in the calculation of the number of shares considered to be present for purposes of determining whether there is a quorum at the Annual Meeting. What is a broker non-vote? The term broker non-vote refers to shares that are held of record by a broker for the benefit of the broker’s clients but that are not voted at the Annual Meeting by the broker on certain non-routine matters set forth in New York Stock Exchange, or NYSE, Rule 402.08(B) because the broker did not receive instructions from the broker’s clients on how to vote the shares and, therefore, was prohibited from voting the shares. How many votes are needed to elect directors? Pursuant to a majority voting bylaw adopted by our Board of Directors and further described in our Amended and Restated Bylaws, the election of each of the six director nominees requires the affirmative vote of a majority of the votes cast at the Annual Meeting with respect to each nominee. The number of shares voted “for” a director nominee must exceed the number of votes cast “against” that nominee for the nominee to be elected as a director to serve until the next annual meeting or until his or her successor has been duly elected and qualified. Your proxy will be voted in accordance with your instructions. If no instructions are given, the proxy holders will vote “FOR” each of the director nominees. If you hold your shares through a brokerage, bank or other nominee, or in “street name,” it is important to cast your vote if you want it to count in the election of directors. If you hold your shares in street name and you do not instruct your bank or broker how to vote your shares in the election of directors, no votes will be cast on your behalf. Broker non-votes and abstentions will have no effect on the outcome of the election. Pursuant to the resignation policy adopted by our Board of Directors and further described in our Corporate Governance Guidelines, any nominee for director who is not elected shall promptly tender his or her conditional resignation to our Board of Directors following certification of the stockholder vote. The Nominations, Corporate Governance and Social Responsibility Committee will consider the resignation offer and recommend to our Board of Directors the action to be taken with respect to the offered resignation. In determining its recommendation, the Nominations, Corporate Governance and Social Responsibility Committee shall consider all factors it deems relevant. Our Board of Directors will act on the Nominations, Corporate Governance and Social Responsibility Committee’s recommendation within 90 days following certification of the stockholder vote and will publicly disclose its decision with respect to the director’s resignation offer (and the reasons for rejecting the resignation offer, if applicable). Any director who tenders his or her resignation pursuant to the resignation policy shall not participate in the Nominations, Corporate Governance and Social Responsibility Committee’s recommendation or Board of Directors action regarding whether to accept the resignation offer. If each member of the Nominations, Corporate Governance and Social Responsibility Committee is required to tender his or her resignation pursuant to the resignation policy in the same election, then the independent directors of our Board of Directors who are not required to tender a resignation pursuant to the resignation policy shall consider the resignation offers and make a recommendation to our Board of Directors. To the extent that one or more directors’ resignations are accepted by our Board of Directors, our Board of Directors in its discretion may determine either to fill such vacancy or vacancies or to reduce the size of the Board within the authorized range. 4 How many votes are needed to approve Proposals 2 and 3? Proposals 2 and 3 require the affirmative vote of holders of a majority of voting power entitled to vote thereon, present in person or represented by proxy, at the Annual Meeting. Proxy cards marked “abstain” will have the effect of a “NO” vote and broker non-votes will have no effect on the outcome of the vote. The outcome of Proposal 2, the advisory vote on the approval of the compensation of our Named Executive Officers, will not be binding on us or the Board. However, the Board and the Compensation Committee will review the voting results and take them into consideration when making future decisions regarding executive compensation. Are there any stockholder proposals this year? No stockholder proposals are included in this Proxy Statement, and we have not received notice of any stockholder proposals to be raised at this year’s Annual Meeting. What if I want to change my vote(s)? You may revoke your proxy prior to the close of voting at the Annual Meeting by any of the following methods: • sending written notice of revocation to our Secretary; • sending a signed proxy card bearing a later date; • voting by telephone or on the Internet at a later date; or • attending the Annual Meeting, revoking your proxy and voting in person. What is householding? Householding is a cost-cutting procedure used by us and approved by the SEC to limit duplicate copies of our proxy materials being printed and delivered to stockholders sharing a household. Under the householding procedure, we send only one Notice or Annual Report and Proxy Statement to stockholders of record who share the same address and last name, unless one of those stockholders notifies us that the stockholder would like a separate Notice or Annual Report and Proxy Statement. A separate proxy card is included in the materials for each stockholder of record. A stockholder may notify us that the stockholder would like a separate Notice or Annual Report and Proxy Statement by phone at 415-421-7900 or by mail at the following mailing address: Williams-Sonoma, Inc., Attention: Annual Report Administrator, 3250 Van Ness Avenue, San Francisco, California 94109. If we receive such notification that the stockholder wishes to receive a separate Notice or Annual Report and Proxy Statement, we will promptly deliver such Notice or Annual Report and Proxy Statement. If you wish to update your participation in householding, you may contact your broker or our mailing agent, Broadridge Investor Communications Solutions, at 800-542-1061. What if I received more than one proxy card? If you received more than one proxy card, it means that you have multiple accounts with brokers and/or our transfer agent. You must complete each proxy card in order to ensure that all shares beneficially held by you are represented at the meeting. If you are interested in consolidating your accounts, you may contact your broker or our transfer agent, EQ Shareowner Services, at 800-468-9716. Who pays the expenses incurred in connection with the solicitation of proxies? We pay all of the expenses incurred in preparing, assembling and mailing the Notice or this Proxy Statement and the materials enclosed. We have retained Skinner & Company to assist in the solicitation of proxies at an estimated cost to us of $7,000. Some of our officers or employees may solicit proxies personally or by telephone or other means. None of those officers or employees will receive special compensation for such services. 5 P r o x y CORPORATE GOVERNANCE Director Independence Our Board of Directors has determined that the following former or current members of the Board satisfied the independence requirements of our “Policy Regarding Director Independence Determinations,” which is part of our Corporate Governance Guidelines: Adrian Bellamy, Scott Dahnke, Anthony Greener, Robert Lord, Anne Mulcahy, Grace Puma, William Ready, Christiana Smith Shi, Sabrina Simmons, Jerry Stritzke and Frits van Paasschen. Accordingly, the Board has determined that none of these individuals has a material relationship with us and that each of these individuals is independent within the meaning of the NYSE and SEC director independence standards, as currently in effect. Further, each member of our Board committees satisfied the independence requirements of the NYSE and SEC, and any heightened independence standards applicable to each committee on which they serve. The Board’s independence determination was based on information provided by our directors and discussions among our officers and directors. Board Leadership Structure We currently separate the positions of Chief Executive Officer and Chairman of the Board. Mr. Bellamy, an independent director, has served as our Chairman of the Board since May 2010. Our Corporate Governance Guidelines provide that in the event that the Chairman of the Board is not an independent director, the Board shall elect a Lead Independent Director. As Mr. Bellamy is an independent director, we have not appointed a separate Lead Independent Director. Mr. Bellamy will be retiring as of the Annual Meeting, Mr. Dahnke will be succeeding Mr. Bellamy as Chairman of the Board if he is re-elected at the Annual Meeting. Separating the positions of Chief Executive Officer and Chairman of the Board maximizes the Board’s independence and aligns our leadership structure with current trends in corporate governance best practices. Our Chief Executive Officer is responsible for day-to-day leadership and for setting the strategic direction of the company, while the Chairman of the Board provides independent oversight and advice to our management team, and presides over Board meetings. Board Meetings and Executive Sessions During fiscal 2019, our Board held a total of 4 meetings. Each director who was a member of our Board during fiscal 2019 attended at least 75% of the aggregate of (i) the total number of meetings of the Board held during the period for which such director served as a director and (ii) the total number of meetings held by all committees of the Board on which such director served during the periods that such director served. It is the Board’s policy to have a separate meeting time for independent directors, typically during the regularly scheduled Board meetings. During fiscal 2019, executive sessions were led by our Chairman of the Board, Mr. Bellamy. Attendance of Directors at Annual Meeting of Stockholders It is our policy that directors who are nominated for election at our Annual Meeting should attend the Annual Meeting. All but one director who was nominated for election at our 2019 Annual Meeting attended the meeting. Board Committees Our Board has three standing committees: the Audit and Finance Committee, the Compensation Committee and the Nominations, Corporate Governance and Social Responsibility Committee. Each committee operates under a written charter adopted by the Board. The committee charters are each available on the company’s website at ir.williams-sonomainc.com/governance and are also available in print to any stockholder upon request. 6 The following table sets forth the members of each committee as of April 6, 2020, the functions of each committee, and the number of meetings held during fiscal 2019. Committee and Members Audit and Finance: Sabrina Simmons, Chair Anne Mulcahy Grace Puma Compensation: Adrian Bellamy, Chair Scott Dahnke Frits van Paasschen Nominations, Corporate Governance and Social Responsibility: Adrian Bellamy Scott Dahnke Number of Meetings in Fiscal 2019 9 Functions of Committee • Assists our Board in its oversight of the integrity of our financial statements; the qualifications, independence, retention and compensation of our independent registered public accounting firm; the performance of our internal audit function; and our compliance with legal and regulatory requirements; • Prepares the report that the SEC rules require to be included in our annual proxy statement; • Reviews and recommends policies related to dividend, stock repurchase and foreign currency programs; and • Assists the Board with its oversight of our major financial risk exposures, and reviews with management such exposures and the steps management has taken to monitor and control such exposures. • Reviews and determines our executive officers’ 5 compensation; • Reviews and determines our general compensation goals and guidelines for our employees; • Administers certain of our compensation plans and provides assistance and recommendations with respect to other compensation plans; • Reviews the compensation discussion and analysis report that the SEC rules require to be included in our annual proxy statement; • Assists the Board with its oversight of risk arising from our compensation policies and programs, and assesses on an annual basis potential material risk from our compensation policies and programs; and • Appoints, sets the compensation of, and determines independence of any compensation consultant or other advisor retained. • Reviews and recommends corporate governance policies; • Identifies and makes recommendations for nominees for 4 director and considers criteria for selecting director candidates; • Considers stockholders’ director nominations and proposals; • Reviews and determines our compensation policy for our non-employee directors; • Considers resignation offers of director nominees and recommends to the Board the action to be taken with respect to each such offered resignation; • Oversees the evaluation of our Board and our senior management team; and • Oversees corporate social responsibility, sustainability, stockholder engagement and disclosure regarding corporate social responsibility and sustainability matters. 7 P r o x y Audit and Finance Committee The Board has determined that each member of the Audit and Finance Committee is independent under the NYSE rules, as currently in effect, and Rule 10A-3 of the Securities Exchange Act of 1934, as amended. The Board has determined that Ms. Simmons is an “audit committee financial expert” under the SEC rules. The Board has also determined that each Audit and Finance Committee member is “financially literate,” as described in the NYSE rules. Compensation Committee The Board has determined that each member of the Compensation Committee is independent under the NYSE rules, as currently in effect, is an “outside director” as such term is defined with respect to Section 162(m) of the Internal Revenue Code and is a “non-employee director” under Section 16(b) of the Securities Exchange Act of 1934. Compensation Committee Interlocks and Insider Participation Mr. Bellamy, Mr. Dahnke, Mr. Greener, Mr. Stritzke and Mr. van Paasschen served as members of the Compensation Committee during fiscal 2019. No member of this committee was at any time during fiscal 2019 or at any other time an officer or employee of the company, or had any relationship with the company requiring disclosure under Item 404 of Regulation S-K. In addition, none of our executive officers served as a member of the board of directors or compensation committee of any entity that has or had one or more executive officers serving as a member of our Board or Compensation Committee. Nominations, Corporate Governance and Social Responsibility Committee The Board has determined that each member of the Nominations, Corporate Governance and Social Responsibility Committee is independent under the NYSE rules currently in effect. Each member of the Nominations, Corporate Governance and Social Responsibility Committee is a non-employee director. In June 2019, the Board delegated oversight of corporate social responsibility and sustainability matters to the Nominations, Corporate Governance and Social Responsibility Committee. During fiscal 2019, in furtherance of the Nominations, Corporate Governance and Social Responsibility Committee’s functions, the Committee took the following actions, among other things: • Evaluated the composition of the Board, and considered desired skill sets, qualities and experience for potential future Board members, as well as potential candidates; • Evaluated the composition of the committees of the Board; • Oversaw key initiatives related to corporate social responsibility, sustainability and stockholder engagement; • Considered and recommended to the Board the submission to stockholders of the director nominees described in the company’s 2019 Proxy Statement; and • Managed the annual Board self-assessment process. Director Nominations The Nominations, Corporate Governance and Social Responsibility Committee’s criteria and process for evaluating and identifying the candidates that it selects, or recommends to the Board for selection, as director nominees are as follows: • The Nominations, Corporate Governance and Social Responsibility Committee periodically reviews the current composition and size of the Board; 8 • The Nominations, Corporate Governance and Social Responsibility Committee manages the annual self- assessment of the Board as a whole and considers the performance and qualifications of individual members of the Board when recommending individuals for election or re-election to the Board; • The Nominations, Corporate Governance and Social Responsibility Committee reviews the qualifications of any candidates who have been properly recommended by stockholders, as well as those candidates who have been identified by management, individual members of the Board or, if it deems appropriate, a search firm. Such review may, in the Nominations, Corporate Governance and Social Responsibility Committee’s discretion, include a review solely of information provided to it or also may include discussions with persons familiar with the candidate, an interview with the candidate or other actions that the Nominations, Corporate Governance and Social Responsibility Committee deems appropriate; • In evaluating the qualifications of candidates for the Board, the Nominations, Corporate Governance and Social Responsibility Committee considers many factors, including issues of character, judgment, independence, financial expertise, industry experience, range of experience, and other commitments. The Nominations, Corporate Governance and Social Responsibility Committee values diversity, but does not assign any particular weight or priority to any particular factor. The Nominations, Corporate Governance and Social Responsibility Committee considers each individual candidate in the context of the current perceived needs of the Board as a whole. While the Nominations, Corporate Governance and Social Responsibility Committee has not established specific minimum qualifications for director candidates, it believes that candidates and nominees must be suitable for a Board that is composed of directors (i) a majority of whom are independent; (ii) who are of high integrity; (iii) who have qualifications that will increase the overall effectiveness of the Board; and (iv) who meet the requirements of all applicable rules, such as financial literacy or financial expertise with respect to Audit and Finance Committee members; • In evaluating and identifying candidates, the Nominations, Corporate Governance and Social Responsibility Committee has the sole authority to retain and terminate any third-party search firm that is used to identify director candidates and the sole authority to approve the fees and retention terms of any search firm; • After such review and consideration, the Nominations, Corporate Governance and Social Responsibility Committee recommends to the Board the slate of director nominees; and • The Nominations, Corporate Governance and Social Responsibility Committee endeavors to notify, or cause to be notified, all director candidates of the decision as to whether to nominate individuals for election to the Board. There are no differences in the manner in which the Nominations, Corporate Governance and Social Responsibility Committee evaluates nominees for director based on whether the nominee is recommended by a stockholder, management or a search firm. Stockholder Recommendations The Nominations, Corporate Governance and Social Responsibility Committee will consider recommendations from stockholders regarding possible director candidates for election at next year’s Annual Meeting. Pursuant to our Stockholder Recommendations Policy, the Nominations, Corporate Governance and Social Responsibility Committee considers recommendations for candidates to the Board from stockholders holding no fewer than 500 shares of the company’s common stock continuously for at least six months prior to the date of the submission of the recommendation. A stockholder that desires to recommend a candidate for election to the Board shall direct the recommendation in writing to Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. The recommendation must include: (i) the candidate’s name, home and business contact information; (ii) detailed biographical data and qualifications of the candidate; (iii) information regarding any relationships between the candidate and the company within the last three years; (iv) evidence of the 9 P r o x y recommending person’s ownership of company common stock; (v) a statement from the recommending stockholder in support of the candidate; and (vi) a written indication by the candidate of his or her willingness to serve if elected. A stockholder that desires to recommend a person directly for election to the Board at the company’s Annual Meeting must also meet the deadlines and other requirements set forth in Rule 14a-8 of the Securities Exchange Act of 1934 and the company’s Restated Bylaws, each of which are described in the “Stockholder Proposals” section on page 71. Each director nominated in this Proxy Statement was recommended for election to the Board by the Nominations, Corporate Governance and Social Responsibility Committee. Mr. Ready was initially identified as a possible director candidate by Ms. Alber and was recommended for appointment to the Board by the company’s human resources department, which led the search for qualified director candidates. The Board did not receive any director nominee recommendation from any stockholder in connection with this Proxy Statement. Risk Oversight Board Oversight of Risk The Board actively manages the company’s risk oversight process and receives regular reports from management on areas of material risk to the company, including operational, financial, legal and regulatory risks. The Board is also responsible for oversight of the company’s cybersecurity risks. Our Board committees assist the Board in fulfilling its oversight responsibilities in certain areas of risk. The Audit and Finance Committee assists the Board with its oversight of the company’s major financial risk exposures. Additionally, in accordance with NYSE requirements, the Audit and Finance Committee reviews with management the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the company’s risk assessment and risk management policies. The Compensation Committee assists the Board with its oversight of risks arising from our compensation policies and programs and assesses on an annual basis potential material risk to the company from its compensation policies and programs, including incentive and commission plans at all levels. The Nominations, Corporate Governance and Social Responsibility Committee assists the Board with its oversight of risks associated with Board organization, Board independence, succession planning, corporate governance, corporate social responsibility and sustainability. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly informed through committee reports about such risks. In connection with the recent COVID-19 outbreak, the Board together with management has overseen our efforts to mitigate financial and human capital management risk exposures associated with the outbreak. Evaluation of Risks Relating to Compensation Programs Our Compensation Committee is responsible for monitoring our compensation policies and programs relative to all our employees, including non-executive officers, for potential risks that are reasonably likely to have a material adverse effect on our company. In performing its duties, the Compensation Committee regularly reviews and discusses potential risks that could arise from our employee compensation plans and programs with our management and the Compensation Committee’s independent compensation consultant. The Compensation Committee is responsible for reporting to the Board any material risks associated with our compensation plans and programs, including recommended actions to mitigate such risks. For fiscal 2019, the Compensation Committee retained an independent consultant, Pay Governance LLC, to identify and assess the risks inherent in the company’s compensation programs and policies. Accordingly, Pay Governance LLC evaluated the company’s executive and non-executive compensation programs for such risk and the mechanisms in our programs designed to mitigate these risks. Among other things, Pay Governance LLC reviewed our pay philosophy, forms of incentives, performance metrics, balance of cash and equity compensation, balance of long-term and short-term incentive periods, compensation governance practices, and equity grant administration practices. Based on the assessment, Pay Governance LLC concluded that our compensation programs and policies do not create risks that are reasonably likely to have a material adverse effect on our company. 10 Corporate Responsibility & Sustainability We carry on a goal that began with the first Williams Sonoma store in 1956: to care for our customers and the communities where we do business. Since 2011, we have published annual Corporate Responsibility Reports, and our most recent report details the significant strides we have made across our brands toward our goals around responsibly sourced materials and Fair Trade™. Our pillars of Planet, People, and Purpose lay out a clear strategy and concrete goals focused on: quality products; responsible materials and production; safe, healthy and inclusive work environments; investing in people; and being a responsible corporate citizen. We believe we have made significant progress in executing on our commitments to Planet, People and Purpose, but we still have more work to do. We have set targeted, but reachable, goals in these areas to help build on our achievements to-date. Planet From responsible materials to mindful manufacturing, we are committed to reducing our impact on the planet. As a retailer committed to responsible business practices, one of our biggest impacts comes from the materials we use in our products. For that reason, we have made big commitments to responsibly sourced materials and practices across all our brands, including: • 100% Forest Stewardship Council® – certified catalog paper since 2006; • 100% responsibly sourced cotton by 2021; • 50% responsibly sourced wood by 2021; and • 100% GREENGUARD certified company-produced Pottery Barn Kids bedroom and nursery furniture by 2020. As our revenue has grown, we have reduced our carbon intensity year-over-year since 2011 through energy reduction initiatives like lighting retrofits, saving energy and money across the company. Our consumer lighting products use LED bulbs across our stores, and brands like Rejuvenation are leading the design of energy-efficient lighting for a broad range of spaces, from homes to businesses. Our work has earned recognition across our industry, including: • Textile Exchange Top 10 global company for preferred fibers; • Sustainable Furnishings Council Top Scoring global company for sustainable wood furniture; • REPREVE’s Champion of Sustainability Award for keeping 57 million plastic bottles out of landfill; and P r o x y • Barron’s 100 Most Sustainable Companies for three years running. People We are committed to creating positive change for our customers and the communities we call home. From the artisans and factory workers making our products to our associates, we put people first. We strive to deliver a workplace experience where the quality of our engagement with fellow associates, business partners and customers matches the quality of the products and services we bring to the marketplace. We hold all our suppliers to high social standards and are committed to integrity and honesty throughout all aspects of our business. Further, we go beyond compliance to develop industry-leading initiatives that improve the lives of workers. We were the first home retailer to bring Fair Trade USA®’s factory certification program into the home sector and have exceeded our 2020 commitment to deliver $3 million in community development funds to workers. We were the founding partner with nonprofit Nest on its Ethical Handcrafted Program to bring transparency to artisanal supply chains and were the first retailer to feature the Nest Ethically Handcrafted seal 11 on product. Through partnerships with HERproject and VisionSpring, we’ve invested in financial and health education as well as vision services to increase the well-being and prosperity of 100,000 workers in our supply chain by 2020. Purpose From local volunteering to industry-wide impact, we are making a difference at home and beyond. As a values- based business, we rely on our associates to lead and make an impact every day. We cannot succeed without them—from the people working in our stores, to our corporate offices, to our factory floors. We are proud that, in 2019, over 50% of our board members, and 53% of our executives at the vice president level and above, were women. In 2018, we signed onto CEO Action for Diversity and Inclusion, expanding our networks of LGBTQ+, African American and Veteran associates and organizing celebrations for Diwali, Pride and Veteran’s Day, as well as our second annual company-wide Martin Luther King, Jr. Day of Service. In 2019, Forbes named us a Best Employer for Women, and in 2020 a Best Employer for Diversity. Outside our operations, our mission of creating a sense of home in people’s lives guides our giving and volunteering strategy. We support a range of causes that reflect the passion and dedication of our associates and resonate with our customers, allowing us to raise funds to support the causes we believe in. Since 2012, we have donated over $63 million in corporate, customer and associate donations. Our partners include organizations that promote and strengthen the well-being of children, women, families and LGBTQ+ communities, such as St. Jude Children’s Research Hospital®, No Kid Hungry, AIDS Walk and Canada Children’s Hospitals. Governance of Sustainability In 2019, our Board delegated oversight of sustainability to the Nominations, Corporate Governance and Social Responsibility Committee. We also have a robust collection of corporate policies and programs that speak to our long-standing commitment to our employees, supply chain, health and safety, human rights, cybersecurity and ethics. These policies and programs are relevant to our business, critical to our employees, and important to our customers. Management of sustainability is led by our executive vice president of sourcing, who is responsible for coordinating a cross-functional team of subject matter experts. Management provides reports and updates on our sustainability initiatives to the Nominations, Corporate Governance and Social Responsibility Committee or full Board on a biannual basis. We invite you to learn more about our initiatives and impact our Corporate Responsibility & Sustainability site: www.sustainability.williams-sonomainc.com. Director Compensation Fiscal 2019 Highlights • Emphasis on equity in the overall compensation mix to support alignment with our stockholders. • Full-value equity grants under a fixed-value annual grant policy with vesting for retention purposes. • No performance-based equity awards. • A robust stock ownership guideline to support stockholder alignment. • A stockholder-approved annual limit on total director compensation. • No retirement benefits and limited perquisites. • Effective as of the start of fiscal 2019, our Board reduced the additional annual cash and equity compensation of our Chair of the Board by 50% to align his compensation with market practice. 12 Director Compensation Program Overview Our non-employee directors receive cash compensation and equity grants for their service on our Board, with additional cash and equity compensation provided to the Chair of the Board and the Chair of each Board committee. Decisions regarding our non-employee director compensation program are approved by the full Board based on recommendations by the Nominations, Corporate Governance and Social Responsibility Committee. In making such recommendations, the Nominations, Corporate Governance and Social Responsibility Committee takes into consideration the duties and responsibilities of our non-employee directors, the director compensation practices of peer companies and whether such recommendations align with the interests of our stockholders. The Nominations, Corporate Governance and Social Responsibility Committee periodically reviews the total compensation of our non-employee directors and each element of our director compensation program. At the direction of the Nominations, Corporate Governance and Social Responsibility Committee, the Compensation Committee’s independent compensation consultant analyzes the competitive position of the company’s director compensation program against the peer group used for executive compensation purposes. Fiscal 2019 Board Chair Compensation Changes The compensation program for our Chair of the Board reflects the value he provides to the company as a senior advisor with a wealth of retail and consumer product experience and his great depth of knowledge about the consumer products industry. Following the recommendation of the Nominations, Corporate Governance and Social Responsibility Committee and the Compensation Committee’s compensation consultant, in March 2019 the Board determined to reduce the additional annual cash and equity compensation paid to our Chair of the Board, effective as of the start of fiscal 2019, by 50% from fiscal 2018 compensation amounts, resulting in a reduction from $200,000 to $100,000 for each of the cash and equity components. This compensation reduction was made to align the Chair’s compensation with market practice. No other changes were made to our director compensation program. Director Stock Ownership Policy The Board has approved a stock ownership policy. Each non-employee director must hold at least $400,000 worth of shares of company stock by the fifth anniversary of such director’s initial election to the Board. If a director holds at least $400,000 worth of shares of company stock during the required time period, but the value of such director’s shares decreases below $400,000 due to a drop in the company’s stock price, the director shall be deemed to have complied with this policy so long as the director does not sell shares of company stock. If a director has not complied with this policy during the required time period, then the director may not sell any shares until such director holds at least $400,000 worth of shares of company stock. A director’s unvested restricted stock units will not count toward satisfying the ownership requirements. As of April 6, 2020, all of our directors have satisfied the ownership requirements or have been on the Board for less than five years. P r o x y Stockholder Approved Compensation Limit Under our stockholder-approved maximum annual limit on non-employee director compensation, stock awards granted during a single fiscal year under the plan or otherwise, taken together with any cash fees paid during such fiscal year for services on the Board, will not exceed $750,000 in total value for any non-employee director. 13 Fiscal 2019 Non-Employee Director Compensation The following table sets forth non-employee director compensation amounts for fiscal 2019. Per-Committee Meeting Attendance Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Cash Compensation for Board Service(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Equity Grant for Board Service(2)(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Cash Compensation to Chair of the Board(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Equity Grant to Chair of the Board(3) Annual Cash Compensation to Chair of the Audit and Finance Committee(1) . . . . . . . . . . . . . . . . . . . Annual Equity Grant to Chair of the Audit and Finance Committee(3) . . . . . . . . . . . . . . . . . . . . . . . . . Annual Cash Compensation to Chair of the Compensation Committee(1) . . . . . . . . . . . . . . . . . . . . . . . Annual Equity Grant to Chair of the Compensation Committee(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Cash Compensation to Chair of the Nominations, Corporate Governance and Social Responsibility Committee(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Equity Grant to Chair of the Nominations, Corporate Governance and Social Responsibility Committee(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2019 — $ 80,000 $165,000 $100,000 $100,000 $ 25,500 $ 25,500 $ 12,500 $ 12,500 $ $ 8,250 8,250 (1) The annual cash compensation is paid in quarterly installments so long as the non-employee director continues to serve on the Board at the time of such payments. (2) Any cash compensation or equity grant otherwise payable to Scott Dahnke will be paid directly to or transferred from Mr. Dahnke to a non-investment fund affiliate of his employer. (3) The annual equity grant is awarded on the date of the Annual Meeting. Equity grants are made in the form of restricted stock units. These restricted stock units vest on the earlier of one year from the date of grant or the day before the next regularly scheduled annual meeting, subject to continued service through the vesting date. The number of restricted stock units granted is determined by dividing the total monetary value of each award, as set forth in the table, by the closing price of our common stock on the trading day prior to the grant date, rounding down to the nearest whole share. Directors also receive dividend equivalent payments with respect to outstanding restricted stock unit awards. (4) Directors who are appointed to the Board after the company’s last Annual Meeting receive an equity grant on the appointment date on a prorated basis based on the number of days that the director is scheduled to serve between the appointment date to the Board and the date one year from the prior year’s Annual Meeting. In addition to the compensation described above, non-employee directors received reimbursement for travel expenses related to attending our Board, committee or business meetings. Non-employee directors and their spouses received discounts on our merchandise. 14 Director Compensation Table The following table shows the compensation provided to non-employee directors who served during all or a portion of fiscal 2019. Fees Earned or Paid in Cash ($) Stock Awards ($)(1) All Other Compensation ($)(2)(3) Adrian Bellamy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Dahnke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anthony Greener . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Robert Lord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anne Mulcahy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grace Puma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Christiana Smith Shi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sabrina Simmons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jerry Stritzke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Frits van Paasschen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $192,500 $ 66,813 $ 27,033 $ 69,451 $ 80,000 $ 80,000 $ 40,973 $105,500 $ 1,978 $ 80,000 $277,466(4) $189,758(5) — $267,891(6) $164,946(7) $164,946(7) $173,208(8) $190,446(9) — $164,946(7) $36,014 $11,961 $ 2,026 $ 4,719 $ 8,326 93 $ $ 1,390 468 $ $ 102 $ 1,379 Total ($) $505,980 $268,532 $ 29,059 $342,061 $253,272 $245,039 $215,571 $296,414 $ 2,080 $246,325 (1) Represents the grant date fair value of the restricted stock unit awards granted in fiscal 2019 as calculated in accordance with FASB ASC Topic 718, by multiplying the closing price of our common stock on the trading day prior to the grant date by the number of restricted stock units granted. As of February 2, 2020, the persons who served as non-employee directors during all or a portion of fiscal 2019 held the following numbers of unvested restricted stock units: Adrian Bellamy: 4,668; Scott Dahnke: 2,775; Anthony Greener: 0; Robert Lord: 0; Anne Mulcahy: 2,775; Grace Puma: 2,775; Christiana Smith Shi: 0; Sabrina Simmons: 3,204; Jerry Stritzke: 0; and Frits van Paasschen: 2,775. Mr. Greener, Mr. Lord, Ms. Smith Shi and Mr. Stritzke left the Board prior to the end of fiscal 2019. (2) Represents the taxable value of discount on merchandise. (3) Excludes dividend equivalent payments, which were previously factored into the grant date fair value of disclosed equity awards. (4) Represents the grant date fair value associated with a restricted stock unit award of 4,668 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $277,466. (5) Represents the grant date fair value associated with (i) a restricted stock unit award of 418 shares of common stock made on April 5, 2019, with a fair value as of the grant date of $59.36 per share for an aggregate grant date fair value of $24,812 and (ii) a restricted stock unit award of 2,775 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $164,946. P r o x y (6) Represents (i) the grant date fair value associated with a restricted stock unit award of 2,775 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $164,946 and (ii) the incremental fair value of 1,487 restricted stock units that were accelerated in connection with Mr. Lord’s retirement from the Board. (7) Represents the grant date fair value associated with a restricted stock unit award of 2,775 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $164,946. (8) Represents the grant date fair value associated with a restricted stock unit award of 2,914 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $173,208. (9) Represents the grant date fair value associated with a restricted stock unit award of 3,204 shares of common stock made on June 5, 2019, with a fair value as of the grant date of $59.44 per share for an aggregate grant date fair value of $190,446. 15 Corporate Governance Guidelines and Code of Business Conduct and Ethics Our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, both of which apply to all of our employees, including our Chief Executive Officer, Chief Financial Officer and Controller, are available on our website at ir.williams-sonomainc.com/governance. Copies of our Corporate Governance Guidelines and our Code of Business Conduct and Ethics are also available upon written request and without charge to any stockholder by writing to: Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. To date, there have been no waivers that apply to our Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions under our Code of Business Conduct and Ethics. We intend to disclose any amendment to, or waivers of, the provisions of our Code of Business Conduct and Ethics that affect our Chief Executive Officer, Chief Financial Officer, Controller or persons performing similar functions by posting such information on our website at ir.williams-sonomainc.com/governance. Communicating with Members of the Board Stockholders and all other interested parties may send written communications to the Board or to any of our directors individually, including non-management directors and the Chairman of the Board, at the following address: Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. All communications will be compiled by our Corporate Secretary and submitted to the Board or an individual director, as appropriate, on a periodic basis. 16 PROPOSAL 1 ELECTION OF DIRECTORS Upon the recommendation of our Nominations, Corporate Governance and Social Responsibility Committee, our Board has nominated the persons set forth in the tables below. Our Board has no reason to believe that any of the nominees will be unwilling or unable to serve as a director. However, should a nominee become unwilling or unable to serve prior to the Annual Meeting, our Nominations, Corporate Governance and Social Responsibility Committee would recommend another person or persons to be nominated by our Board to stand for election, and your proxies would be voted for the person or persons selected by the committee and nominated by our Board. There are no family or special relationships between any director nominee or executive officer and any other director nominee or executive officer. There are no arrangements or understandings between any director nominee or executive officer and any other person pursuant to which he or she has been or will be selected as our director and/or executive officer. Information Regarding the Director Nominees The following table sets forth information, as of April 6, 2020, with respect to each director nominee. We have also included information about each nominee’s specific experience, qualifications, attributes and skills that led the Board to conclude that he or she should serve as a director of the company, in light of our business and structure, at the time we file this Proxy Statement. Each director nominee furnished the biographical information set forth in the table. Executive Officer: Nominee Laura Alber . . . . . . . . . . Age 51 Director Since Position with the Company and Business Experience, including Directorships Held During Past Five Years Specific Experience, Qualifications, Attributes and Skills 2010 • Chief Executive Officer since • Extensive retail industry, 2010 • President since 2006 • President, Pottery Barn Brands, 2002 – 2006 • Executive Vice President, Pottery Barn, 2000 – 2002 • Senior Vice President, Pottery Barn Catalog and Pottery Barn Kids Retail, 1999 – 2000 • Director, Fitbit, Inc. (fitness trackers), since 2016 • Director, RealD Inc. (3D technologies), 2013 – 2015 merchandising and operational experience, including 24 years of experience with the company • Implemented successful growth strategies, including Pottery Barn Kids, Pottery Barn Bed + Bath and PBteen, as well as the company’s global expansion P r o x y 17 Independent Directors: Nominee Scott Dahnke . . . . . . . . . Age 54 Anne Mulcahy . . . . . . . . Age 67 Director Since Position with the Company and Business Experience, including Directorships Held During Past Five Years Specific Experience, Qualifications, Attributes and Skills 2019 • Global co-CEO since 2016, • Extensive experience building brand equity in leading consumer brands • Substantial expertise in the global retail and consumer industry Managing Partner, 2003 – 2015, L Catterton (private equity) • Managing Director, Deutsche Bank Capital Partners (private equity), 2002 – 2003 • Managing Director, AEA Investors (private equity), 1998 – 2002 • Chief Executive Officer, infoGROUP Inc. (formerly known as InfoUSA; Nasdaq-listed) (marketing), 1997 – 1998 • Principal (Partner), McKinsey & Company (management consulting), 1991 – 1997 • Director, Noodles & Company (restaurant), 2011 – 2019 2018 • Lead Independent Director, • Extensive insight into organizational and operational management issues crucial to a large public company • Strong reputation for leadership in business innovation and talent development Johnson & Johnson (consumer healthcare products), since 2012; director since 2009 • Director, Graham Holdings Company (education and media), since 2008 • Director, LPL Financial Holdings Inc. (broker-dealer) since 2013 • Chief Executive Officer, 2001 – 2009, and Chairman, 2002 – 2010, Xerox Corporation (technology and services); other roles of increasing responsibility, 1976 – 2001 • Director, Target Corporation (retail), 1997 – 2017 18 Nominee William Ready . . . . . . . Age 40 Director Since 2020 Specific Experience, Qualifications, Attributes and Skills • Extensive expertise in the digital commerce field, technology industry and leading and scaling high growth companies. • Experience on the board of a public company. Position with the Company and Business Experience, including Directorships Held During Past Five Years • President of Commerce, Google LLC (internet search company), since 2020 • Director, Automatic Data Processing, Inc. (human resources software company), since 2016 • Chief Operating Officer, PayPal Holdings, Inc. (digital commerce company), 2016 – 2019 • Senior Vice President, Global Head of Product and Engineering, PayPal Holdings, Inc., 2015 – 2016 • Senior Vice President, Global Head of Merchant and NextGen Commerce, PayPal Holdings, Inc., 2015 • Chief Executive Officer, BrainTree (a mobile and web payment systems company, acquired by PayPal Holdings, Inc. in 2013), 2011 – 2015 Sabrina Simmons . . . . . Age 56 2015 • Chair of the Audit and Finance • Extensive financial and accounting expertise as chief financial officer of a large public company • Extensive experience as an executive in the retail industry, including 16 years at The Gap, Inc. P r o x y Committee • Executive Vice President, Chief Financial Officer, The Gap, Inc. (clothing), 2008 – 2017 • Executive Vice President, Corporate Finance, 2007 – 2008, Senior Vice President, Corporate Finance and Treasurer, 2003 – 2007, Vice President and Treasurer, 2001 – 2003, The Gap, Inc. • Director, e.l.f. Cosmetics, Inc. (cosmetics), since 2016 • Director, Columbia Sportswear Company (outdoor apparel and gear), since 2018 19 Nominee Frits van Paasschen . . . . Age 59 Director Since Position with the Company and Business Experience, including Directorships Held During Past Five Years Specific Experience, Qualifications, Attributes and Skills • Extensive experience in retail and hospitality, with over 15 years of experience as an executive • Strong understanding of global retail operations and strategy 2017 • Member of the Compensation Committee • Member, Supervisory Board, Royal DSM N.V. (life and material sciences), since 2017 • Member, Board Member, CitizenM Hotels (hotels) since 2017 • Chairman, Convene (workspace and property technology), since 2017 • Author, The Disruptors’ Feast, published 2017 • President, Chief Executive Officer, Starwood Hotels and Resorts (hotels), 2007 – 2015 • President, Chief Executive Officer, Coors Brewing Company (beer), 2005 – 2007 • GM (President) Europe, Middle East & Africa, 2000 – 2004, GM (President) Americas and Africa, 1998 – 2000, Vice President Strategic Planning, 1997 – 1998, Nike Inc. (athletic footwear and apparel) • Chairman, Supervisory Board, Apollo Hotels (hotels), 2016 – 2018 • Director, Barclays PLC (banking), 2013 – 2016 • Director, Jones Apparel Group Inc. (clothing), 2004 – 2007 • Director, Oakley, Inc. (sunglasses and athletic apparel), 2004 – 2007 Required Vote for This Proposal The election of each director nominee requires the affirmative vote of a majority of the votes cast at the Annual Meeting with respect to each nominee. The number of shares voted “for” a director nominee must exceed the number of votes cast “against” that nominee for the nominee to be elected as a director to serve until the next annual meeting or until his or her successor has been duly elected and qualified. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF ALL OF THE DIRECTOR NOMINEES LISTED ABOVE. 20 ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION PROPOSAL 2 This is a proposal asking stockholders to approve, on an advisory basis, the compensation of our Named Executive Officers as disclosed in this Proxy Statement in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the “Dodd-Frank Act,” and as required under Section 14A of the Exchange Act. This proposal is commonly known as a “Say on Pay” proposal and gives our stockholders the opportunity to express their views on the compensation of our Named Executive Officers. The company’s current policy is to hold a Say on Pay vote each year, and we expect to hold another advisory vote with respect to executive compensation at the 2021 Annual Meeting. Compensation Program and Philosophy As described in detail under the heading “Executive Compensation,” our executive officer compensation program is constructed to attract, retain and motivate a highly qualified executive team to support our primary objective of creating long-term value for stockholders, while maintaining direct links between executive pay, individual performance, the company’s financial performance and stockholder returns. A significant portion of individual compensation is directly dependent on the company’s achievement of financial goals, which we believe aligns executive interests with stockholder interests and encourages long-term stockholder returns. Further in alignment with stockholder interests, each of our Named Executive Officers is subject to a stock ownership requirement. The Chief Executive Officer is required to hold five times her base salary, and each of the other Named Executive Officers is required to hold two times his or her base salary in shares of common stock. Fiscal 2019 Compensation Summary To align our executive compensation packages with our executive compensation philosophy, the following compensation decisions were made by the Compensation Committee for fiscal 2019. • No Adjustments to Chief Executive Officer Compensation: Given the increase to the Chief Executive Officer’s compensation in 2018, the base salary, bonus target and annual equity grant were unchanged for fiscal 2019. Consistent with prior years, individual performance, an assessment of market data, and her experience in her role were also considered. • Performance-Based Cash Bonus: Performance-based cash bonuses were paid for fiscal 2019 performance based on the company’s earnings per share goal, the achievement of positive net cash provided by operating activities, business unit performance and the individual performance of our Named Executive Officers. • Performance-Based and Time-Based Equity: In fiscal 2019, our Named Executive Officers were granted performance stock units, or PSUs, based on performance against four equally-weighted metrics— revenue, earnings, return on invested capital and operating cash flow—and restricted stock units, or RSUs, with service vesting. The PSUs are earned based on actual three-year performance against each of the four metrics relative to target, subject to certain pre-established adjustments, and vest on the third anniversary of the grant date. No PSUs are earned for below threshold performance, 50% of target are earned for threshold performance, 100% of target are earned for target performance, and 200% of target are earned for maximum performance and above. The RSUs vest 25% per year over a four-year period beginning on the grant date. In addition to the above summary, stockholders are encouraged to read the “Executive Compensation” section of this Proxy Statement for details about our executive compensation programs, including information about the fiscal 2019 compensation of our Named Executive Officers. 21 P r o x y We are asking our stockholders to indicate their support for our Named Executive Officer compensation as described in this Proxy Statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our Named Executive Officers and the philosophy, policies and practices described in this Proxy Statement. Accordingly, we ask our stockholders to vote “FOR” the following resolution at the 2020 Annual Meeting: “RESOLVED, that the company’s stockholders approve, on an advisory basis, the compensation of the Named Executive Officers, as disclosed in the company’s Proxy Statement for the 2020 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Executive Compensation, the tabular disclosure regarding such compensation and the accompanying narrative disclosure.” Required Vote for this Proposal To approve this proposal, a majority of voting power entitled to vote thereon, present in person or represented by proxy, at the Annual Meeting must vote “FOR” this proposal. This Say on Pay vote is advisory, and therefore not binding on the company, the Compensation Committee or our Board. Our Board and our Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote against the Named Executive Officer compensation as disclosed in this Proxy Statement, we will consider our stockholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns. Under the rules of the NYSE, brokers are prohibited from giving proxies to vote on executive compensation matters unless the beneficial owner of such shares has given voting instructions on the matter. This means that if your broker is the record holder of your shares, you must give voting instructions to your broker with respect to Proposal 2 if you want your broker to vote your shares on the matter. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DESCRIBED IN THIS PROXY STATEMENT PURSUANT TO THE COMPENSATION DISCLOSURE RULES OF THE SEC. 22 PROPOSAL 3 RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM This is a proposal asking stockholders to ratify the selection of Deloitte & Touche LLP, or Deloitte, as our independent registered public accounting firm for the fiscal year ending January 31, 2021. The Audit and Finance Committee selected Deloitte as our independent registered public accounting firm for the fiscal year ending January 31, 2021, subject to ratification by our stockholders. Although stockholder ratification of our independent registered public accounting firm is not required by law, as a matter of corporate governance, we are requesting that our stockholders ratify such selection. A Deloitte representative will be present at the Annual Meeting and will have the opportunity to make a statement and to respond to appropriate questions. Deloitte Fees and Services Deloitte has audited our financial statements for the last 40 years. Based in part upon information provided by Deloitte, the Audit and Finance Committee determined that Deloitte is independent under applicable independence standards. The Audit and Finance Committee has reviewed and discussed the fees billed by Deloitte for services in fiscal 2019, as detailed below, and determined that the provision of non-audit services was compatible with Deloitte’s independence. Deloitte provided the company with the following services: Audit Fees Deloitte billed approximately $2,600,000 for fiscal 2019 and $2,400,000 for fiscal 2018 for professional services to (i) audit our consolidated financial statements and perform an assessment of the effectiveness of our internal control over financial reporting included in our Annual Report on Form 10-K, (ii) review our condensed consolidated financial statements included in our quarterly reports on Form 10-Q, (iii) audit our 401(k) plan, and (iv) audit our statutory reports for our global entities. Audit-Related Fees During fiscal 2019 and fiscal 2018, Deloitte did not perform any assurance and related services that were reasonably related to the performance of the audit or review of our financial statements. Tax Fees Deloitte billed $0 for fiscal 2019 and approximately $103,000 for fiscal 2018, related to tax consultation services. All Other Fees Deloitte billed a total of approximately $2,000 for each of fiscal 2019 and fiscal 2018, for all other fees. All other fees consisted of license fees related to the use of Deloitte’s online accounting research tool. During fiscal 2019 and 2018, Deloitte did not perform any prohibited non-audit services for us. Pre-Approval Policy All services performed by Deloitte, whether audit or non-audit services, must be pre-approved by the Audit and Finance Committee or a designated member of the Audit and Finance Committee, whose decisions must be reported to the Audit and Finance Committee at its next meeting. Pre-approval cannot be obtained more than one year before performance begins and can be for general classes of permitted services such as annual audit services or tax consulting services. All fees paid to Deloitte for fiscal 2019 and fiscal 2018 were pre-approved by the Audit and Finance Committee. 23 P r o x y Required Vote for this Proposal To approve this proposal, a majority of voting power entitled to vote thereon, present in person or represented by proxy, at the Annual Meeting must vote “FOR” this proposal. If stockholders vote against this proposal, the Audit and Finance Committee will consider interviewing other independent registered public accounting firms. There can be no assurance, however, that it will choose to appoint another independent registered public accounting firm if this proposal is not approved. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE SELECTION OF DELOITTE & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING JANUARY 31, 2021. 24 AUDIT AND FINANCE COMMITTEE REPORT The Audit and Finance Committee oversees the company’s financial reporting process on behalf of the Board. In meeting these responsibilities, as described under the heading “Corporate Governance—Board Committees,” we perform the following functions: • Monitor the integrity of the company’s financial reports, earnings and guidance press releases, and other company financial information; • Appoint and/or replace the independent registered public accounting firm, pre-approve all audit and non-audit services of the independent registered public accounting firm, and assess its qualifications and independence; • Review the performance of the company’s internal audit function, the company’s auditing, accounting and financial reporting procedures, and the company’s independent registered public accounting firm; • Monitor the company’s compliance with legal and regulatory requirements, in accordance with the Audit and Finance Committee charter; • Monitor the company’s system of internal controls and internal control over financial reporting; • Retain independent legal, accounting or other advisors when necessary and appropriate; • Review and recommend policies related to dividend, stock repurchase and foreign currency programs; and • Review with management the company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the company’s risk assessment and risk management policies. In performing these functions, we took the following actions, among other things, related to fiscal 2019: • Reviewed and discussed the company’s audited consolidated financial statements for fiscal 2019 and unaudited quarterly condensed consolidated financial statements for fiscal 2019 with management and Deloitte; • Reviewed, discussed with management, and approved the company’s periodic filings on Forms 10-K and 10-Q; • Reviewed, discussed with management, and approved all company earnings and guidance press releases; • Reviewed and discussed the company’s internal controls over financial reporting with management and Deloitte, including the evaluation framework and subsequent assessment of effectiveness; P r o x y • Reviewed and discussed with the company’s internal audit department the company’s internal audit plans, the significant internal audit reports issued to management, and management’s responses; • Reviewed and discussed with management and the company’s internal audit department the company’s major financial risk exposures, including with regard to legal and regulatory matters, and the company’s risk assessment and risk management policies; • Met with Deloitte, with and without management present, to discuss the overall quality of the internal and external audit process and the financial reporting process; and • Discussed with Deloitte its independence from the company based on the following: (i) our confirmation that no member of Deloitte’s current or former audit team is or has been employed by the company in a financial reporting oversight role; (ii) our review of audit and non-audit fees; (iii) our review of critical audit matters; and (iv) the written communications from Deloitte as required by Public Company Accounting Oversight Board, or PCAOB, requirements. 25 During fiscal 2019, we discussed the following other matters, among other things, with Deloitte: • Deloitte’s responsibilities in connection with the audit of the company’s financial statements; • Deloitte’s annual letter describing its internal quality control procedures; • Any significant issues arising during the audit and any other matters relating to the conduct of the audit of the company’s financial statements; and • Matters required to be discussed pursuant to relevant PCAOB and SEC requirements, including the quality of the company’s accounting principles, the soundness of significant judgments and the clarity of disclosures in the company’s financial statements. The Audit and Finance Committee hereby reports as follows:* (1) The Audit and Finance Committee has reviewed and discussed the company’s audited financial statements with management and Deloitte; (2) The Audit and Finance Committee has discussed with Deloitte the matters required by the PCAOB and the SEC; and (3) The Audit and Finance Committee has received the written disclosures and the letter from Deloitte required by the applicable requirements of the PCAOB regarding Deloitte’s communications with the Audit and Finance Committee concerning independence and has discussed with Deloitte its independence. Based on the review and discussions referred to in items (1) through (3) above, the Audit and Finance Committee recommended to the Board that the audited financial statements be included in the company’s Annual Report on Form 10-K for fiscal 2019 for filing with the SEC. AUDIT AND FINANCE COMMITTEE OF THE BOARD OF DIRECTORS Sabrina Simmons, Chair Anne Mulcahy Grace Puma * This report shall not be deemed to be (i) “soliciting material,” (ii) “filed” with the SEC, (iii) subject to Regulations 14A or 14C of the Securities Exchange Act of 1934, as amended, or (iv) subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference into any of our other filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except to the extent we specifically incorporate it by reference into such filing. 26 INFORMATION CONCERNING EXECUTIVE OFFICERS The following table provides certain information about our executive officers as of April 6, 2020. Our executive officers are appointed by and serve at the pleasure of our Board, subject to rights, if any, under employment contracts. Name Position with the Company and Business Experience Laura Alber . . . . . . . . . . Age 51 * Julie Whalen . . . . . . . . . Age 49 • Executive Vice President, Chief Financial Officer since 2012 • Treasurer, 2011 – 2014 • • Vice President, Controller, 2003 – 2006 Senior Vice President, Controller, 2006 – 2012 Alex Bellos . . . . . . . . . . Age 35 President, West Elm Brand since 2017 Senior Vice President, General Manager, Rejuvenation, 2013 – 2017 • • • Vice President, Strategy and Development, 2010 – 2013 • Various Retail Operations and Finance Roles, 2008 – 2010 Marta Benson . . . . . . . . Age 57 Ryan Ross . . . . . . . . . . . Age 48 David King . . . . . . . . . . Age 51 President, Pottery Barn Brand since 2017 • • Executive Vice President, Pottery Barn Merchandising, 2015 – 2017 • • Chief Executive Officer, Gump’s, 2006 – 2011 Senior Vice President, Business Development, 2011 – 2015 President, Williams Sonoma Brand since 2019 • • Executive Vice President, Emerging Brands, 2019 – 2019 • Executive Vice President, Rejuvenation, 2017 – 2019 • Executive Vice President, Marketing & Digital Commerce HSN, Inc., 2015 – 2017 Senior Vice President, Digital Commerce, HSN, Inc., 2013 – 2015 • • Chief Creative Officer, Stylus Media Group, 2010-2013 • Various Retail Operations and Finance Roles, Pottery Barn Bed and Bath, 2000 – 2008 • Executive Vice President, General Counsel and Secretary since 2017 • Senior Vice President, General Counsel and Secretary, 2011 – 2017 • Vice President, Deputy General Counsel, 2010 – 2011 • Vice President, Associate General Counsel, 2006 – 2010 • Director, Associate General Counsel, 2004 – 2006 P r o x y * Biographical information can be found in the table under the section titled “Information Regarding the Director Nominees” beginning on page 17 of this Proxy Statement. 27 EXECUTIVE COMPENSATION A Message from the Compensation Committee of the Board of Directors Dear Fellow Stockholders, As we look forward to the 2020 Annual Meeting, this letter highlights some of our financial accomplishments, business opportunities and challenges, and communications with stockholders since our last meeting. We invite you to review this proxy Compensation Discussion & Analysis, or CD&A, for more detailed information. Fiscal 2019 was an outstanding year for our company. We outpaced the industry with our strong comparable revenue growth and maintained high profitability with operating margin expansion and EPS growth above expectations. Our performance was driven by e-commerce, which reached another all-time high at 56.2% of total revenues, while across our brands, growth was led by a significant acceleration in the West Elm and Pottery Barn businesses. Our cross-brand initiatives Business to Business, The Key and in-home Design Crew also continued to scale and become more impactful accelerators of our growth. These results demonstrate the power of our digital first, design-led platform of strong home brands and our high level of execution. They also give us the confidence that we have a winning strategy to continue to drive profitable market share gains for the long term. Key highlights for fiscal year 2019, both financially, and for our stockholders, included: • GAAP Diluted earnings per share, or EPS, and Non-GAAP Diluted EPS(1) of $4.49 and $4.84, respectively. • Comparable Brand Revenue Growth of 6%. • GAAP Return on Invested Capital, or ROIC, of 20.9%, significantly higher than our peer group average. • Non-GAAP ROIC(1) of 22.4%, significantly higher than our peer group average. • One-Year Total Stockholder Return of +32.5% exceeded both our peer group (-13.1%) and the S&P 400 Index (+9.4%). • Three-Year Total Stockholder Return of +59.2% exceeded both our peer group (-0.9%) and the S&P 400 Index (+19.0%). In response to the 2019 Say on Pay vote, we contacted stockholders collectively representing more than half of our outstanding shares, as well as proxy advisory firms. We primarily discussed their perspectives on our compensation programs and corporate governance. Following these discussions, we made meaningful enhancements to the 2020 CD&A that follows, focusing primarily on transparency, context, and readability. As we look to the year ahead, we are faced with unprecedented challenges in the wake of the COVID-19 pandemic. We are doing all that is possible to support our associates while continuing to serve our customers during this difficult time. We are extremely focused on our financial health and are implementing cost and capital reduction measures across the company to ensure that we self-fund our business and continue to outperform in the longer term. We thank our stockholders for taking the time to share their insights, whether in person or through written correspondence, and look forward to a continuing dialogue. Sincerely, Compensation Committee of the Board of Directors Adrian Bellamy, Chair Scott Dahnke Frits van Paasschen (1) A reconciliation of the GAAP to non-GAAP diluted earnings per share and the definition of non-GAAP Return on Invested Capital may be found in pages 9 to 10 in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on March 18, 2020, which is incorporated herein by reference. We have calculated the average non-GAAP Return on Invested Capital of companies in our peer group using the same methodology by which we calculate our non-GAAP Return on Invested Capital. 28 Compensation Discussion and Analysis The Compensation Discussion and Analysis, or CD&A, describes our 2019 compensation program as it relates to the compensation of our Named Executive Officers, or NEOs. The CD&A provides an overview and analysis of our compensation programs and policies for our NEOs, the compensation decisions made by the Compensation Committee under those programs and policies, and the factors that the Compensation Committee considered and the process it followed in making those decisions. Our NEOs in 2019 were: Laura Alber Director, President and Chief Executive Officer Julie Whalen Executive Vice President, Chief Financial Officer Alex Bellos President, West Elm Brand Marta Benson President, Pottery Barn Brand Ryan Ross* President, Williams Sonoma Brand * Mr. Ross was promoted from Executive Vice President, Emerging Brands to President, Williams Sonoma Brand effective July 10, 2019, following the resignation of former incumbent Janet Hayes. Executive Summary The Compensation Committee of the Board of Directors is responsible for the design and execution of the Company’s compensation program for executive officers. In designing and administering the program for 2019, the Committee focused on the following principles: • Alignment with stockholders: aligning compensation with stockholder interests through incentive programs that reward achievement of financial and operational results that we believe are the drivers of stockholder value for our company; • Accountability for near-term and long-term performance: balancing achievement of near-term and long- term results for our stockholders; and • Competitiveness: providing competitive target compensation to ensure that we can attract, retain, and motivate exceptional leadership talent to develop and execute our business strategy. Performance and Compensation Highlights Highlights of our strategy, fiscal year performance, and compensation program include: P r o x y Company Strategy Fiscal 2019 Business Highlights • Digital-first company with retail stores as a competitive advantage. • Highly differentiated platform to launch and scale new businesses. • Deliver strong profitable growth through innovation, relevancy and customer engagement, and global expansion. • Williams-Sonoma, Inc. comparable sales, GAAP earnings per share (“EPS”) ($4.49 for fiscal 2019) and non-GAAP EPS(1) ($4.84 for fiscal 2019) increased 6.0%, 10.9% and 11.0%(2), respectively. • Adjusted EPS as measured under our 2019 bonus plan of $4.96 (bonus EPS goal of $4.88). • West Elm and Pottery Barn comparable revenues up 14.4% and 4.1%, respectively. • Successfully executed initiatives to offset impact of tariff headwinds. • Delivered fiscal year 2019 total stockholder return of 32.5%. • Produced fiscal year 2019 GAAP return on invested capital (ROIC) of 20.9% and non-GAAP ROIC(1) of 22.4%. 29 2019 Compensation Program 2019 CEO Compensation Decisions • Annual Bonus: continued to use achievement of EPS performance to fund our bonus plan and allocate awards to reflect brand/operational performance. • Performance-Based RSUs (“PSUs”): continued to award PSUs that are earned based on achievement of pre-set 3-year goals for revenue growth, earnings growth, ROIC, and operating cash flow. • Restricted Stock Units (“RSUs”): awarded RSUs with 4-year prorated, time-based vesting to attract and retain talent and reward individual performance and contribution. • After reviewing factors including market data, company performance, and individual contribution, the Committee kept Ms. Alber’s salary rate and bonus target unchanged for 2019. CEO Pay Component Base Salary Annual Bonus Target PSUs at target (2019-21 performance period) RSUs Target Total Direct Compensation CEO Pay Component Annual Bonus Award Value of PSUs Earned at Fiscal 2019 Year-End (2017-19 performance period)(3) 2019 Amount $1,500,000 $3,000,000 $6,000,000 $6,000,000 $16,500,000 % Change from 2018 0% 0% 0% 0% 0% 2019 Amount $3,500,000 $12,965,641 % of Target Award 117% 200% What We Have ✓ Rigorous, objective performance goals and EPS-funded bonus pool ✓ Limited perquisites ✓ Competitive stock ownership guidelines and retention requirement ✓ Clawback policy covering cash incentives and stock awards ✓ Double-trigger change-in-control provisions ✓ Independent compensation consultant and Board Compensation Committee ✓ Annual risk assessment of What We Do Not Have ✕ No “golden parachute” gross-ups ✕ No hedging/pledging/short sales of company stock ✕ No dividends paid on unvested shares ✕ No options/SARs granted below fair market value ✕ No supplemental retirement benefits ✕ No repricing or cash out of underwater options/SARs without stockholder approval ✕ No excessive severance ✕ No guaranteed salary increases, compensation policies and programs bonuses, or long-term incentive awards • Contacted 18 of our top 25 stockholders, collectively representing approximately 54% of our shares outstanding, to discuss their perspectives on our compensation and governance practices. • Met with several portfolio managers and proxy advisory firms, ISS and Glass Lewis. • Committed to making awards within ongoing, annual LTI program. O We do not intend to make future one-time awards to NEOs. • Made meaningful improvements to 2020 CD&A, with focus on transparency, context, and readability. 30 2019 CEO Performance Award Outcomes Executive Compensation Practices Stockholder Outreach 2020 Updated Peer Group • Replaced Foot Locker with Wayfair (see page 41). (1) A reconciliation of the GAAP to non-GAAP diluted earnings per share and the definition of non-GAAP Return on Invested Capital may be found on pages 9 to 10 in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on March 18, 2020, which is incorporated herein by reference. (2) Non-GAAP EPS percent change adjusted to account for the $0.10 per diluted share impact of a 53rd week in fiscal 2018. (3) Based on a stock price of $70.08, the closing price of our common stock on January 31, 2020, the last business day of fiscal 2019. Company Values and Strategy Our compensation programs support Williams-Sonoma’s values and reward execution of our corporate strategy. Our Values Everything we do revolves around our mission to enhance our customers’ lives at home. We are committed to quality and service, and delivering an inspiring retail experience. Our core values include: We believe that our company has no limit and is driven by our associates and their imagination. We are committed to an environment that attracts, motivates, and recognizes high performance. People First We are here to please our customers – without them, nothing else matters. Customers Quality We take pride in everything we do. From our people to our products, and in our relationships with business partners and our community, quality is our signature. Stockholders We are committed to providing a superior return to our stockholders. It’s everyone’s job. Integrity We do business with the highest level of integrity. Every day, in everything we do. Corporate Responsibility P r o x y We will build sustainability into every corner of our enterprise so that our continued financial success will enhance the lives of our many stakeholders, the communities where we have a business presence, and the natural environment upon which we rely. Company Strategy • As the world’s largest design-led, digital-first home retailer, we are helping shape the future of shopping. • Home furnishing lags other retail sectors in online sales penetration. As a digital-first company with retail stores as a competitive advantage, we believe this market fragmentation provides a significant opportunity for growth moving forward. 31 Global Market • Our cross-brand initiatives and loyalty programs have been highly accretive to growth and have significantly increased our share of customer spend and enhanced the customer experience through improved personalization. • We are aggressively pursuing business-to-business opportunities, with a targeted path to $2 billion in annual revenues. 32 WE ARE PURSUING TARGET ACCOUNTS ACROSS 7 INDUSTRY VERTICALS OUR COMPETITIVE EDGE OVER EXISTING PLAYERS HOSPITALITY RESIDENTIAL EDUCATION Hotels, Resorts, Restaurants, Country Clubs Single and Multi-Family Designers and Developers Educational Establishments and University Housing GOVERNMENT HEALTHCARE + WELLNESS RETAIL Government and Military Senior Living, Hospitals, Health and Fitness Retail Store Builds and Malls COMMERCIAL Commercial, Workplace and Sports/ Entertainment Arenas Design and product development expertise Breadth of aesthetics and price points Support for all B2B opportunities, large and small On-the-ground support for worldwide sourcing Additional detail regarding our values and strategy can be seen by viewing our 2019 investor presentation which can be found on our investor relations site: ir.williams-sonomainc.com. Financial Performance Fiscal 2019 Performance Highlights Fiscal 2019 was another year of outstanding performance for our evolving company. Driven by strong comparable brand growth, continued expense management, and margin expansion, we achieved GAAP diluted earnings per share of $4.49 and non-GAAP diluted earnings per share of $4.84, which outperformed the high end of our external guidance and represented growth of each at approximately 11% over the prior year. Fiscal 2019 financial achievements included: Continued Strong Earnings Growth Financial Metric Performance Year-over-Year Growth GAAP Diluted EPS . . . . . . . . . . . Non-GAAP Diluted EPS(1) . . . . . . Comparable Revenue Growth . . . $ 4.49 $ 4.84 6.0% 10.9% 11.0%(2) — (1) A reconciliation of GAAP to non-GAAP diluted earnings per share may be found in pages 9 to 10 in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on March 18, 2020, which is incorporated herein by reference. We have calculated the average non-GAAP Return on Invested Capital of companies in our peer group using the same methodology by which we calculate our non-GAAP Return on Invested Capital. (2) Adjusted to account for the $0.10 per diluted share impact of the 53rd week in fiscal 2018. Strong Consolidated and Brand Revenue Growth P r o x y Brand 2019 Comparable Revenue Growth(1) Pottery Barn . . . . . . . . . . . . . . . . . . . . West Elm . . . . . . . . . . . . . . . . . . . . . . Williams Sonoma . . . . . . . . . . . . . . . Pottery Barn Kids and Teen . . . . . . . Total(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.1% 14.4% 0.4% 4.5% 6.0% (1) (2) Comparable brand revenue is calculated on a 52-week to 52-week basis for fiscal 2019. Total comparable brand revenue growth includes the results of Rejuvenation and Mark and Graham. 33 Industry Leading Financial Returns to Stockholders Financial Metric Performance Commentary GAAP Return on Invested Capital Non-GAAP Return on Invested . . . . . 20.9% Significantly higher than our peer group average Capital(1) . . . . . . . . . . . . . . . . . . . . . . . Operating Cash Flow . . . . . . . . . . . . . . . . Cash Returned to Stockholders . . . . . . . . Operating Income . . . . . . . . . . . . . . . . . . . . . Total Stockholder Return (1-Year)(2) 22.4% Significantly higher than our peer group average. $607M An increase of 4% over fiscal 2018. $300M Through our dividend and share repurchase programs. $466M An increase of 7% over fiscal 2018. 32.5% Significantly exceeded peers and S&P 400 (see chart Total Stockholder Return (3-Year)(2) . . . 59.2% Significantly exceeded peers and S&P 400 (see chart below). below). (1) The definition of non-GAAP Return on Invested Capital may be found in pages 9 to 10 in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on March 18, 2020, which is incorporated herein by reference. We have calculated the average non-GAAP Return on Invested Capital of companies in our peer group using the same methodology by which we calculate our non-GAAP Return on Invested Capital. (2) Total Stockholder Return (TSR) calculated as of January 31, 2020. 1-Year TSR & 3-Year TSR 59.2% 32.5% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% 19.0% 9.4% -0.9% -10.8% -15.9% -13.1% Williams-Sonoma Prior (2019) Peer Group Median Current (2020) Peer Group Median S&P 400 Index 1-Year 3-Year 34 2019 Compensation Program for Executive Officers 2019 Compensation Program Summary The table below highlights the components of our executive compensation program and their strong alignment to stockholder interests. Component Form Purpose Alignment to Stockholder Interests Base Salary Cash • Fixed compensation • Attract and retain NEOs short- term Annual Incentive Annual Bonus Plan • Incentivize and reward achievement of carefully designed business / individual objectives • Encourage behaviors that support Company’s desired short-term goals and stable, long-term outcomes Performance- Based RSUs (PSUs) • Motivate achievement of long- term performance and stockholder value creation • Attract and retain NEOs long- term • Provide opportunity to build ownership in Company • High-quality, stable executive leadership • Market-competitive and aligned with scale, scope, and complexity of role • Bonus pool funded based on EPS performance vs. pre-set goal • Annual goals consistently set above prior year performance • Actual awards recognize business unit performance against both quantitative and qualitative goals • Equally weighted across scorecard of relevant financial metrics that are aligned with stockholder interests: ‰ Revenue (3-year CAGR) ‰ EPS (3-year CAGR) ‰ Operating Cash Flow (3-year average) ‰ ROIC (3-year average) • Emphasis on stock price performance Long-Term Incentives Time-Based RSUs • Attract and retain NEOs long- term • Provide opportunity to build • Emphasis on stock-price ownership in Company • Align interests with stockholders performance P r o x y • Value of holdings tied to stock price • As of the end of fiscal 2019, Ms. Alber held over 18x her base salary in company stock (well above her 5x guideline) • Required to retain at least 50% of net after-tax shares received until the ownership guideline has been achieved Stock Ownership Guidelines • Directly aligns interest of NEOs with stockholders 35 Fiscal 2019 Incentive Payout Summary Annual Bonus Plan The chart below illustrates the year-over-year increases of our target EPS goal under our 2001 Incentive Bonus Plan, as well as the EPS level at which our annual bonus plan funded for that year. Our performance goal is consistently set higher than both the previous year’s target and actual EPS performance. Annual Bonus - EPS Performance Goals FY14-FY19 Target EPS - Plan Results $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 In addition, for participants to be eligible for any bonus payout, achievement of positive net cash flow from operating activities was required in the performance year 2019. As outlined on page 45, this performance trigger was achieved. For fiscal 2019, the annual bonus plan design and results were as follows: Level Below Threshold . . Threshold . . . . . . . . . . . . . . . . . . Target Maximum . . . . . . . % of Goal < 95% 95% 100% 105% Adjusted EPS Goals % of Target Pool Funded Actual Adjusted EPS Actual Plan Funding < $4.63 $4.63 $4.88 $5.13 0% 71.2% 100% 128.8% $4.96(1) (101.6% of $4.88 target) 100% (reduced from 109%) (1) Derived from non-GAAP EPS of $4.84, as further adjusted for the impact of List 4 China Tariffs, which were not known or contemplated at the time the targets were set. Upon management’s recommendation, the Committee applied negative discretion to reduce funding from approximately 109% of target funding at an EPS of $4.96 to 100% of target. 36 Performance-Based RSUs The PSU grants made in 2017 were subject to achievement of a three-year adjusted earnings growth plan target covering fiscal 2017 through fiscal 2019 that was established at the time of grant. In addition, for participants to be eligible for any payout, achievement of positive net cash flow from operating activities was required in the year of grant 2017. As disclosed in the fiscal 2017 proxy statement, this performance trigger was achieved. Beginning with fiscal 2018 grants, our PSU plan has a scorecard of four metrics. As with our Annual Bonus Plan, we believe our PSU grants are set using challenging performance targets and are fully aligned with the rigorous expectations and long-term interests of our stockholders. As shown in the chart below, threshold goals for past grants have been consistently set above the median of our peer group’s prior-year performance (i.e., earnings growth for these grants). PSU Goals Comparison to Prior Year Peer Group Performance Peer Group Median Performance WSI Threshold WSI Target WSI Maximum FY14 PSU Program (vested FY17) FY15 PSU Program (vested FY18) FY16 PSU Program (vested FY19) FY17 PSU Program (vested FY20) 25th Percentile 50th Percentile 75th Percentile P r o x y At the time of grant, the Compensation Committee set a performance target for cumulative three-year growth based on compound annual earnings growth of 5% for the PSUs covering the fiscal years 2017-19. At the target performance level, the participants would earn 100% of their target PSUs. For the fiscal year 2017-19 performance period, the Company achieved compound annual earnings growth rate of 13.1%, which exceeded the target and resulted in the vesting of 200% of the target number of PSUs. 37 2019 Stockholder Outreach In 2019, we conducted an extensive engagement effort with our largest stockholders, the summary results of which and our responses are shown in the table below. We heightened our outreach following the Say-on-Pay vote last year and intend to continue investing in the relationship with our stockholder community moving forward. Company Participants To ensure access to key roles involved in compensation and governance issues, company participants in the discussions with stockholders included: • Board Chair and Compensation Committee Chair • Executive Vice President, Chief Financial Officer • Executive Vice President, General Counsel Extent of Engagement We contacted 18 of our top 25 stockholders representing approximately 54% of our shares owned to discuss their perspectives on our compensation and governance practices. In addition, we met with several portfolio managers and proxy advisory firms, ISS and Glass Lewis. 2019 Shareholder Outreach (% of Shares) 13% 40% 47% Met With Directly Contacted No Direct Contact We met with 10 stockholders who in aggregate held approximately 40% of our shares. 8 stockholders that we contacted either confirmed they had no concerns (or did not require a meeting) or did not respond to our request (13% of shares). We did not reach out to 7 of our top 25 stockholders because they either are known to not engage in investor meetings or are sufficiently familiar with us that management concluded that outreach was not necessary. Key Themes from Stockholder Engagement Stockholder Perspectives What We Did Area One-time awards Feedback • Prefer awards within normal structure and with rigorous performance goals • Concern with size of one-time CEO award in 2018 Changes in 2019 or for 2020 ✓ Committed to making awards within ongoing, annual LTI program o We do not intend to make future one-time awards to NEOs. ✓ Aligning target awards with competitive practices Peer group composition • Consider revising ✓ Revised peer group for 2020, replacing Foot peers to better reflect digital/e-commerce strategy Locker with Wayfair 38 Goal setting and metrics Performance-based compensation emphasis Transparency and communication • Desire for greater disclosure on goal setting process and performance assessment • Generally supportive of mix of metrics in annual bonus and performance shares • Continue to ensure goals and hurdles align with stockholder expectations • Continue to focus on performance-based pay ✓ Improved and simplified disclosure of goals and performance review ✓ Reviewed and confirmed mix of sales growth, EPS, cashflow, and ROIC over 3 years is appropriate ✓ Focused on top-line and bottom-line growth, balance sheet strength, and return on strategic investments ✓ In 2019, 50% of NEO equity value and 55% of NEO target total compensation was contingent on performance ✓ In 2020, performance conditions impact 55% of NEO equity value and 37% of NEO total target compensation ✓ Conduct annual review of pay mix and design, with focus on both our individual strategy and market norms ✓ Ongoing monitoring of retail- and general- industry compensation and governance trends ✓ Significant stockholder outreach efforts made during 2019 ✓ Meaningful improvements made to 2020 CD&A, with focus on transparency, context, readability, and strengthening the linkage between business strategy and compensation design/outcome o Restructured the Executive Summary and added the Compensation Committee letter, outreach learnings, and graphics to the CD&A • Stockholders appreciated communication and outreach efforts during this past year • Desire for greater transparency surrounding program changes as compensation and governance strategy continues to mature and evolve P r o x y 39 Our Peer Group The Compensation Committee uses a peer group composed of public companies in the retail industry to review competitive compensation data for the Company’s executives. The Compensation Committee evaluates this proxy peer group on an annual basis to ensure that the companies selected remain appropriate. The proxy peer group for fiscal 2019 was selected by the Compensation Committee based on the guiding criteria described below, with advice from its former consultant, F.W. Cook. Certain proxy peer companies may not meet all selection criteria but are included because they are direct competitors of our business, direct competitors for our executive talent, have a comparable business model, or for other reasons. The proxy peer group guiding criteria for fiscal 2019 was as follows: GICS Industry Classification Selection Criteria Revenues Market Capitalization Current Peer listed by a proxy advisory firm Among the top 100 e-retailers or an operator of multiple brands Positive total stockholder returns over the prior one- and three-year periods Targeted Range Home Furnishing Retail Apparel Retail Department Stores $1.5B – $15B $250M – $40B Our Fiscal 2019 Peer Group For fiscal 2019, the Compensation Committee reviewed the proxy peer group against our guiding criteria and made the following adjustments: Peer Companies Added Capri Holdings Limited (formerly Michael Kors Holdings Limited) PVH Corp. Tailored Brands, Inc. Peer Companies Removed Nordstrom, Inc. Ross Stores, Inc. Urban Outfitters, Inc. Our resulting fiscal 2019 proxy peer group consisted of the following 15 companies: American Eagle Outfitters, Inc. Bed Bath & Beyond Inc. Capri Holdings Limited Foot Locker, Inc. The Gap, Inc. Fiscal 2019 Peer Group L Brands, Inc. Levi Strauss & Co Lululemon Athletica Inc. PVH Corp. Ralph Lauren Corporation RH (Restoration Hardware Holdings) Tailored Brands, Inc. Tapestry, Inc. Tiffany & Co. V.F. Corporation 40 Our Fiscal 2020 Peer Group For fiscal 2020, the Compensation Committee reviewed the proxy peer group using revised criteria for selection: Selection Criteria Industry Targeted Range Home Furnishing Retail Apparel Retail Department Stores Other Select Retailers (online, global brands) E-commerce Companies $3B – $12B $2.5B – $11.5B Revenues Market Capitalization Geographic competitor for talent Performance: growth in revenue and net income; key industry performance metrics Positive total stockholder returns over the prior one- and three-year periods Qualitative factors: similar product offerings; key competitor for business/talent; listed as a peer in proxy advisor reports; large or emerging e-commerce presence and/or international presence. The Committee made the following adjustments to the peers: Peer Companies Added Wayfair Inc. Peer Companies Removed Foot Locker, Inc. Wayfair Inc. was added to our peer group due to its similar product offerings, focus on e-commerce and having its revenue and TSR within the Company’s range. Foot Locker, Inc. was removed from our peer group due to its lack of similarity in its portfolio of product offerings and its focus on brick-and-mortar retail locations. The resulting fiscal 2020 proxy peer group consists of the following 15 companies: American Eagle Outfitters, Inc. Bed Bath & Beyond Inc. Capri Holdings Limited The Gap, Inc. L Brands, Inc. Fiscal 2020 Peer Group Levi Strauss & Co Lululemon Athletica Inc. PVH Corp. Ralph Lauren Corporation RH (Restoration Hardware Holdings) Tailored Brands, Inc. Tapestry, Inc. Tiffany & Co. V.F. Corporation Wayfair Inc. Overview of Chief Executive Officer Compensation for Fiscal 2019 In an executive session at a meeting in March 2019, without the Chief Executive Officer present, the Compensation Committee reviewed Ms. Alber’s base salary, bonus target, and 2019 target equity value. Given the increase provided the prior year, the Compensation Committee recommended keeping Ms. Alber’s base salary ($1,500,000), bonus target (200% of salary, or $3,000,000), and annual equity grant ($12,000,000; split evenly between PSUs and RSUs) unchanged for fiscal 2019. Consistent with prior years, the Committee also considered her individual performance, an assessment of market data, and her experience in her role. With respect to the fiscal 2019 company-wide bonus pool, the Company achieved a funding level of 109% of target funding. However, upon management’s recommendation, the Committee applied negative discretion to the funding amount to reduce funding to target (100%). The Compensation Committee determined the payout for Ms. Alber to be at 117% of her target bonus, in alignment with this company result. P r o x y 41 Finally, the Company achieved adjusted earnings growth CAGR performance of 13.1% with respect to the fiscal 2017 to fiscal 2019 PSU grants made in 2017. Based on the formulaic, pre-set payout design, the PSUs vested at 200% of target. For Ms. Alber, whose target grant was 92,506 PSUs, the resulting payout was 185,012 shares. Compensation Element Base Salary Target Bonus % Target Bonus $ Performance-Based RSUs Time-Based RSUs FY 2019 Annual Bonus Achievement Actual FY 2019 Bonus % Actual FY 2019 Bonus $ Level / Result $1,500,000 200% of salary $3,000,000 $6,000,000 $6,000,000 117% of target $3,500,000 FY 2017 – FY 2019 PSU Achievement FY 2017 – 2019 PSU Target Shares FY 2017 – 2019 PSU Payout % FY 2017 – 2019 PSU Payout 92,506 PSUs 200% of target shares 185,012 PSUs Components of Our Compensation Program, 2019 Decisions and the Decision-Making Process Our compensation program for our NEOs is made up of four components, as listed below, which are designed to create long-term value for stockholders and to attract, motivate, and retain outstanding executives. These components collectively provide target compensation that is significantly “at risk” and performance-based. 42 NEO Target Pay Mix As shown in the charts below, approximately 55% of Ms. Alber’s target compensation is tied directly to performance conditions (bonus and PSUs). An additional 36% is “at risk” via service conditions and stock price (RSUs). The other NEOs, on average, have 36% of target compensation tied directly to performance conditions and another 45% “at risk.” We believe this mix of pay provides strong incentives for our NEOs to remain with the Company and continue creating value for our stockholders and other prominent stakeholders. CEO Target Pay Mix 36% 18% 36% 9% Base Salary Target Bonus RSUs PSUs Other NEO Avg. Target Pay Mix 45% 19% 19% 17% Base Salary Target Bonus RSUs PSUs Base Salary In March 2019, the Compensation Committee reviewed and set the fiscal 2019 base salaries of our NEOs, based on individual performance, an analysis of each executive’s experience (as well as past, current and anticipated contributions to the Company’s success), the Chief Executive Officer’s recommendations (other than with respect to her own base salary), each executive’s position relative to executives in our proxy peer group, and other market data. Following this review, the base salaries for Ms. Whalen, Mr. Bellos, Ms. Benson, and Mr. Ross were increased. P r o x y 43 The following table shows the fiscal 2018 and fiscal 2019 base salaries for the NEOs. Named Executive Officer Fiscal 2018 Base Salary Fiscal 2019 Base Salary Laura Alber . . . . . . . . . . . Julie Whalen . . . . . . . . . . Alex Bellos . . . . . . . . . . . Marta Benson . . . . . . . . . Ryan Ross(1) . . . . . . . . . . . $1,500,000 $ 800,000 $ 750,000 $ 750,000 $ 525,000 $1,500,000 $ 850,000 $ 850,000 $ 850,000 $ 700,000 (1) Mr. Ross was promoted from Executive Vice President, Emerging Brands to President, Williams Sonoma Brand effective July 10, 2019. Annual Cash Bonus Cash bonuses are awarded to our NEOs under the 2001 Incentive Bonus Plan, or the Bonus Plan, and paid only when threshold company and business objectives are met or exceeded. At the beginning of each fiscal year, the Compensation Committee reviews and establishes individual bonus targets for each NEO and threshold, target, and maximum EPS goals under the Bonus Plan, which determine the funding pool from which executive bonuses are paid. In addition, the Compensation Committee sets a threshold performance goal that must be achieved, which establishes the maximum bonus payable under the Bonus Plan to each NEO subject to the Compensation Committee’s discretion to reduce such amount. For fiscal 2019, this goal was positive net cash flow provided by operating activities, as disclosed on the Company’s consolidated statements of cash flows. This threshold goal was met in fiscal 2019, and the Compensation Committee used negative discretion to determine the actual payout to each NEO based on achievement of the EPS goal and individual performance, as described below. Fiscal 2019 Bonus Targets At a meeting held in March 2019, the Compensation Committee reviewed the bonus targets under the Bonus Plan for each NEO. The Compensation Committee considered the recommendations of the Chief Executive Officer, which were informed by the following factors: • Each executive’s respective responsibilities; • The relationship of the bonus target to other compensation elements; • Whether the established bonus targets are effective in motivating our executives to deliver strong performance; and • The bonus targets set by our proxy peers. In executive session at that meeting, without the Chief Executive Officer present, the Compensation Committee reviewed Ms. Alber’s bonus target against our peer group and concluded that her bonus target would remain unchanged for fiscal 2019. The target bonuses as a percentage of base salary under the Bonus Plan remained unchanged for fiscal 2019 for our NEOs, as detailed in the table below. 44 The target bonuses as a percentage of base salary under the Bonus Plan for fiscal 2018 and fiscal 2019 are listed below for each NEO. Named Executive Officer Laura Alber . . . . . . . . . . . . . . . . . . . . Julie Whalen . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . Ryan Ross(1) . . . . . . . . . . . . . . . . . . . . Fiscal 2018 Target Bonus (as a Percentage of Base Salary) Fiscal 2019 Target Bonus (as a Percentage of Base Salary) 200% 100% 100% 100% 100% 200% 100% 100% 100% 100% (1) Mr. Ross was promoted from Executive Vice President, Emerging Brands to President, Williams Sonoma Brand effective July 10, 2019. Our Bonus Performance Goal – EPS The pool from which company-wide bonuses are paid depends on our achievement of an annual EPS goal established by the Compensation Committee. For fiscal 2019, the Compensation Committee set a diluted EPS target of $4.88. Actual EPS for fiscal 2019 is measured under the Bonus Plan by excluding the impact of extraordinary non-recurring charges or unusual items and the effect of changes in accounting principles from GAAP EPS for fiscal 2019 and including any amounts payable to covered employees under the Bonus Plan. The Company achieved performance of $4.96, or an achievement at a funding level of 109% of target funding, which reflects an adjustment to account for the impact of List 4 China Tariffs, which were not known or contemplated at the time bonus funding targets were set. Management recommended and the Committee approved applying negative discretion to the funding amount to reduce funding to target (100%). Additional design and results are provided on page 36. For fiscal 2018 and fiscal 2017, actual funding levels were at 128.9% and 95.0%, respectively. Individual and Business Unit Bonus Objectives Once the bonus pool has been funded based on EPS performance under the Bonus Plan, and once the threshold performance goal is achieved, which establishes the maximum bonus payable under the Bonus Plan to each NEO subject to the Compensation Committee’s discretion to reduce such amount, individual performance is assessed in order to determine the payout of bonuses from the pool. The Compensation Committee believes that the achievement of individual objectives is critical to the overall success of the Company and, as such, bonuses are paid, in part, to reflect individual achievement. For example, if an executive fails to fully meet some or all individual objectives, the executive’s bonus may be significantly reduced or even eliminated. Conversely, if the objectives are overachieved, awards may be subject to less or no reduction from the maximum amount payable to the executive, based on our achievement of the threshold positive net cash flow goal described above. P r o x y The Compensation Committee decides the bonus amount, if any, for the Chief Executive Officer in an executive session in which the Chief Executive Officer is not present. In March 2020, the Compensation Committee reviewed the fiscal 2019 performance of each NEO and considered the recommendations of the Chief Executive Officer for each of the NEOs other than herself. For fiscal 2019, the Compensation Committee approved the bonus payments in the table below under the Bonus Plan for each NEO, which were informed by the following factors: • Achievement of established financial and operating objectives for the Company and each business unit; and 45 • A qualitative assessment of each executive’s leadership accomplishments in the fiscal year (noting that accomplishments that increase stockholder return or that significantly impact future stockholder return are significant factors in the assessment of individual performance) as outlined in the “Key Accomplishments” table below. Named Executive Officer . . . . . . . . . . . . . . . . . . . . . . Laura Alber Julie Whalen . . . . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2019 Bonus Amount* $3,500,000 $1,000,000 $1,600,000 $1,250,000 $ 750,000 Fiscal 2019 Bonus (as a Percentage of Target) 117% 118% 188% 147% 107% * Reflects the Compensation Committee’s exercise of discretion to reduce the maximum amount payable to the executive under the Bonus Plan for fiscal 2019. Named Executive Key Accomplishments Laura Alber . . . . . Ms. Alber’s leadership has been instrumental to the Company’s financial and stock-price performance. Notably, fiscal 2019 saw ~11% EPS growth, 6.0% comparable brand revenue growth and TSR that significantly exceeds the S&P 400 Index over both short (1-year) and longer-term (3-year) timeframes. Julie Whalen . . . . Ms. Whalen’s leadership has been instrumental to the Company’s financial and stock-price performance. Ms. Whalen delivered strong returns to stockholders of approximately $300 million in dividends and share repurchases. She also oversaw an increase on the Company’s non-GAAP ROIC to 22.4%, which continues to be significantly above the industry average. Alex Bellos . . . . . Under Mr. Bellos’ leadership, West Elm achieved comparable revenue growth of 14.4% in fiscal 2019. West Elm had its 10th consecutive year of double-digit revenue growth, while comparable revenue growth accelerated nearly 500 basis points. Marta Benson . . . Under Ms. Benson’s leadership, Pottery Barn had 4.1% comparable revenue growth in fiscal 2019, which was more than 3 times higher than its comparable revenue growth last year and their highest comparable revenue growth since 2014. Ryan Ross . . . . . . In less than four quarters of Mr. Ross’s leadership, Williams Sonoma returned to positive comparable revenue growth for fiscal 2019. Long-Term Incentives The third component of the Company’s compensation program is long-term equity compensation. The Compensation Committee believes that equity compensation awards encourage our executives to work toward the Company’s long-term business and strategic objectives and to maximize long-term stockholder returns. In addition, the Compensation Committee believes that equity awards incentivize executives to remain with the Company. In determining the long-term incentive awards for fiscal 2019, the Compensation Committee considered the strong experience and individual performance of the executive team, the unvested value of equity awards remaining in fiscal 2019, and relevant market data. 46 In fiscal 2019, equity was granted to our NEOs in the form of PSUs and RSUs. PSUs were granted with variable payout based on achievement of three-year performance goals. The Compensation Committee believes that granting equity in the form of PSUs and RSUs drives strong performance, aligns each executive’s interests with those of stockholders, and provides an important and powerful retention tool. Time Frame (Vesting) Purpose Performance Linkage Component Weighting (CEO/NEOs) Performance- Based RSUs (PSUs) . . . 50%/30% (20% for Mr. Ross) 3-year performance targets and cliff vesting • Equally weighted across scorecard of relevant financial metrics that are aligned with stockholder interests: O Revenue (3-year CAGR) O EPS (3-year CAGR) O Operating Cash Flow (3-year average) O ROIC (3-year average) • Emphasis on stock price performance • Emphasis on stock price performance • Motivate achievement of the key indicators of Company success that best drive stockholder value • Reward for attainment of long-term performance and stockholder value creation • Attract and retain NEOs long-term • Provide opportunity to build ownership in Company • Attract and retain NEOs long-term • Provide opportunity to build ownership in Company • Align interests with stockholders Time-Based RSUs . . . . 50%/70% (80% for Mr. Ross) 4-year pro-rated vesting PSUs earned are variable based on actual performance (subject to certain pre-established adjustments) relative to target, as follows: Level % of Target PSUs Below Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum (and above) . . . . . . . . . . . . . . . . . . . . . . . . . 0% 50% 100% 200% P r o x y The Compensation Committee established the three-year performance goals for the PSUs by reference to historical company performance, our fiscal 2019 budget, and our three-year earnings growth plan, which were presented to and reviewed by our Board of Directors. The PSU performance period will run from fiscal 2019 through fiscal 2021. We do not disclose the specific goals utilized due to confidentiality and competitive concerns. We believe that the goals were set at challenging levels (equal to or above prior-grant goals for all four metrics) and are fully aligned with the rigorous expectations and long-term interests of our stockholders. In determining the type and number of equity awards granted to each NEO, the Compensation Committee considered the recommendations of the Chief Executive Officer, which were based on: • The executive’s performance and contribution to the profitability of the Company; • The type and number of awards previously granted to each executive; • The executive’s outstanding equity awards; 47 • The vesting schedule of the executive’s outstanding equity awards; • The optimal mix between long-term incentive awards and other types of compensation, such as base salary and bonus; • The relative value of awards offered by peer companies to executives in comparable positions; and • Additional factors, including increased responsibilities, succession planning, and retention strategy. The Compensation Committee believes that each factor influences the number of shares appropriate for each individual and that no one factor is determinative. In determining the long-term incentive grant for the Chief Executive Officer, the Compensation Committee considered several factors, including the Company’s performance, the assessment by the Compensation Committee of the Chief Executive Officer’s performance, and peer market data. Annual equity grants approved by the Compensation Committee in March 2019 and granted in March and April 2019 were as follows: Named Executive Officer Laura Alber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Julie Whalen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs Granted in Fiscal 2017 Target Equity Value $12,000,000 $ 2,250,000 $ 3,000,000 $ 2,500,000 $ 2,000,000 Number of Restricted Stock Units 104,130 27,334 36,445 30,371 27,811 Number of Performance Stock Units (at Target) 104,130 11,714 15,619 13,016 6,942 In fiscal 2017, the Compensation Committee granted PSUs to Ms. Alber, Ms. Whalen, Mr. Bellos, Ms. Benson and Mr. Ross. The PSUs granted in fiscal 2017 were granted with a cumulative three-year growth target based on compound annual earnings growth. For purposes of calculating the earnings growth rate, costs associated with the acquisition of Outward, Inc., incremental PSU expense over the 100% target, asset impairment charges and legal settlements were excluded pursuant to predetermined exclusions that were established at the time of grant. As adjusted for these predetermined exclusions, our compound annual earnings growth rate was equal to 13.1% over the three-year performance period, which exceeded the target of 5.0% and resulted in the vesting of 200% of the target number of PSUs. Performance-Contingent RSUs Granted to CEO in Fiscal 2018 As disclosed in our fiscal 2018 proxy, Ms. Alber was granted an off-cycle award in 2018 to better align her pay with the company’s strong financial performance and to recognize her contributions in terms of leadership, strategic development, and financial performance since assuming the role of Chief Executive Officer in 2010. In February 2018, the Committee awarded Ms. Alber 203,541 RSUs that vested in equal installments on the first and second anniversary of the grant date, with each installment subject to a net income performance requirement. In February 2019, the first installment vested after the Committee determined that the performance requirement had been met. In February 2020, the Committee confirmed that the net income requirement for the second tranche had been met. As such, the award is now fully earned and vested. As outlined in the Stockholder Outreach section, we are committed to making awards within the ongoing, annual LTI program and we do not intend to make future one-time awards to NEOs. Benefits Provided to Named Executive Officers Subject to certain limited exceptions, all the benefits offered to our NEOs are offered broadly to our full-time associates. For example, a limited number of company executives are provided with reimbursement of financial consulting services up to $12,000 annually. The Compensation Committee believes that providing this assistance 48 is prudent given the complexity of these executives’ compensation and financial arrangements and helps our NEOs maximize the compensation we pay to them. In addition, certain of our long-tenured employees receive benefits under a car allowance program that we no longer offer to new employees. We maintain an Executive Deferred Compensation Plan that is available to all U.S. employees at the level of Vice President and above and provides an opportunity for individual retirement savings on a tax- and cost-effective basis. We do not offer any company match to this benefit plan. We do not sponsor any additional supplemental executive retirement plans. Additionally, employees at the level of Director and above can participate in supplemental life insurance plans that offer enhanced benefits. We believe that these benefits allow our NEOs to concentrate on their responsibilities and our future success. The value of the benefits offered to each of the NEOs is detailed in the Other Annual Compensation from Summary Compensation Table on page 54. Roles in Determining Executive Compensation Role of Compensation Committee Each year, the Compensation Committee determines appropriate business targets for the fiscal year and evaluates executives’ performance against those targets. As the Compensation Committee structures the executive compensation program, it considers the accounting and tax implications of each compensation element, as well as stockholder dilution from any equity awards. The Compensation Committee updates the Board of Directors regarding compensation decisions for executives and for the Chief Executive Officer, except for adjustments to the Chief Executive Officer’s base salary, which are determined by the independent members of the Board. The Compensation Committee’s role is further detailed in the Compensation Committee Charter, which is available on our website at ir.williams-sonomainc.com/governance. In making pay decisions, the Compensation Committee reviews each executive’s past and current compensation and analyzes: • Each NEO’s achievement of established financial and operating objectives for that executive’s area of responsibility; • The compensation opportunity for each NEO relative to the compensation opportunity disclosed by companies in the proxy peer group for the officer’s corresponding position, for each compensation element; • Internal positioning among the NEOs; and • Whether value and vesting terms of outstanding long-term incentive awards are sufficient to provide an appropriate balance of short and long-term incentives, drive sustained performance, and provide potential for appropriate reward. Role of Our Chief Executive Officer and Management The Chief Executive Officer is present at Compensation Committee meetings (except when her own compensation is being discussed) and makes recommendations regarding the compensation program in general and each executive’s compensation specifically. Her recommendations are made in the context of peer group and other relevant data and are based on a quantitative analysis and comparison of each executive’s performance against fiscal year business and strategic objectives and her qualitative evaluation of each executive’s contributions to the Company’s long-term objectives. Further, she provides input on each executive’s respective responsibilities and growth potential, as well as each’s equity position and potential compensation payouts. Other members of management are also present at portions of Compensation Committee meetings to provide background information, as necessary. Role of Independent Compensation Committee Consultant For fiscal 2019, Pay Governance LLC was selected to become the new independent executive compensation consultant for the Compensation Committee. Pay Governance LLC provides services only as directed by the Compensation Committee and has no other relationship with the Company. The Compensation Committee has reviewed its relationship with Pay Governance LLC and has identified no conflicts of interest 49 P r o x y In fiscal 2019, Pay Governance LLC attended Compensation Committee meetings and provided periodic updates on relevant compensation trends and developments. In addition, Pay Governance provided advice and analysis on topics such as Say on Pay, stockholder outreach, disclosure, equity utilization, and non-employee director compensation. Role of Market Data The Compensation Committee, the Chief Executive Officer, and management believe that knowledge of general market practices and the specific compensation practices of our proxy peer group, listed on page 41, is important in assessing the design and competitiveness of our compensation package. When market data is reviewed, it is considered as a reference point, rather than a fixed policy, for compensation positioning and decision-making. We do not set compensation to meet specific benchmarks or percentiles. When target total direct compensation was set at the beginning of fiscal 2019, the Compensation Committee confirmed the resulting competitive positioning was appropriate for each executive given their individual experience, complexity of role, business unit performance, and the Company’s consistently strong operating performance and sustained revenue and earnings growth in recent years. Additional Information Executive Stock Ownership Guidelines The Compensation Committee has established stock ownership guidelines for our NEOs. Executive stock ownership supports the Company’s primary objective of creating long-term value for stockholders by aligning the executives’ interests directly with those of the Company’s stockholders. Each executive is expected to maintain this minimum ownership while employed with us. The current guidelines for stock ownership are: Position President and Chief Executive Officer Other Named Executive Officers Ownership Guideline 5x Base Salary 2x Base Salary The following equity holdings count toward the stock ownership guidelines: shares directly owned by the executive or his or her immediate family members; shares held in trust or any similar entity benefiting the executive or the executive’s immediate family; and shares owned through the Williams-Sonoma, Inc. 401(k) Plan. Unexercised stock appreciation rights, unexercised stock options, performance shares with incomplete performance periods, and unvested restricted stock units or other full-value awards do not count towards the stock ownership guidelines listed above. We do not currently grant stock appreciation rights or stock options to our NEOs. Executives covered under the ownership guidelines are required to retain at least 50% of the net after-tax shares received as a result of the release of restricted stock units until the applicable ownership guideline has been achieved. As of February 2, 2020, all our NEOs meet or exceed the stock ownership guidelines or comply with the stock retention requirements for vested restricted stock units that are designed to bring the executive up to the applicable ownership level. Ms. Alber’s personal wealth is tied to company performance, and as of February 2, 2020, she held stock worth 18x her base salary, well above the 5x guideline. Double-Trigger Change of Control Provisions Each of our NEOs is entitled to double-trigger change of control benefits under our 2012 EVP Level Management Retention Plan, other than our Chief Executive Officer, who is entitled to such benefits under an individual arrangement. None of our NEOs are provided with any type of “golden parachute” excise tax gross-up. We believe that our change of control arrangements are competitive compensation practices and meet the Company’s objectives of: • Enhancing our ability to retain these key executives as such arrangements are an important component of competitive compensation programs; 50 • Ensuring that our executives remain objective and fully dedicated to the Company’s business and strategic objectives at a critical time; • Facilitating a smooth transition should a change in control occur; • Avoiding windfalls, which could occur if payments are made automatically as a result of the transaction; and • Mitigating any potential employer liability and avoiding future disputes or litigation by requiring a departing executive to sign a release agreement acceptable to us as a condition to receiving such payments and benefits. The Compensation Committee has considered the total potential cost of the change of control arrangements provided to our NEOs and has determined that such cost is reasonable and reflects the importance of the objectives described above. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements—Management Retention Agreement” and the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements—Management Retention Plan,” beginning on page 60, for more information. Severance Protection for the Chief Executive Officer As previously disclosed, we have entered into a severance arrangement with Ms. Alber providing for certain severance benefits in the event of the termination of her employment without cause or if she resigns for good reason, in each case, outside of the change in control context. Such severance benefits are conditioned, among other things, on her execution of a release agreement. The Compensation Committee implemented this arrangement to ensure that she remains focused on the Company’s business and strategic objectives rather than potential personal economic exposure and given that Ms. Alber’s departure in such circumstances is due, at least in part, to circumstances not within her control. The Compensation Committee has considered the total potential cost of her severance benefits and determined them to be reasonable. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements—Amended and Restated Employment Agreement with Laura Alber,” beginning on page 61, for more information. RSU and PSU Vesting Provisions Upon Death, Disability, or Retirement Additionally, consistent with the practice of many of our peers and to encourage our employees to remain employed with the Company through the date of the applicable vesting event, grants of RSUs, including the PSUs granted to our NEOs, provide for pro-rata vesting upon death or disability, and upon retirement, full vesting in the case of time-based RSUs and pro-rata vesting in the case of PSUs. Retirement is defined as leaving the Company at age 70 or later, with a minimum of 15 years of service. PSUs granted to our NEOs vest on a pro-rata basis subject to the achievement of the applicable performance goals in the event of death, disability, or retirement. Currently, none of our NEOs are retirement eligible. Please see the section titled “Employment Contracts and Termination of Employment and Change-of-Control Arrangements—Amended and Restated Employment Agreement with Laura Alber,” beginning on page 61, for more information. Clawback Policy Following Financial Restatement In March 2018, our Compensation Committee adopted a clawback policy regarding recovery of past payments or awards in the event of a financial restatement. In such event, the Compensation Committee will review all cash and equity awards that, in whole or in part, were granted or paid to, or earned by, our executive officers based on 51 P r o x y performance during the financial period subject to such restatement. If any award would have been lower or would not have vested, been earned or been granted based on such restated financial results, the Committee may, if it determines appropriate in its sole discretion and to the extent permitted by governing law, (a) cancel such award, in whole or in part, whether or not vested, earned or payable and/or (b) require the award holder to repay to the Company an amount equal to all or any portion of the value from the grant, vesting, or payment of the award that would not have been realized or accrued based on the restated financial results. Internal Revenue Code Section 162(m) Section 162(m) of the Internal Revenue Code places a limit of $1 million on the amount of compensation that we may deduct as a business expense in any year with respect to certain of our most highly paid executive officers. While the Compensation Committee considers the deductibility of compensation as one factor in determining executive compensation, the Compensation Committee retains the discretion to award and pay compensation that is not deductible as it believes that it is in the best interests of our stockholders to maintain flexibility in our approach to executive compensation and to structure a program that we consider to be the most effective in attracting, motivating, and retaining key executives. Compensation Committee Report The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on this review and discussion with management, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for fiscal 2019. COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS Adrian Bellamy, Chair Scott Dahnke Frits van Paasschen 52 Summary Compensation Table for Fiscal 2019, Fiscal 2018 and Fiscal 2017 This table sets forth certain annual and long-term compensation earned by or granted to our Named Executive Officers. For more information on the realized pay of our Named Executive Officers, please see “Overview of Chief Executive Officer Compensation for Fiscal 2019” on page 41, “Components of Our Compensation Program, 2019 Decisions and the Decision-Making Process,” beginning on page 42, and “PSUs Granted in Fiscal 2017” on page 48. Stock Awards ($)(2)(3) Option Awards ($) Non-Equity Incentive Plan Compensation ($)(4) All Other Compensation ($)(5)(6) Name and Principal Position Laura Alber . . . . . . . . . . . . . . . Director, President and Chief Executive Officer Julie Whalen . . . . . . . . . . . . . . Executive Vice President, Chief Financial Officer Alex Bellos . . . . . . . . . . . . . . . President, West Elm Brand Marta Benson . . . . . . . . . . . . . President, Pottery Barn Brand Fiscal Year 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 Salary ($)(1) Bonus ($) $1,500,000 $1,473,077 $1,400,000 $ 836,541 $ 800,010 $ 786,545 — — — — — — $11,999,941 $21,999,903 $ 9,999,899 $ 2,249,946 $ 2,249,982 $ 2,999,883 $ 823,077 $ 723,077 $ 457,596 — — $ 2,999,928 $ 1,999,989 $660,000(7) $ 1,999,915 $ 823,077 $ 736,539 $ 671,539 — — — $ 2,499,959 $ 2,999,959 $ 1,499,942 Ryan Ross(8) . . . . . . . . . . . . . 2019 $ 648,077 $660,000(9) $ 2,749,864 President, Williams Sonoma Brand — — — — — — — — — — — — — $3,500,000 $3,750,000 $3,000,000 $1,000,000 $1,000,000 $ 750,000 $1,600,000 $1,500,000 $ 750,000 $1,250,000 $ 900,000 $ 750,000 $ 28,503 $ 31,186 $ 29,433 $ 29,300 $ 28,811 $ 28,647 $ 22,062 $ 10,822 $164,651 $ 16,621 $ 14,830 $ 13,947 Total ($) $17,028,444 $27,254,166 $14,429,332 $ 4,115,787 $ 4,078,803 $ 4,565,075 $ 5,445,067 $ 4,233,888 $ 4,032,162 $ 4,589,657 $ 4,651,328 $ 2,935,428 $ 750,000 $248,961 $ 5,056,902 (1) Variances in the salary column versus annual base salary rate are a result of the timing of paychecks issued in a given fiscal year, as well as the impact of a 53-week fiscal year in fiscal 2018 as compared to 52-week fiscal years in fiscal 2019 and 2017. (2) Represents the grant date fair value of awards granted in fiscal 2019, fiscal 2018 and fiscal 2017, as calculated in accordance with FASB ASC Topic 718 by multiplying the closing price of our stock on the trading day prior to the grant date by the number of units granted. The number of restricted stock units and performance stock unit awards granted is determined by dividing the total monetary value of each award by the closing price of our common stock on the trading day prior to the grant date, rounding down to the nearest whole share. (3) The amounts in the stock awards column include the fair market value of performance stock unit awards assuming probable achievement of the performance goal at target levels resulting in the following fair market values for the performance stock unit awards: Ms. Alber – $5,999,971 (fiscal 2019), $5,999,967 (fiscal 2018) and $4,999,949 (fiscal 2017); Ms. Whalen – $674,961 (fiscal 2019), $674,985 (fiscal 2018) and $599,955 (fiscal 2017); Mr. Bellos – $899,967 (fiscal 2019), $599,992 (fiscal 2018) and $299,981 (fiscal 2017); Ms. Benson – $749,982 (fiscal 2019), $899,963 (fiscal 2018) and $299,978 (fiscal 2017); and Mr. Ross $624,949 (fiscal 2019), $149,986 (fiscal 2018) and $224,986 (fiscal 2017). Assuming maximum achievement of the performance goal, the fair market value of those performance stock units would be: Ms. Alber – $11,999,941 (fiscal 2019), $11,999,934 (fiscal 2018) and $9,999,899 (fiscal 2017); Ms. Whalen – $1,349,921 (fiscal 2019), $1,349,969 (fiscal 2018) and $1,199,910 (fiscal 2017); Mr. Bellos – $1,799,934 (fiscal 2019), $1,199,984 (fiscal 2018) and $599,962 (fiscal 2017); Ms. Benson – $1,499,964 (fiscal 2019), $1,799,927 (fiscal 2018) and $599,955 (fiscal 2017); and Mr. Ross – $1,249,898 (fiscal 2019). (4) Represents amounts earned under the company’s 2001 Incentive Bonus Plan for fiscal 2019, fiscal 2018 and fiscal 2017. (5) Details are provided in the Other Annual Compensation from Summary Compensation Table on page 54. (6) Excludes dividend equivalent payments, which were previously factored into the grant date fair value of disclosed equity awards. (7) Represents a special, discretionary sign-on bonus of $660,000 that was awarded to Mr. Bellos in connection with his promotion to President, West Elm Brand. The sign-on bonus is repayable ratably over a five-year period in the event Mr. Bellos leaves the company or is terminated for cause within five years from the effective date of his promotion. (8) Mr. Ross became a Named Executive Officer in fiscal 2019. (9) Represents a special, discretionary sign-on bonus of $660,000 that was awarded to Mr. Ross in connection with his promotion to President, William-Sonoma Brand. The sign-on bonus is repayable ratably over a five-year period in the event Mr. Ross leaves the company or is terminated for cause within five years from the effective date of his promotion. 53 P r o x y Other Annual Compensation from Summary Compensation Table This table sets forth the compensation and benefits included under “All Other Compensation” in the Summary Compensation Table above. Laura Alber . . . . . . . . . . . . . . . . . . . . . . . . . Julie Whalen . . . . . . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . . . . Life Insurance Premiums(1) Matching Contribution to the 401(k) Plan(2) Car Allowance $5,382 $4,878 $3,510 $2,915 $2,792 $2,743 $1,662 $1,341 $ 785 $8,198 $7,348 $6,470 $2,268 $8,346 $8,308 $7,923 $8,385 $8,019 $7,904 $8,400 $9,481 $6,635 $8,423 $7,482 $7,477 $7,076 $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 — — — — — — — Fiscal Year 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 Executive Financial Services $ 8,775 $12,000 $12,000 $12,000 $12,000 $12,000 $12,000 — — — — — — Total $ 28,503 $ 31,186(3) $ 29,433 $ 29,300 $ 28,811 $ 28,647 $ 22,062 $ 10,822 $164,651(4) $ 16,621 $ 14,830 $ 13,947 $248,961(5) (1) Premiums paid by us for term life insurance in excess of $50,000 for each fiscal year. (2) Represents company matching contributions under our 401(k) plan. Similar to our other full-time employees, Named Executive Officers were eligible to participate in our 401(k) plan and received matching contributions from the company of up to $8,400 during calendar 2019, $8,250 during calendar 2018, and $8,100 during calendar 2017. Matching amounts above this maximum are due to differences between calendar and fiscal year contributions. (3) Does not include incremental cost of one-time personal use by Ms. Alber of the company airplane because she fully reimbursed the company for such cost. (4) (5) Includes the following for Mr. Bellos: $87,830 in home sale and purchase assistance, $53,655 in moving and relocation expenses and a $15,746 tax restoration payment, in each case paid pursuant to the company’s relocation policy in connection with his promotion to President, West Elm Brand in June 2017, which required that Mr. Bellos relocate from Portland, Oregon to Brooklyn, New York. Includes the following for Mr. Ross: $109,684 in home sale and purchase assistance, $90,621 in moving and relocation expenses and a $39,312 tax restoration payment, in each case paid pursuant to the company’s relocation policy in connection with his promotion to President, Williams-Sonoma Brand in July 2019, which required that Mr. Ross relocate from Portland, Oregon to San Rafael, California. 54 Grants of Plan-Based Awards This table sets forth certain information regarding all grants of plan-based awards made to the Named Executive Officers during fiscal 2019. Estimated Future Payouts Under Non-Equity Incentive Plan Awards Target ($)(1)(2) Estimated Future Payouts Under Equity Incentive Plan Awards Target (#) Threshold ($) Maximum ($)(2) Threshold (#) Maximum (#) All Other Stock Awards: Number of Shares of Stock or Units (#) Grant Date Fair Value of Stock and Option Awards ($) Compensation Committee Approval Date Grant Date Laura Alber . . . . . . . . . — — — Julie Whalen . . . . . . . . — Alex Bellos . . . . . . . . . — — Marta Benson . . . . . . . — — Ryan Ross . . . . . . . . . . — — 52,065 104,130 208,260 — — — — $3,000,000 $10,000,000 — — 4/18/2019 3/27/2019(3) — 4/18/2019 3/27/2019(4) — — — — $ 850,000 $10,000,000 — — 5,857 4/18/2019 3/27/2019(3) — 4/18/2019 3/27/2019(4) — — — — — — — — — — — 4/18/2019 3/27/2019(3) — 4/18/2019 3/27/2019(4) — 4/18/2019 3/27/2019(3) — 4/18/2019 3/27/2019(4) — 3/13/2019 3/11/2019(3) — 4/18/2019 3/27/2019(4) — 7/9/2019(3) — 7/10/2019 7/9/2019(4) — 7/10/2019 — $ 850,000 $10,000,000 — — 7,809 — — — $ 850,000 $10,000,000 — — 6,508 — — — $ 700,000 $10,000,000 — — 3,471 — 1,815 — — — — — — — — — 11,714 — — 15,619 — — 13,016 — — 6,942 — 3,630 23,428 — — — — — — — — — — — 104,130 — — — — 27,334 — — — 36,445 — — — 30,371 — — — 27,811 — — 8,471 — — — 7,260 — — — — — 26,032 — — 31,238 — — 13,884 — (1) Target potential payment for each eligible executive pursuant to our established incentive targets. (2) The Compensation Committee established a threshold performance goal that needed to be satisfied in order for payments under our stockholder-approved 2001 Incentive Bonus Plan to be earned. For fiscal 2019, the Compensation Committee established the threshold performance goal for the 2001 Incentive Bonus Plan as positive net cash flow provided by operating activities as set forth in the company’s consolidated statements of cash flows. The Compensation Committee also set a secondary performance goal to guide its use of discretion in determining whether to reduce bonus amounts from the maximum shown in the table above; the Compensation Committee typically expects to pay bonuses at target levels if the secondary performance goal is met at target. For fiscal 2019, the Compensation Committee set the secondary performance goal as an earnings per share target of $4.88 (excluding extraordinary non-recurring charges and the effect of changes in accounting principles from GAAP EPS for fiscal 2019, including any amounts payable to covered employees under the 2001 Incentive Bonus Plan). As further described in the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision-Making Process—Annual Cash Bonus” in the Compensation Discussion and Analysis on page 44, the 2001 Incentive Bonus Plan’s threshold performance goal was achieved and the secondary performance goal was achieved between target and maximum levels, and the Compensation Committee elected to apply its discretion in determining to reduce the actual amount to be paid to the Named Executive Officers under the 2001 Incentive Bonus Plan below the maximum potential payment shown in the table above. (3) Grants of restricted stock units. See the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision Making Process—Long-Term Incentives” in the Compensation Discussion and Analysis beginning on page 46 and the footnotes to the “Outstanding Equity Awards at Fiscal Year-End” table beginning on page 56 for more information regarding these grants. (4) Grants of performance stock units. See the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision Making Process—Long-Term Incentives” in the Compensation Discussion and Analysis beginning on page 46 and the footnotes to the “Outstanding Equity Awards at Fiscal Year-End” table beginning on page 56 for more information regarding these grants. The number of performance stock units granted appears in the “Target” column. P r o x y 55 Outstanding Equity Awards at Fiscal Year-End The following tables set forth information regarding equity awards held by our Named Executive Officers on February 2, 2020. Number of Shares or Units of Stock that have not Vested (#) Market Value of Shares or Units of Stock that have not Vested($)(1) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested ($)(1) Laura Alber . . . . . . . . . . Julie Whalen . . . . . . . . . Alex Bellos . . . . . . . . . . Marta Benson . . . . . . . . Ryan Ross . . . . . . . . . . . 104,130(2) — 92,289(4) — 101,771(6) 46,253(7) 185,012(8) 20,522(9) 27,334(2) — 24,226(4) — 12,951(7) 22,200(8) 5,746(9) 36,445(2) — 21,534(4) — 12,379(10) 12,378(11) 4,625(7) 2,536(12) 1,232(9) 30,371(2) — 32,301(4) — 11,101(7) 1,642(9) 11,100(8) 8,471(13) — 27,811(15) — 9,229(4) — 5,589(16) 9,580(17) $ 7,297,430 — $ 6,467,613 — $ 7,132,112 $ 3,241,410 $12,965,641 $ 1,438,182 $ 1,915,567 — $ 1,697,758 — $ 907,606 $ 1,555,776 $ 402,680 $ 2,554,066 — $ 1,509,103 — 867,520 $ 867,450 $ 324,120 $ 177,723 $ $ 86,339 $ 2,128,400 — $ 2,263,654 — 777,958 115,071 785,888 593,648 — $ 1,948,995 — 646,768 — 391,677 671,366 $ $ $ $ $ $ $ — 104,130(3) — 123,051(5) — — — — — 11,714(3) — 13,843(5) — — — — 15,619(3) — 12,305(5) — — — — — — 13,016(3) — 18,457(5) — — — — 3,630(14) — 6,942(3) — 3,076(5) — — — $7,297,430 — $8,623,414 — — — — — $ 820,917 — $ 970,117 — — — — $1,094,580 — $ 862,334 — — — — — — $ 912,161 — $1,293,467 — — — — $ 254,390 — $ 486,495 — $ 215,566 — — (1) Based on a stock price of $70.08, the closing price of our common stock on January 31, 2020, the last business day of fiscal 2019. 56 (2) Represents restricted stock units granted on April 18, 2019. The restricted stock units vest as follows: (i) 25% of the units vest on April 18, 2020; (ii) 25% of the units vest on April 18, 2021; (iii) 25% of the units vest on April 18, 2022; and (iv) 25% of the units vest on April 18, 2023, each subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (3) Represents performance stock units granted on April 18, 2019. The performance stock units vest on April 18, 2022, subject to continued service and achievement of performance criteria. The shares above reflect a target payout of 100%. This award has a potential payout of 200% if the maximum performance criteria are achieved and 50% if the threshold performance criteria are achieved. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (4) Represents restricted stock units granted on April 18, 2018. The restricted stock units vest as follows: (i) 25% of the units vested on April 18, 2019; (ii) 25% of the units vest on April 18, 2020; (iii) 25% of the units vest on April 18, 2021; and (iv) 25% of the units vest on April 18, 2022, each subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (5) Represents performance stock units granted on April 18, 2018. The performance stock units vest on April 18, 2021, subject to continued service and achievement of performance criteria. The shares above reflect a target payout of 100%. This award has a potential payout of 200% if the maximum performance criteria are achieved and 50% if the threshold performance criteria are achieved. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (6) Represents restricted stock units granted on February 6, 2018. The restricted stock units vest as follows: (i) 50% of the units vest on February 6, 2019; and (ii) 50% of the units vest on February 6, 2020, each subject to continued service and a performance criterion of positive net income during the prior fiscal year with respect to each vesting date, which have each been met. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (7) Represents restricted stock units granted on May 1, 2017. The restricted stock units vest as follows: (i) 25% of the units vest on May 1, 2018; (ii) 25% of the units vest on May 1, 2019; (iii) 25% of the units vest on May 1, 2020; and (iv) 25% of the units vest on May 1, 2021, each subject to continued service and a performance criterion of positive net cash flow provided by operating activities (excluding any non-recurring charges) for fiscal 2017 as provided on the company’s consolidated statements of cash flows, which has been met. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. P r o x y (8) Represents performance stock units granted on May 1, 2017. The performance stock units vest on May 1, 2020 because the continued service requirement was met and the performance criterion was achieved, resulting in payout of 200% of target. See the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision-Making Process—PSUs Granted in Fiscal 2017” in the Compensation Discussion and Analysis beginning on page 48 for more information regarding the achievement of the performance criterion. In addition, upon vesting, the executive received a cash payment equal to dividends declared between the grant date and the vesting date. (9) Represents restricted stock units granted on April 18, 2016. The restricted stock units vest as follows: (i) 25% of the units vested on April 18, 2017; (ii) 25% of the units vested on April 18, 2018; (iii) 25% of the units vest on April 18, 2019; and (iv) 25% of the units vest on April 18, 2020, each subject to continued service and a performance criterion of positive net cash flow provided by operating activities (excluding any non-recurring charges) for fiscal 2016 as provided on the company’s consolidated statements of cash flows, which has been met. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. 57 (10) Represents restricted stock units granted on June 5, 2017. The restricted stock units vest as follows: (i) 25% of the units vested on June 5, 2018; (ii) 25% of the units vest on June 5, 2019; (iii) 25% of the units vest on June 5, 2020; and (iv) 25% of the units vest on June 5, 2021, each subject to continued service and a performance criterion of positive net cash flow provided by operating activities (excluding any non-recurring charges) for fiscal 2017 as provided on the company’s consolidated statements of cash flows, which has been met. (11) Represents performance stock units granted on June 5, 2017. The performance stock units vested on May 1, 2020, because the continued service requirement was met and the performance criterion was achieved, resulting in payout of 200% of target. See the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision-Making Process—PSUs Granted in Fiscal 2017” in the Compensation Discussion and Analysis beginning on page 48 for more information regarding the achievement of the performance criterion. In addition, upon vesting, the executive received a cash payment equal to dividends declared between the grant date and the vesting date. (12) Represents restricted stock units granted on January 6, 2017. The restricted stock units vest as follows: (i) 25% of the units vested on January 6, 2018; (ii) 25% of the units vested on January 6, 2019; (iii) 25% of the units vest on January 6, 2020; and (iv) 25% of the units vest on January 6, 2021, each subject to continued service and a performance criterion of positive net cash flow provided by operating activities (excluding any non-recurring charges) for fiscal 2017 as provided on the company’s consolidated statements of cash flows, which has been met. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (13) Represents restricted stock units granted on July 10, 2019. The restricted stock units vest as follows: (i) 25% of the units vest on July 10, 2020; (ii) 25% of the units vest on July 10, 2021; (iii) 25% of the units vest on July 10, 2022; and (iv) 25% of the units vest on July 10, 2023, each subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (14) Represents performance stock units granted on July 10, 2019. The performance stock units vest on April 18, 2022, subject to continued service and achievement of performance criteria. The shares above reflect a target payout of 100%. This award has a potential payout of 200% if the maximum performance criteria are achieved and 50% if the threshold performance criteria are achieved. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date (15) Represents restricted stock units granted on March 13, 2019. The restricted stock units vest as follows: (i) 25% of the units vest on March 13, 2020; (ii) 25% of the units vest on March 13, 2021; (iii) 25% of the units vest on March 13, 2022; and (iv) 25% of the units vest on March 13, 2023, each subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (16) Represents restricted stock units granted on September 6, 2017. The restricted stock units vest as follows: (i) 25% of the units vest on September 6, 2018; (ii) 25% of the units vest on September 6, 2019; (iii) 25% of the units vest on September 6, 2020; and (iv) 25% of the units vest on September 6, 2011, each subject to continued service. In addition, upon vesting, the executive receives a cash payment equal to dividends declared between the grant date and the vesting date. (17) Represents performance stock units granted on September 6, 2017. The performance stock units vest on May 1, 2020, because the continued service requirement was met and the performance criterion was achieved, resulting in payout of 200% of target. See the section entitled “Components of our Compensation Program, 2019 Decisions and the Decision-Making Process—PSUs Granted in Fiscal 2017” in the Compensation Discussion and Analysis beginning on page 48 for more information regarding the achievement of the performance criterion. In addition, upon vesting, the executive received a cash payment equal to dividends declared between the grant date and the vesting date. 58 Option Exercises and Stock Vested The following table sets forth information regarding the vesting of restricted stock unit awards held by our Named Executive Officers during fiscal 2019. Laura Alber . . . . . . . . . . . . . . . Julie Whalen . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . Option Awards Stock Awards Number of Shares Acquired on Exercise (#) — — — — — Value Realized on Exercise ($)(1) — — — — — Number of Shares Acquired on Vesting (#) 338,635 51,197 20,100 20,140 5,870 Value Realized on Vesting ($)(2) $19,014,287 $ 2,941,618 $ 1,204,915 $ 1,150,672 358,374 $ (1) The value realized upon exercise is calculated as the difference between the closing price of our stock on the trading day prior to the exercise date and the applicable exercise price of the option awards, multiplied by the number of shares exercised. (2) The value realized upon vesting is calculated as the closing price of our stock on the trading day prior to the vesting date multiplied by the number of units vested. Pension Benefits None of our Named Executive Officers received any pension benefits during fiscal 2019. Nonqualified Deferred Compensation The following table reflects amounts deferred under the Executive Deferred Compensation Plan by our Named Executive Officers Plan. Laura Alber . . . . . . . . . . . Julie Whalen . . . . . . . . . . Alex Bellos . . . . . . . . . . . Marta Benson . . . . . . . . . Ryan Ross . . . . . . . . . . . . Executive Contributions in Fiscal 2019 ($)(1) — — — $723,115 $ 62,115 Registrant Contributions in Fiscal 2019 ($) — — — — — Aggregate Earnings (Loss) in Fiscal 2019 ($) — — — $73,572 $ 7,454 Aggregate Withdrawals/ Distributions ($) — — — — — Aggregate Balance at February 2, 2020 ($) — — — $1,467,153 97,300 $ (1) These amounts represent executive contributions attributable to fiscal 2019, and are included in the Summary Compensation Table for fiscal 2019 in the salary and bonus columns. Participation in the Executive Deferred Compensation Plan is limited to a group of select management and highly compensated employees. In fiscal 2019, participants were able to defer up to 75% of their base salary and up to 100% of their bonus, net of applicable employment and withholding taxes and subject to a minimum deferral requirement (5% of salary). Participant accounts are not put aside in trust or any other funding vehicle, and the obligations of the company to pay are an unsecured promise to pay in the future. Although no investments are held in the plan, participant accounts track investment funds chosen by the participant from a specified list, and accounts are adjusted for earnings that the investments would have accrued had the investment fund been held by such participant accounts. Accounts are generally distributed at termination of employment, although a participant can make an election at the time of deferral to have the distribution occur at an earlier or later date. A choice of quarterly installments over 5, 10, 15 or 20 years, or a single lump sum, is available for terminations due to retirement or disability, as defined in the plan, if the account is over $15,000. All other distributions are paid as a single lump sum. The commencement of payments can be postponed, subject to advance election and minimum deferral requirements. At death, the plan may provide a death benefit funded by a life insurance policy, in addition to payment of the participant’s account. 59 P r o x y Employment Contracts and Termination of Employment and Change-of-Control Arrangements Management Retention Agreement We entered into an amended and restated management retention agreement with Laura Alber on September 6, 2012. The management retention agreement restates substantially all of the material terms of the prior agreement, with the exception of extending the term of the agreement through September 7, 2033. All other terms are substantially the same as the EVP Retention Plan, as described below. Management Retention Plan Effective March 27, 2019, we amended and restated the 2012 EVP Level Management Retention Plan, or the EVP Retention Plan. The EVP Retention Plan restates substantially all of the material terms of the prior 2012 EVP Level Management Retention Plan. Each of Ms. Whalen, Mr. Bellos, Ms. Benson and Mr. Ross are subject to the EVP Retention Plan. The EVP Retention Plan will remain in effect through March 26, 2022, unless earlier terminated by the company in accordance with the plan. If within 18 months following a change of control, an executive’s employment is terminated by us without “cause,” or by the executive for “good reason,” then (i) 100% of such executive’s outstanding equity awards, including full value awards, with performance-based vesting where the payout is a set number or zero depending on whether the performance metric is obtained, will immediately become fully vested, except that if a full value award has performance-based vesting and the performance period has not been completed and the number of shares that can be earned is variable based on the performance level, a pro-rata portion of such executive’s outstanding equity awards will immediately become fully vested at the target performance level, and (ii) in lieu of continued employment benefits (other than as required by law), such executive will be entitled to receive payments of $3,000 per month for 12 months. In addition, if, within 18 months following a change of control, the executive’s employment is terminated by us without “cause,” or by the executive for “good reason,” such executive will be entitled to receive (i) severance equal to 200% of such executive’s base salary as in effect immediately prior to the change of control or such executive’s termination, whichever is greater, with such severance to be paid over 24 months, and (ii) 200% of the average annual bonus received by such executive in the last 36 months prior to the termination, with such severance to be paid over 24 months. Each executive’s receipt of the severance benefits discussed above is contingent on such executive signing and not revoking a release of claims against us, such executive’s continued compliance with our Code of Business Conduct and Ethics (including its provisions relating to confidential information and non-solicitation), such executive not accepting employment with one of our competitors, and such executive’s continued non-disparagement of us. In the event that the severance payments and other benefits payable to an executive under a retention agreement constitute a “parachute payment” under Section 280G of the U.S. tax code and would be subject to the applicable excise tax, then the executive’s severance payments and other benefits will be either (i) delivered in full or (ii) delivered to a lesser extent such that no portion of the benefits are subject to the excise tax, whichever results in the receipt by such executive on an after-tax basis of the greatest amount of benefits (such provision, a “better after-tax” provision). For purposes of the EVP Retention Plan, “cause” means: (i) an act of dishonesty made by the executive in connection with his or her responsibilities as an employee; (ii) the executive’s conviction of, or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude; (iii) the executive’s gross misconduct; (iv) the executive’s unauthorized use or disclosure of any proprietary information or trade secrets of the company or any other party to whom the executive owes an obligation of nondisclosure as a result of the executive’s relationship with the company; (v) the executive’s willful breach of any obligations under any written agreement or covenant with the company or breach of the company’s Code of Business Conduct and Ethics; or (vi) the executive’s continued failure to perform his or her employment duties after he or 60 she has received a written demand of performance which specifically sets forth the factual basis for the belief that the executive has not substantially performed his or her duties and has failed to cure such non-performance within 30 days after receiving such notice. For purposes of the EVP Retention Plan, “change of control” means the occurrence of any of the following events: (i) a change in the ownership of the company which occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the company that, together with the stock held by such Person, constitutes more than 50% of the total voting power of the stock of the company; provided, however, that for purposes of this subsection (i), the acquisition of additional stock by any one Person, who is considered to own more than 50% of the total voting power of the stock of the company will not be considered a change of control; or (ii) a change in the effective control of the company which occurs on the date that a majority of members of the Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors prior to the date of the appointment or election; provided, however, that for purposes of this subsection (ii), if any Person is considered to effectively control the company, the acquisition of additional control of the company by the same Person will not be considered a change of control; or (iii) a change in the ownership of a substantial portion of the company’s assets which occurs on the date that any Person acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the company that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of the assets of the company immediately prior to such acquisition or acquisitions; provided, however, that for purposes of this subsection (iii), the following will not constitute a change in the ownership of a substantial portion of the company’s assets: (A) a transfer to an entity that is controlled by the company’s stockholders immediately after the transfer, or (B) a transfer of assets by the company to: (1) a stockholder of the company (immediately before the asset transfer) in exchange for or with respect to the company’s stock, (2) an entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the company, (3) a Person that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the company, or (4) an entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a Person. For purposes of this subsection (iii), gross fair market value means the value of the assets of the company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. For purposes of this definition, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the company. Notwithstanding the foregoing, a transaction shall not be deemed a change of control unless the transaction qualifies as a change in the ownership of the company, change in the effective control of the company or a change in the ownership of a substantial portion of the company’s assets, each within the meaning of Section 409A. For purposes of the EVP Retention Plan, “good reason” means, without the executive’s consent, (i) a material reduction in his or her annual base salary (except pursuant to a reduction generally applicable to senior executives of the company), (ii) a material diminution of his or her authority, duties or responsibilities, (iii) the executive ceasing to report directly to a specified individual or the Board of the company or the entity holding all or substantially all of the company’s assets following a change of control, or (iv) relocation of the executive to a location more than 50 miles from the company’s San Francisco, California main office location. In addition, upon any such voluntary termination for good reason, the executive must provide written notice to the company of the existence of one or more of the above conditions within 90 days of its initial existence, and the company must be provided with at least 30 days from the receipt of the notice to remedy the condition. Amended and Restated Employment Agreement with Laura Alber We entered into an amended and restated employment agreement with Laura Alber, effective as of September 6, 2012, which amended and restated the prior agreement entered into with Ms. Alber, effective May 26, 2010. The employment agreement restates substantially all of the material terms of the prior agreement, with the exception of extending the term of the agreement through September 7, 2033 and referencing Ms. Alber’s then current base 61 P r o x y salary of $1,300,000. If we terminate Ms. Alber’s employment without “cause,” if she terminates her employment with us for “good reason,” or if her employment is terminated due to her death or “disability,” she will be entitled to receive (i) severance equal to 24 months of her base salary to be paid over 24 months, (ii) a lump sum payment equal to 200% of the average annual bonus received by her in the last 36 months prior to the termination, (iii) in lieu of continued employment benefits (other than as required by law), payments of $3,000 per month for 18 months, and (iv) accelerated vesting of her then-outstanding equity awards that vest solely based upon Ms. Alber’s continued service by up to an additional 18 months’ of vesting credit, and if the awards were subject to cliff-vesting of more than one year, the cliff-vesting provision will be lifted and vesting credit given as if the award had been subject to monthly vesting, and equity awards subject to performance-based vesting will remain outstanding through the date upon which the achievement of the applicable performance milestones are certified with such awards paid out, subject to the attainment of the applicable performance milestones, to the same extent and at the same time as if Ms. Alber had remained employed through the 18-month anniversary of her termination date. Ms. Alber’s receipt of the severance benefits discussed above is contingent on her signing and not revoking a release of claims against us, her continued compliance with our Code of Business Conduct and Ethics (including its provisions relating to confidential information and non-solicitation), her not accepting employment with one of our competitors, and her continued non-disparagement of us. For purposes of the employment agreement with Ms. Alber, “cause” is defined as (i) an act of dishonesty made by her in connection with her responsibilities as an employee, (ii) Ms. Alber’s conviction of or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude, (iii) Ms. Alber’s gross misconduct, (iv) Ms. Alber’s unauthorized use or disclosure of any proprietary information or trade secrets of the company or any other party to whom she owes an obligation of nondisclosure as a result of her relationship with the company, (v) Ms. Alber’s willful breach of any obligations under any written agreement or covenant with the company or breach of the company’s Code of Business Conduct and Ethics, or (vi) Ms. Alber’s continued failure to perform her employment duties after she has received a written demand of performance from the Board which specifically sets forth the factual basis for the Board’s belief that she has not substantially performed her duties and has failed to cure such non-performance to the company’s satisfaction within 30 days after receiving such notice. For purposes of the employment agreement with Ms. Alber, “disability” means Ms. Alber (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering company employees. For purposes of the employment agreement with Ms. Alber, “good reason” is defined as, without Ms. Alber’s consent, (i) a reduction in her base salary (except pursuant to a reduction generally applicable to senior executives of the company), (ii) a material diminution of her authority or responsibilities, (iii) a reduction of Ms. Alber’s title, (iv) Ms. Alber ceasing to report directly to the Board of Directors, or (v) the Board of Directors failing to re-nominate Ms. Alber for Board membership when her Board term expires while she is employed by the company. In addition, upon any such voluntary termination for good reason, Ms. Alber must provide written notice to the company of the existence of one or more of the above conditions within 90 days of its initial existence and the company must be provided with at least 30 days to remedy the condition. 62 The following table describes the payments and/or benefits which would have been owed by us to Ms. Alber as of February 2, 2020 if her employment had been terminated in various situations, without taking into account the “better after-tax” provision or applicable taxes. Compensation and Benefits Termination Without Cause or for Good Reason (No Change-of-Control) Termination Without Cause or for Good Reason (Change-of- Control) Base Salary(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonus Payment(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Awards(4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . Health Care Benefits(8) . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000 $ 6,100,000 $44,497,436 54,000 $ $ 3,000,000 $ 6,100,000 $47,980,412(6) $ 36,000 Death/Disability $ 3,000,000(2) $ 6,100,000(2) $44,497,436(7) $ 54,000 (1) Represents 200%, or 24 months, of Ms. Alber’s base salary as of February 2, 2020. (2) Will be reduced by the amount of any payments Ms. Alber receives through company-paid insurance policies. (3) Represents 200% of the average annual bonus received by Ms. Alber in the 36-month period prior to February 2, 2020. (4) Value is based on a stock price of $70.08, the closing price of our common stock on January 31, 2020, the last business day of fiscal 2019. (5) For illustrative purposes only, performance stock units are estimated at target. (6) Represents the sum of (i) $25,576,747 for acceleration of vesting of 364,965 restricted stock units and (ii) $22,403,665 for acceleration of vesting of 319,687 performance stock units. (7) Represents the sum of (i) $23,918,164 for acceleration of vesting of 341,298 restricted stock units and (ii) $20,579,272 for acceleration of vesting of 293,654 performance stock units. (8) Based on a monthly payment of $3,000 to be paid by the company for 18 months or 12 months, as applicable, in lieu of continued employment benefits. All Other Named Executive Officers Except as described above in connection with a termination following a change of control of the company, the other Named Executive Officers are generally not entitled to severance benefits in connection with their termination for good reason or involuntary termination. The following table describes the payments and/or benefits which would have been owed by us to the Named Executive Officers as of February 2, 2020 under the EVP Retention Plan if, within 18 months following a change of control of the company, the executive’s employment was terminated by us without cause, or by the executive for good reason, without taking into account the “better after-tax” provision or applicable taxes. P r o x y Name Potential Double-Trigger Change in Control Benefits Base Salary(1) Bonus Payment(2) Equity Awards(3) Health Care Benefits(4) Julie Whalen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,700,000 $1,700,000 $1,700,000 $1,400,000 $1,633,333 $1,683,333 $1,333,333 $1,050,000 $7,492,533(5) $7,909,509(6) $7,879,655(7) $4,873,223(8) $36,000 $36,000 $36,000 $36,000 (1) Represents 200% of each Named Executive Officer’s base salary as of February 2, 2020. (2) Represents 200% of the average annual bonus received by each Named Executive Officer in the 36-month period prior to February 2, 2020. (3) Value is based on a stock price of $70.08, the closing price of our common stock on January 31, 2020, the last business day of fiscal 2019. 63 (4) Based on a monthly payment of $3,000 to be paid by the company for 12 months in lieu of continued employment benefits. (5) Represents the sum of (i) $4,923,610 for acceleration of vesting of 70,257 restricted stock units and (ii) $2,568,923 for acceleration of vesting of 36,657 performance stock units. (6) Represents the sum of (i) $5,518,870 for acceleration of vesting of 78,751 restricted stock units and (ii) $2,390,639 for acceleration of vesting of 34,113 performance stock units. (7) Represents the sum of (i) $5,285,083 for acceleration of vesting of 75,415 restricted stock units and (ii) $2,594,572 for acceleration of vesting of 37,023 performance stock units. (8) Represents the sum of (i) $3,581,088 for acceleration of vesting of 51,100 restricted stock units and (ii) $1,292,135 for acceleration of vesting of 18,438 performance stock units. Acceleration Provisions Under Equity Award Agreements and 2001 LTIP Restricted stock units and performance stock units were granted to our Named Executive Officers in each of fiscal 2019, fiscal 2018 and fiscal 2017. Pursuant to our equity award agreements, our Named Executive Officers are eligible for pro-rata accelerated vesting of their equity awards in the event of a Named Executive Officer’s death or “disability,” and upon “retirement,” full vesting in the case of time-based restricted stock units and pro-rata vesting in the case of performance-based restricted stock units. Such accelerated vesting benefits are subject to the achievement of performance goals in the case of performance stock units. The performance stock units also provide that upon a “change in control,” the performance goals shall be deemed satisfied at target and, for purposes of any severance and corporate transaction vesting provisions, the performance stock units will generally be treated in the same manner as a time-based restricted stock unit award covering the number of shares based on such deemed target performance. For purposes of the equity awards, “disability” means the occurrence of any of the following events: (i) the executive being unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to last for a continuous period of not less than 12 months; (ii) the executive is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under the company’s accident and health plan covering the company’s employees; or (iii) the executive has been determined to be totally disabled by the Social Security Administration. For purposes of the equity awards, “retirement” means the executive’s termination of employment for a reason other than “cause,” “disability,” or death subsequent to the executive having attained age 70 and having been employed by the company for at least 15 years. Currently, none of the Named Executive Officers satisfy the requirements for “retirement.” For purposes of the equity awards, “cause” means: (i) embezzlement, theft or misappropriation by the executive of any property of any of the company; (ii) the executive’s breach of any fiduciary duty to the company; (iii) the executive’s failure or refusal to comply with laws or regulations applicable to the company and their businesses or the policies of the company governing the conduct of its employees or directors; (iv) the executive’s gross incompetence in the performance of their job duties; (v) the executive’s commission of a felony or of any crime involving moral turpitude, fraud or misrepresentation; (vi) the executive’s failure to perform duties consistent with a commercially reasonable standard of care; (vii) the executive’s failure or refusal to perform job duties or to perform specific directives of the executive’s supervisor or designee, or the senior officers or the Board; or (viii) any gross negligence or willful misconduct by the executive resulting in loss to the company or damage to the reputation of the company. For purposes of the equity awards, “change in control” generally has the same meaning as “change in control” under the EVP Retention Plan or in the Named Executive Officer’s employment agreement, as applicable. 64 In addition, our 2001 Long-Term Incentive Plan provides that, in the event of a merger or sale of all or substantially all of the assets of the company, a liquidation or dissolution of the company or a corporate reorganization of the company, equity awards held by all plan participants (including our Named Executive Officers) will vest in full immediately prior to such transaction to the extent they are terminated at the time of such transaction without provision to the holder of an equivalent substitute award. The following table describes the benefits which would have been paid to our Named Executive Officers under these provisions had they been fully triggered on February 2, 2020. None of our Named Executive Officers were eligible to retire on February 2, 2020. Name Laura Alber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Julie Whalen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alex Bellos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Death/Disability (1)(2) $29,620,994(3)(4) $ 4,410,415(5) $ 4,250,772(6) $ 4,332,486(7) $ 2,272,134(8) Award Termination (No Substitute Award) (1)(2) $47,980,412(9) $ 7,492,533(10) $ 7,909,509(11) $ 7,879,655(12) $ 4,873,223(13) (1) Value is based on a stock price of $70.08, the closing price of our common stock on January 31, 2020, the last business day of fiscal 2019. (2) For illustrative purposes only, performance stock units are estimated at target. (3) Under her employment agreement, Ms. Alber may be entitled to greater acceleration in the event of her death or disability, as described above in the table on page 63. (4) Represents the sum of (i) $17,279,06 for acceleration of vesting of 246,574 restricted stock units and (ii) $12,341,088 for acceleration of vesting of 176,100 performance stock units. (5) Represents the sum of (i) $2,926,261 for acceleration of vesting of 41,756 restricted stock units and (ii) $1,484,154 for acceleration of vesting of 21,178 performance stock units. (6) Represents the sum of (i) $3,078,824 for acceleration of vesting of 49,933 restricted stock units and (ii) $1,171,948 for acceleration of vesting of 16,723 performance stock units. (7) Represents the sum of (i) $2,993,467 for acceleration of vesting of 42,715 restricted stock units and (ii) $1,339,019 for acceleration of vesting of 19,107 performance stock units. (8) Represents the sum of (i) $1,675,403 for acceleration of vesting of 23,907 restricted stock units and (ii) $596,731 for acceleration of vesting of 8,515 performance stock units. (9) Represents the sum of (i) $25,576,747 for acceleration of vesting of 364,965 restricted stock units and (ii) $22,403,665 for acceleration of vesting of 319,687 performance stock units. (10) Represents the sum of (i) $4,923,610 for acceleration of vesting of 70,257 restricted stock units and (ii) $2,568,923 for acceleration of vesting of 36,657 performance stock units. (11) Represents the sum of (i) $5,518,870 for acceleration of vesting of 78,751 restricted stock units and (ii) $2,390,639 for acceleration of vesting of 34,113 performance stock units. (12) Represents the sum of (i) $5,285,083 for acceleration of vesting of 75,415 restricted stock units and (ii) $2,594,572 for acceleration of vesting of 37,023 performance stock units. (13) Represents the sum of (i) $3,581,088 for acceleration of vesting of 51,100 restricted stock units and (ii) $1,292,135 for acceleration of vesting of 18,438 performance stock units. CEO Pay Ratio We are required to disclose the annual total compensation of the Chief Executive Officer, the median of the annual total compensation of all employees of the company and its subsidiaries excluding the Chief Executive 65 P r o x y Officer (“Median Employee”) and the ratio of those two amounts (“CEO Pay Ratio”) for fiscal 2019. The annual total compensation of our Chief Executive Officer was $17,028,444 in fiscal 2019, as reflected in the Summary Compensation Table above. Based on reasonable estimates, the annual total compensation of the Median Employee was $11,493 for fiscal 2019. Accordingly, for fiscal 2019, the ratio of the annual total compensation of our Chief Executive Officer to the median annual total compensation of all of our other employees was 1,482 to 1. The Median Employee for fiscal 2019 was a Retail Sales Associate located in New Jersey, who was part-time in fiscal 2019. In preparation for and during our holiday selling season in the fourth quarter of our fiscal year, we hire a substantial number of temporary and seasonal employees, primarily in our retail stores, customer care centers and distribution facilities, who are included in the determination of the median employee. If we exclude permanent part-time, temporary and seasonal employees from our pay ratio calculation, the median annual total compensation of the remaining employees increases to $42,924, which would result in a ratio of 397 to 1. The annual total compensation used to identify our Median Employee for fiscal 2019 was determined based on all taxable wages earned in fiscal 2019 for each individual who was employed on the last day of the fiscal year. We also converted all relevant employee compensation, on a country-by-country basis, to U.S. dollars based on the applicable exchange rate as of the end of the fiscal year. Incentive Award Committee Pursuant to its charter and the 2001 Long-Term Incentive Plan, the Compensation Committee may delegate the authority to make non-executive officer grants to two or more directors, one or more officers of the company, or otherwise in any manner permitted under applicable law. The Compensation Committee does not delegate any of its authority with respect to grants to executive officers and non-employee directors of the company. The Compensation Committee delegated to Adrian Bellamy, the Chair of the Compensation Committee, and Laura Alber the authority to grant equity to certain non-executive employees within a stated budget in connection with the company’s annual equity grants for fiscal 2019. The Compensation Committee also appointed an Incentive Award Committee consisting of Laura Alber and Julie Whalen for fiscal 2019. The Compensation Committee delegated to the Incentive Award Committee the authority to grant equity awards under the company’s 2001 Long-Term Incentive Plan within certain prescribed limits to non-executive officer employees with a corporate rank at or below Senior Vice President. The Chief Executive Officer believes it is important to provide our associates with long-term incentive vehicles that are directly linked to stockholder return. Granting equity-based incentives aligns the interests of our associates with those of our stockholders and reinforces the company’s pay-for-performance strategy. This delegation is reviewed by the Compensation Committee annually and includes limitations on the number of shares subject to the grants, both on an individual basis and in the aggregate. Reports of awards made by the Incentive Award Committee are included in the materials presented at the Compensation Committee’s regularly scheduled meetings. 66 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have policies in our Code of Business Conduct and Ethics that provide that employees must not engage in any transaction when an employee may face a real or perceived conflict of interest with the company. Our Code of Business Conduct and Ethics is distributed to all employees on an annual basis and made available throughout the year in our internal document database. It is also available on our website and in print to any stockholder who requests it. In addition, we have in place policies and procedures with respect to related person transactions that provide that our executive officers, directors and principal stockholders, as well as their immediate family members and affiliates, are not permitted to enter into a related party transaction with us unless (i) the transaction is approved or ratified by our Audit and Finance Committee or the disinterested members of our Board or (ii) the transaction involves the service of one of our executive officers or directors or any related compensation, is reportable under Item 402 of Regulation S-K and is approved by our Compensation Committee. For the purposes of our related party transaction policy, “related party transaction” means any transaction in which the amount involved exceeds $120,000 in any calendar year and in which any of our executive officers, directors and principal stockholders, as well as their immediate family members and affiliates, had, has or will have a direct or indirect material interest, other than transactions available to all of our employees. It is our policy to approve related party transactions only when it has been determined that such transaction is in, or is not inconsistent with, our best interests and those of our stockholders, including situations where we may obtain products or services of a nature, quantity or quality, or on other terms, that are not readily available from alternative sources or when the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party. Indemnification Agreements We have indemnification agreements with our directors and executive officers. These agreements, among other things, require us to indemnify each director and executive officer to the fullest extent permitted by Delaware law, including coverage of expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’s services as a director or executive officer. P r o x y 67 SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT This table sets forth information regarding the ownership of our common stock as of April 6, 2020 by: • each person known to us to own more than 5% of our outstanding common stock; • each director; • the Named Executive Officers; and • all current executive officers and directors as a group. Unless otherwise noted, the persons listed below have sole voting and investment power. In addition, unless otherwise noted, the address of each stockholder noted in the following table is c/o Williams-Sonoma, Inc., 3250 Van Ness Avenue, San Francisco, California 94109. Information regarding our non-management 5% stockholders is derived from the most recently available 13G filings. Name and Address of Beneficial Owner Position with Company Common Stock Amount and Nature of Beneficial Ownership Awards Exercisable or Vesting within 60 days(1) Total Percent of Class(2) Capital Research Global Investors . . . . 333 South Hope Street Los Angeles, CA 90071 The Vanguard Group, Inc. 100 Vanguard Blvd. Malvern, PA 19355 . . . . . . . . . . BlackRock Inc. . . . . . . . . . . . . . . . . . . . 55 East 52nd Street New York, NY 10055 FMR LLC . . . . . . . . . . . . . . . . . . . . . . . 245 Summer Street Boston, MA 02210 Aristotle Capital Management, LLC . . 11100 Santa Monica Blvd., Suite 1700 Los Angeles, CA 90025 Blackhill Capital, Inc. . . . . . . . . . . . . . . 161 Madison Avenue Morristown, NJ 07960 Laura Alber . . . . . . . . . . . . . . . . . . . . . . — — — — — — 7,998,898 — 7,998,898(3) 10.4% 7,326,017 — 7,326,017(4) 9.5% 7,157,730 — 7,157,730(5) 9.3% 3,950,286 — 3,950,286(6) 5.1% 5,061,112 — 5,061,112(7) 6.6% 4,001,098 — 4,001,098(8) 5.2% Director, Chief Executive Officer and President 430,027(9) 285,455 715,482 Julie Whalen . . . . . . . . . . . . . . . . . . . . . Executive Vice President, 58,318(10) 49,329 107,647 Alex Bellos . . . . . . . . . . . . . . . . . . . . . . Marta Benson . . . . . . . . . . . . . . . . . . . . Chief Financial Officer President, West Elm Brand President, Pottery Barn Brand 68 9,647 38,400 48,047 17,061 36,651 53,712 * * * * Name and Address of Beneficial Owner Position with Company Common Stock Amount and Nature of Beneficial Ownership Awards Exercisable or Vesting within 60 days(1) Total Percent of Class(2) Ryan Ross . . . . . . . . . . . . . . . . . . . . . . . President, Williams Sonoma Brand 9,876 12,656 22,532 Adrian Bellamy . . . . . . . . . . . . . . . . . . . Scott Dahnke . . . . . . . . . . . . . . . . . . . . . Anne Mulcahy . . . . . . . . . . . . . . . . . . . . Grace Puma . . . . . . . . . . . . . . . . . . . . . . William Ready . . . . . . . . . . . . . . . . . . . Sabrina Simmons . . . . . . . . . . . . . . . . . Frits van Paasschen . . . . . . . . . . . . . . . . All current executive officers and Director Director Director Director Director Director Director 65,166 20,418 1,716 6,187 — 10,915 6,187 4,668 2,775 2,775 2,775 659 3,204 2,775 69,834 23,193 4,491 8,962 659 14,119 8,962 * * * * * * * * directors as a group (13 persons) . . . — 658,659(11) 473,415 1,132,074 1.5% * Less than 1%. (1) Reflects exercisable restricted stock units vesting within 60 days of April 6, 2020 (prior to withholding of any such shares to satisfy applicable statutory withholding requirements). (2) Assumes settlement or vesting of awards included in footnote (1) into shares of our common stock with respect to the named individual. Based on 77,213,492 shares outstanding as of April 6, 2020. (3) The information above and in this footnote is based on information taken from the Schedule 13G filed by Capital Research Global Investors, a division of Capital Research and Management Company, with the Securities and Exchange Commission on February 14, 2020. Capital Research Global Investors has sole voting power with respect to 7,998,660 shares and sole dispositive power with respect to 7,998,660 shares. (4) The information above and in this footnote is based on information taken from the Schedule 13G of The Vanguard Group, Inc. filed with the Securities and Exchange Commission on February 12, 2020. The Vanguard Group, Inc. has sole voting power with respect to 40,991 shares, shared voting power with respect to 14,940 shares, sole dispositive power with respect to 7,280,187 shares and shared dispositive power with respect to 45,830 shares. (5) The information above and in this footnote is based on information taken from the Schedule 13G of BlackRock Inc. filed with the Securities and Exchange Commission on February 6, 2020. BlackRock Inc. has sole voting power with respect to 6,842,836 shares and sole dispositive power with respect to 7,157,730 shares. (6) The information above and in this footnote is based on information taken from the Schedule 13G filed by FMR LLC and Abigail P. Johnson, a Director and the Chairman and the Chief Executive Officer of FMR LLC, with the Securities and Exchange Commission on February 6, 2020. FMR LLC has sole voting power with respect to 797,496 shares, shared voting power with respect to 0 shares, and sole dispositive power with respect to 3,950,286 shares. Ms. Johnson has sole voting power and sole dispositive power with respect to 3,950,286 shares. (7) The information above and in this footnote is based on information taken from the Schedule 13G filed by Aristotle Capital Management, LLC with the Securities and Exchange Commission on February 14, 2020. Aristotle Capital Management, LLC has sole voting power with respect to 1,853,866 shares and sole dispositive power with respect to 5,061,112 shares. 69 P r o x y (8) The information above and in this footnote is based on information taken from the Schedule 13G filed by Blackhill Capital, Inc. with the Securities and Exchange Commission on February 10, 2020. Blackhill Capital, Inc. has sole voting power with respect to 4,001,098 shares and sole dispositive power with respect to 4,001,098 shares. (9) Includes 15,430 shares held by Ms. Alber in the Williams-Sonoma, Inc. Stock Fund under our 401(k) plan, based on a statement dated April 6, 2020. (10) Includes 1,078 shares held by Ms. Whalen in the Williams-Sonoma, Inc. Stock Fund under our 401(k) plan, based on a statement dated April 6, 2020. (11) Includes 16,725 shares held by the executive officers in the Williams-Sonoma, Inc. Stock Fund under our 401(k) plan, based on statements dated April 6, 2020. 70 STOCKHOLDER PROPOSALS Stockholder proposals must comply with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934 and be received by our Secretary at our principal executive offices no later than December 18, 2020 in order to be included in our Proxy Statement for the 2021 Annual Meeting. In order to submit a proposal to be raised at the 2021 Annual Meeting that will not be included in our Proxy Statement for the 2021 Annual Meeting, stockholder proposals must comply with our Restated Bylaws. Under our Restated Bylaws a stockholder must give advance notice to our Secretary of any business, including nominations of directors for our Board, that the stockholder wishes to raise at our Annual Meeting. To be timely under our Restated Bylaws, the notice must be received by our Secretary not less than 90 days or more than 120 days prior to June 3, 2021, the anniversary of our 2020 Annual Meeting. Therefore, stockholder proposals must be received by our Secretary at our principal executive offices between February 3, 2021 and March 5, 2021 in order to be raised at our 2021 Annual Meeting. Under Rule 14a-8 of the Securities Exchange Act of 1934, as amended, if the date of the 2021 Annual Meeting changes by more than 30 days from the anniversary of this year’s Annual Meeting, to be included in our Proxy Statement, stockholder proposals must be received by us within a reasonable time before our solicitation is made. Under our Restated Bylaws, if the date of the 2021 Annual Meeting changes by more than 30 days from the anniversary of this year’s Annual Meeting, stockholder proposals to be brought before the 2021 Annual Meeting must be delivered not later than the 90th day prior to the 2021 Annual Meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by us. With respect to a stockholder’s nomination of a candidate for our Board, the stockholder notice to the Secretary must contain certain information as set forth in our Restated Bylaws and described under the section “Corporate Governance—Board Committees—Nominations, Corporate Governance and Social Responsibility Committee” about both the nominee and the stockholder making the nomination. With respect to any other business that the stockholder proposes, the stockholder notice must contain a brief description of such business and the reasons for conducting such business at the meeting, as well as certain other information as set forth in our Restated Bylaws. Any stockholder (or group of up to 20 stockholders) meeting our continuous ownership requirements of three percent (3%) or more of our common stock for at least three years who wishes to nominate a candidate or candidates for election in connection with our 2021 Annual Meeting and require us to include such nominees in our Proxy Statement and form of proxy for our 2021 Annual Meeting must submit a notice to our Secretary at our principal executive offices no later than December 18, 2020 and no earlier than November 18, 2020 (i.e., no later than the 120th day and no earlier than the 150th day before the one-year anniversary of the date on which we first mailed our proxy materials for our 2020 Annual Meeting). If the date of the 2021 Annual Meeting is more than 30 days before or after the one-year anniversary of the 2020 Annual Meeting (the “Other Meeting Date”), the notice must be received at our principal executive offices not later than the close of business on the later of the 90th day prior to such Other Meeting Date or the 10th day following the date on which public announcement of the date of such meeting is first made by the us. P r o x y If we receive notice of a matter to come before the 2021 Annual Meeting that is not in accordance with the deadlines described above, we will use our discretion in determining whether or not to bring such matter before the Annual Meeting. If such matter is brought before the Annual Meeting, then our proxy card for such meeting will confer upon our proxy holders discretionary authority to vote on such matter. Stockholder proposals should be sent to: Williams-Sonoma, Inc., Attention: Corporate Secretary, 3250 Van Ness Avenue, San Francisco, California 94109. 71 NOTE ABOUT FORWARD-LOOKING STATEMENTS In this proxy statement, the Company has disclosed information which may be considered forward-looking within the meaning of the U.S. federal securities laws. Forward-looking statements may appear throughout this proxy statement, including in the Compensation Committee letter and the Compensation Discussion and Analysis. In some cases, you can identify these forward-looking statements by the use of terms such as “believe,” “will,” “expect” anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “would,” and “continue to,” or similar expressions, and variations or negatives of these words, but the absence of these words does not mean that a statement is not forward-looking. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to statements regarding our response to the COVID-19 pandemic, our implementation of cost and capital reduction measures, our opportunities for growth, our expansion into global markets, our business initiatives and strategy, our annual revenue targets and stockholder engagement. For information regarding risks and uncertainties associated with our business and a discussion of some of the factors that may cause actual results to differ materially from the results expressed or implied by such forward-looking statements, please refer to our SEC filings, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” sections of our 2019 Annual Report on Form 10-K. The Company undertakes no obligation to update information in this proxy statement. INFORMATION REFERENCED IN THIS PROXY STATEMENT The content of the websites referred to in this proxy statement are not incorporated by reference into this proxy statement. 72 AVAILABILITY OF PROXY STATEMENT AND ANNUAL REPORT ON FORM 10-K Pursuant to SEC rules, we have elected to provide access to our proxy materials by notifying you of the availability of our proxy materials on the Internet. Copies of this Proxy Statement and our Annual Report on Form 10-K, including the financial statements for fiscal 2019 as filed with the SEC, are available at our website at ir.williams-sonomainc.com/financial-reports-page and upon written request and without charge to any stockholder by writing to: Williams-Sonoma, Inc., Attention: Annual Report Administrator, 3250 Van Ness Avenue, San Francisco, California 94109. San Francisco, California April 17, 2020 P r o x y 73 [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] DIRECTOR NOMINEES AND EXECUTIVE OFFICERS LAURA ALBER (cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:15)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:775)(cid:70)(cid:72)(cid:85) scott dahnke Director anne mulcahy Director William Ready Director SABRINA SIMMONS Director FRITS VAN PAASSCHEN Director ALEX BELLOS President, West Elm Brand MARTA BENSON President, Pottery Barn Brand DAVID KING Executive Vice President, General Counsel and Secretary Ryan Ross President, Williams Sonoma Brand JULIE WHALEN (cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:57)(cid:76)(cid:70)(cid:72)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:775)(cid:70)(cid:72)(cid:85) CORPORATE INFORMATION CORPORATE HEADQUARTERS Williams-Sonoma, Inc. 3250 Van Ness Avenue San Francisco, California 94109 Stock Exchange Listing New York Stock Exchange Symbol: WSM Corporate Website williams-sonomainc.com Stockholder/Investor Information ir.williams-sonomainc.com Annual Meeting Wednesday, June 3, 2020 starting at 9:00 a.m. at: Williams-Sonoma, Inc. 3250 Van Ness Avenue San Francisco, California 94109 Transfer Agent EQ Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164 800-468-9716 – shareowneronline.com Independent Registered Public Accounting Firm Deloitte & Touche LLP 555 Mission Street San Francisco, California 94105 TRADEMARKS Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Williams Sonoma, Williams Sonoma Home, Mark and Graham, Rejuvenation POTTERY BARN POTTERY BARN KIDS POTTERY BARN TEEN WEST ELM WILLIAMS SONOMA WILLIAMS SONOMA HOME MARK AND GRAHAM REJUVENATION OUTWARD