Prepared remarks
Welcome to the Williams Sonoma Inc. First Quarter 26 Earnings Conference Call. A question-and-answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead.
Good morning, and thank you for joining our first quarter earnings call. Before we get started, I would like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our annual guidance for fiscal 26 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that these statements will materialize, and actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of the call will be available on our Investor Relations website. Now I would like to turn the call over to Laura J. Alber, our President and Chief Executive Officer.
Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. We are off to a strong start in fiscal 26. In Q1, our comp came in at 4.8%, reflecting strong execution across our portfolio of brands, our channels, and our teams. Thank you to everyone at the company for your hard work and dedication. We are pleased that our growth initiatives are working, and every brand delivered a positive comp in Q1. We also saw strength in both our retail and DTC channels, with improvements across the customer journey. Furniture and non-furniture trends were strong, and collaborations, newness, and innovation all performed well. From a profitability standpoint, we delivered an operating margin of 16.2% ahead of expectations. We delivered this operating margin even while absorbing tariffs and higher fuel costs. Earnings per share was $1.93, up from $1.85 last year. We continue to outperform on both top and bottom lines in this uncertain environment, which includes, but is certainly not limited to, war, trade policy including tariffs, and interest rates.
We are delivering compounding results year after year despite the cyclical swings of the housing market and other macroeconomic events. We believe our strong brands, our proven ability to execute our vision, and our relentless focus on customer service will allow us to accomplish our goals in 2026 and beyond. First, on growth. In Q1, our 4.8% comp reflected our company-wide focus on growing our top line. Our quarter was driven by strong performance at all of our brands, growth from our B2B division, and continued outperformance of our smaller but quickly growing and profitable emerging brands. Also, the product pipeline that we laid out this year is working. We are committed to delivering great customer service and we continue to put the customer at the center of everything we do. We extended AI further into the customer journey. We scaled personalization across our portfolio of brands. And we continued to optimize the shopping and checkout experience.
We also made progress using automation to improve customer care and strengthen product discovery while continuing to advance our design tools. Across operations, we delivered enhancements to support supply chain efficiency and enabled important brand initiatives this quarter. We continue to make progress in supply chain performance with our focus on timely delivery and low returns and replacements. These improvements helped us offset higher year-on-year tariffs and higher fuel costs. We stayed lean and efficient throughout the organization and managed variable costs, and you can see those results in the P&L we shared with you today. Additionally, in the quarter, we returned $373 million to our investors through share buybacks and dividends. Our results demonstrate our discipline and commitment to delivering quality earnings and returning free cash flow to our stockholders. Now let's talk about guidance.
We are reiterating the annual guidance we provided on our Q4 call. We are confident about our business both because of our Q1 results and our strategies for the balance of 2026. However, despite our beat in the first quarter, we are not raising guidance as it is early in the year and there is a lot of uncertainty in the external environment. We are not building in a meaningful housing recovery and we are assuming continued volatility across geopolitics, war, fuel prices, trade policy and tariffs, and interest rates. Of course, we can never plan for extreme outlier events, but what we can do is give you our best estimate for 2026 which at this point reflects comp brand revenue growth of 2% to 6% with a midpoint of 4% and an operating margin in the range of 17.5% to 18.1% with a midpoint of 17.8%. Now let's review our brands. Pottery Barn delivered a positive 1% comp in Q1, and we were pleased to see the brand's results improve.
We saw progress in key categories across furniture, lighting, and textiles. Customers responded to both our spring and summer assortments. The quarter also reflected the actions we have been taking in marketing. We are focused on Pottery Barn's heritage aesthetic both in marketing and product design, and we are improving value across key categories. At the Pottery Barn channel level, DTC improved as we focused on the digital experience. Retail remained strong as customers continued to respond positively to our stores, design services, and the in-person shopping experience including Take It Home Today. We remain focused on executing the Pottery Barn strategy quarter by quarter and are confident about the brand's trajectory in 2026 and beyond. Before I move on, I also want to share an update on leadership at Pottery Barn. This morning, we announced the promotion of Jennifer Keller to the role of President of Pottery Barn.
Over the course of her 29-year tenure, Jen has demonstrated an exceptional track record of driving growth and incubating brands. She brings deep expertise across merchandising, design, e-commerce, and marketing, and has helped drive significant growth for our company. We also have a strong bench of talent in our Pottery Barn children's businesses and that team will continue to lead the brands and will report to me. And finally, today, we announced former Pottery Barn President Monica Bhargava's departure from the company. I want to thank Monica for her significant accomplishments throughout her 26 years with our company. Monica's visionary leadership and creative talent have made a lasting impact across our brands and we are grateful for her many contributions. Now let's turn to our Pottery Barn children's business which delivered yet another strong quarter, running a positive 4.5% comp in Q1.
Growth was driven by product innovation with strength in both furniture and non-furniture. Collaborations and licensing remain key drivers led by Love Shack Fancy, Christopher Loves Julia, and partners to keep the assortment fresh and bring in new customers. We also saw strong momentum in baby supported by high-quality furniture and expanded gifting assortment and improvements to the registry experience both in stores and online. And in dorm, we are entering the season well positioned with complete solutions that meet customers' needs and preferences. In the quarter, we also launched Dormify as our 10th brand, which expands our reach in dorm and small-space living with functional, style-driven solutions for the next generation of customers. As we think about the future, we see meaningful growth ahead in our children's business. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited about the momentum as we move through the year.
Now let's review West Elm. West Elm ran a positive 8.5% comp in Q1, and I am proud to say again that West Elm is on a roll. The drivers at West Elm are consistent and the results are compounding. West Elm continued to make improvements across products, brand heat, and channel excellence. New introductions in both furniture and non-furniture drove growth in both spring and summer; newness performed particularly well. When West Elm was a highlight in Q1, customers who came into our stores saw more newness and better in-stock availability. The strength in the brand gives us confidence to return to store count growth with 5 West Elm openings planned in 2026. Collaborations also remain a key pillar of the growth strategy at West Elm. The Emma Chamberlain collection was a great example; it brought new energy to the brand and connected with a younger customer. It is another proof point that West Elm can create and drive growth through distinctive products and storytelling.
Overall, we are thrilled with momentum at West Elm. The brand is executing well, and we feel good about the opportunity to build on this progress as we move through 2026 and beyond. Now let's review the Williams Sonoma brand. Williams Sonoma continues its streak of strong performance with a positive 5% comp in Q1 on top of a 7.3% comp last year. As we spoke about on the last earnings call, 2026 marks Williams Sonoma's 70th anniversary. At 70 years old, this brand is not slowing down; it is gaining momentum. The kitchen business continues to accelerate and our pipeline of proprietary in-house design products and market exclusives separate us from the competition. We also continue to strengthen the brand through collaborations and marketing partnerships. In Q1, we welcomed world-renowned interior designer Kelly Wearstler as a spokesperson for our exclusive rental offering. We also launched the Stanley Tucci pizza oven from GreenPan, and a food collaboration with Oakville Grocery, a Napa Valley culinary institution and the oldest continuously operating grocery store in California.
In our Williams Sonoma stores, we continue to bring the brand to life through experiences that deepen engagement. In Q1, skill series classes remained an important driver and we also built momentum in registry through events and concierge appointments. We also saw notable momentum in Williams Sonoma Home in the quarter. Customers responded to newness and innovation in color, prints, and pattern. While the business is small, we see opportunity to expand in the underserved high-end furniture and home furnishings market. Looking ahead, we are excited for the summer entertaining season. We have BottleRock this weekend, which is another great example of how we bring the brand to life through food, community, and experiences that are uniquely Williams Sonoma. If you are going to be in Napa this weekend, please give me a call. Now I would like to update you on B2B. B2B started the year strong with another record-breaking quarter delivering growth of 13.7%.
We saw the strength across B2B with continued momentum in both trade, which grew 9%, and contract, which grew 22%. Our B2B team continues to strengthen our position as a preferred partner. We are winning because of our deep relationships with designers, developers, procurement groups, and brands, and because our design-to-deliver capabilities are difficult to replicate. We also delivered several marquee projects in the quarter, including hospitality work for Delano Miami, Bernardus Resort and Spa, multiple locations with national developers like AMLI and Greystar, and continued momentum in sports and entertainment with Capital One Arena, Live Nation Philadelphia, and upcoming work with the US Open. And to start Q2, the team was recognized at the Hospitality Design Expo, winning the Best in Show award. Overall, we are pleased with the start to the year in B2B, and we remain excited about the pipeline and the opportunity ahead.
Now I would like to update you on our emerging brands. With our proven ability to incubate and scale brands in house, these concepts represent sizable growth opportunities for us. Starting with Rejuvenation, which had another strong quarter with double-digit comp growth. Performance was driven by continued momentum in project-led categories, including cabinet hardware, bath, lighting, and mirrors. Rejuvenation also continued to see strong engagement from the trade which reinforces the brand's position with design and renovation customers. In DTC, growth was supported by continued engagement in our core categories. Product innovation continues to be a focus for the brand with high-quality, design-driven product, distinctive details, and customizable options that matter in home project categories. With only 13 stores and great online growth, we are thrilled with the progress in Rejuvenation and we continue to believe in the opportunity for Rejuvenation to be our next billion-dollar brand.
Mark and Graham also had a strong Q1 with a double-digit positive comp. The brand continued to build momentum across key categories and it remains a distinctive destination for personalized gifts for meaningful moments. As we look ahead, we are leading into major seasonal milestones like graduation, Father's Day, wedding season, and summer entertaining. We are doing that with compelling new products and an elevated coastal point of view. And last, certainly not least, GreenRow. GreenRow continued to deliver growth in Q1. We opened our first store in March and it is a great manifestation of the brand; since we last talked, I hope you have had an opportunity to stop by and see the store yourself in SoHo. GreenRow focuses on sustainable, responsibly crafted, vintage-inspired design. The brand combines colorful, eclectic styling with heirloom-quality materials and low-impact manufacturing practices.
Finally, I would like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico, and the UK, driven by differentiated products, ongoing omnichannel improvements, and continued growth in our design and trade businesses. So in closing, as you can see, we are off to a strong start in fiscal 26. I would summarize Q1 with three accomplishments. First, we delivered strong top-line growth with every brand positive. Second, we drove operating margin that exceeded expectations. And third, we delivered earnings growth. And we did all of this in a dynamic and uncertain external environment. This quarter reflected what we set out to do in 2026. We are accelerating growth through strong execution across channels, strength in both furniture and non-furniture, and continued momentum in collaborations, product newness, and product innovation.
We are continuing to invest in the customer experience, and making progress in service and supply chain. And finally, we are staying disciplined on cost and productivity which supports strong profitability and returns to our shareholders. We feel good about the start of the year, and we remain confident in our priorities and our strategies for 2026. While the external environment can shift quickly, our model and our team are built to navigate volatility and keep delivering. With that, I want to thank our teams again for their work and their commitment and I also want to thank our vendors and our shareholders for their partnership and support. Now I will turn it over to Jeff to walk you through the numbers and our outlook in more detail.
Thank you, Laura. And good morning, everyone. We delivered another quarter of growth and strong earnings in Q1. Our results reflect the power of Williams-Sonoma Inc.'s operating model and our team's strong execution on the priorities we laid out for fiscal year 26: accelerating growth, delivering world-class customer service, and driving earnings. As I walk through the numbers, you will see how we delivered on all three priorities this quarter. I will start with our Q1 results, and then review our guidance for fiscal year 26. Q1 net revenues finished at $1.81 billion with comp growth of 4.8%. Both our one-year and two-year comps accelerated from Q4 to Q1, reflecting the continued strength and momentum of our business. Both furniture and non-furniture categories posted positive comps in the quarter, and the trend in both categories accelerated significantly from Q4. From a channel perspective, both e-commerce and retail delivered strong comps with e-commerce up 4.8% and retail up 4.7%.
We accelerated our market share gains as the home furnishings market declined in the low single digits in Q1. We accomplished this even as we maintained our level of full-price selling. Our strong results demonstrate the power of our portfolio of brands, which span different aesthetics, life stages, and price points. Combined with our growth strategies, our portfolio sets Williams-Sonoma, Inc. apart in the home furnishings industry. Moving down the income statement, Q1 gross margin was 44%, down approximately 30 basis points versus last year. Our focus on growth, customer service, and supply chain efficiency partially offset the headwinds from tariffs and higher fuel costs. Merchandise margins declined 100 basis points versus last year. Higher tariffs flowing through to our weighted average cost of goods sold drove this decline. Full-price selling was essentially flat year over year. Ocean freight costs were also pressured by higher oil prices.
However, our size and scale and our talented supply chain team helped mitigate the impact. Supply chain efficiencies, including a lower shrink accrual, delivered approximately 50 basis points of gross margin benefit in the quarter. Our focus and execution on customer service continued to drive efficiency across our supply chain, enabling us to offset the impact of higher fuel prices to domestic shipping costs. I would like to acknowledge and thank our supply chain team for their relentless focus on service and efficiency that is helping us offset higher fuel prices. Occupancy costs leveraged approximately 20 basis points versus last year, with our strong top-line growth more than offsetting the 3% increase in occupancy dollars. Overall, our gross margin came in ahead of our expectations. We are pleased with our ability to partially offset tariff-related merchandise margin pressure and higher fuel prices through supply chain efficiencies and occupancy leverage.
Turning now to SG&A. Q1 SG&A ran at 27.8% of revenues, approximately 30 basis points higher than last year. Employment expense deleveraged 30 basis points. We continue to manage variable employment costs in line with top-line trends while staying focused on investing in talent. Advertising expense as a percent of revenues leveraged 10 basis points. Our in-house marketing team continued to test, scale, and optimize across our portfolio of brands, driving strong customer engagement while remaining disciplined on spend. We also invested in social media, using compelling content, collaborations, and influencer partnerships to increase relevance, expand reach, and drive brand heat. Lastly, general expense deleveraged approximately 10 basis points primarily from timing. On the bottom line, we delivered operating income of $292 million with operating margin at 16.2%. Diluted earnings per share were $1.93, up 4% versus last year.
On the balance sheet, merchandise inventories were $1.46 billion, up 9% versus last year. Included in our inventory is approximately $60 million of embedded incremental tariff costs. Excluding these tariff costs, inventories would have been in line with our top-line growth. Our inventory levels and composition continue to be well positioned to support our sales growth and customer service goals. During the quarter, we invested $58 million in capital expenditures to support our long-term growth. We also returned $373 million to shareholders through share repurchases and dividends. We repurchased $288 million of stock for approximately 1.4% of shares outstanding. We also paid $85 million in dividends, a 15% increase year over year. Summing up our Q1 results, we are proud of the strong execution across the business. We accelerated our top-line growth, continued to improve customer service and supply chain efficiency, and grew earnings per share.
These results speak to the power of our operating model. But none of it would be possible without the incredible team we have here at Williams-Sonoma Inc. I would like to thank our team for their outstanding execution this quarter. Now let's turn to our fiscal year 26 outlook. As Laura mentioned, we remain confident in our strategy and momentum. We are reiterating our guidance as it is still early in the year and the environment is uncertain. We expect fiscal year 26 net revenue comps to be in the range of 2% to 6%, with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. Our guidance continues to assume no material changes in the macroeconomic environment for housing turnover or interest rates. We remain focused on accelerating growth, delivering world-class customer service, and driving earnings. As we discuss guidance, I would like to address three topics top of mind for investors: higher oil prices, tariff refunds, and tariffs.
First, higher oil prices. Higher oil prices are pressuring transportation costs. With ocean freight, we believe our size and scale combined with the outstanding work of our experienced transportation team will allow us to continue to mitigate the impact. For domestic shipping expense, fuel prices near today's levels are embedded in our guidance. While the direction of oil prices is difficult to predict, our guidance reflects our best estimate of the impact of higher oil prices on our business. Second, tariff refunds. Our guidance does not contemplate recognizing any benefit from tariff refunds due to the uncertainty surrounding the timing and potential of recovery. Finally, tariffs. Our assumptions on tariffs remain unchanged as well. As discussed last quarter, we continue to expect the impact of tariffs to be front-half weighted and then moderate over the balance of the year. Our guidance continues to assume all tariffs currently in place remain in effect for the balance of the year, including the Section 232 tariffs, the current Section 301 tariffs, and the Section 122 tariffs.
While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. With the ongoing uncertainty around tariffs, it is impossible to say where they will ultimately land and it is difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance. Also today, we are providing some further inputs for modeling purposes. We expect our full year interest income to be approximately $25 million and our full year effective tax rate to be approximately 25.5%. Turning now to capital allocation. We will continue to prioritize funding our business operations and investing in long-term growth. Our capital expenditure guidance is unchanged. We expect to spend approximately $275 million in capital expenditures for the year.
About 95% of that investment will be focused on e-commerce, retail, and supply chain. In regards to our investment in retail, we continue to expect our year-end store count to be essentially flat to last year, after which we anticipate 1% to 3% growth in store count each year starting in fiscal year 27. Embedded in our fiscal year 26 guidance continues to be approximately 70 basis points of non-comp growth from our investment in retail. We remain committed to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases. On dividends, we will continue to pay our quarterly dividend of $0.76 per share, which is a 15% increase year over year. We are proud to say that fiscal year 26 is the 17th consecutive year of increased dividend payouts. On share repurchases, we have approximately $1.1 billion remaining under our current authorizations and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns.
Looking beyond fiscal year 26, we are reiterating our long-term outlook for mid- to high-single-digit revenue growth and operating margins in the mid- to high-teens. Wrapping up our comments, we are proud to have delivered yet another strong quarter for our shareholders. We are confident we will continue to outperform our peers and deliver shareholder returns for these five reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital-first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet. With that, I will open the call for questions.
Questions and answers
We will now begin the question-and-answer. Please limit your time to one question and one follow-up. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question press 1 again. Okay. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kate McShane of Goldman Sachs. Your line is open. Please go ahead.
Thank you. Good morning. Wanted to first ask about the health of the consumer. If you saw any change of behavior during the quarter, any differences between income cohorts, and if you have seen any changes made to date.
Sure. Good morning, Kate. I cannot really speak for others and what they are saying, but our consumer is responding to our products and our strategies across our channels and across our brands as you can see by this morning's set of numbers. From furniture to smaller items and collaborations, we are seeing broad-based demand. We have put together a pipeline of products that is very appealing and distinctive in the market. People trust us for our quality and value, and they are coming into our stores because of engaging store experiences and service. They seem interested in spending with us, and we believe that is going to continue as we look through the year because the strategies we have built will continue to be implemented. I think you are going to continue to see the momentum we saw in the first quarter.
Thank you. It does appear that you were able to offset a lot of the higher fuel cost with the efficiencies in the supply chain that you laid out on the call. But I was wondering if this inflationary environment were to persist do you think you will have to look to increasing prices at all?
I think it is too early to comment on that. Remember, we do not just compete on price. We compete on the whole offering — the product itself and where it sits in the market versus other similar products. We have strong finishes, product design, exclusives, and exciting product in the works, and that makes customers less price sensitive. That said, we are careful to make sure customers feel good about buying from us, and we want to continue to invest in the customer and give them the best value in the market.
And I will just add, Kate, that as I said in our opening remarks, oil prices at today's levels are embedded in our guidance. We are seeing ocean freight prices pressured, but given our size and scale we are able to mitigate them. For domestic transportation, we are seeing higher costs, but our supply chain efficiencies are really offsetting them. I want to take a moment to acknowledge and thank our entire supply chain organization for their ongoing focus on efficiency and driving customer service, which is producing phenomenal results for the company.
Thank you.
Your next question comes from the line of Seth Sigman of Barclays. Your line is open. Please go ahead.
Thanks so much. Good morning, everyone. So with comps accelerating this quarter relative to prior quarters, at a time when it seems like you have raised prices but those price increases are maybe starting to stabilize, it would imply that the composition of the business is maybe shifting, meaning more volume is improving. Is that directionally right? And if so, what do you think is changing that is driving that? And how do you think about the sustainability as you move through this year?
You are right. We are seeing broad-based comp-level improvements and we are excited to see it across channels. It's a result of the execution of our strategies. We are seeing furniture recovering, we had a good Easter, and we have invested in dorm experience and total customer experience, improved in-stock at retail, and other executional elements that support comp levers. I always think of comp levers as outputs of the strategy, not the strategy itself, but these are not just price-driven improvements.
That is helpful. And then maybe for Jeffrey, on the merchandise margins, they were down this quarter but a little better than expected. You are going to start to lap very healthy margins, particularly in the second and third quarter. Can you remind us how you are thinking about that? How you would expect the cadence to play out throughout the year?
Yes. Margin was down about 100 basis points in merchandise margin in Q1, a little better than Q4 and a little better than we expected. But we are still guiding that the impact of tariffs will be heavily front-weighted and then moderate across the back half of the year simply because of the way the tariffs flow through on our weighted-average cost accounting. Q1 had an easier compare because we had timing items last year; Q2 will not have that benefit, so Q2 will probably be the peak impact of the tariffs. After that, we expect it to moderate for the balance of the year.
Hey guys, great quarter. Can you help us think about the underlying demand curve in the business? Skeptics are going to say that it is tax refund driven, but I do not think that is the case. I was hoping you could opine on strength at West Elm and the recovery in Pottery Barn specifically. More importantly, could you give a better sense for the underlying demand curve in the business?
We are thrilled with the results. Many quarters ago we mentioned we were starting to see inventory in stock and we have confidence building with more newness. It is broad-based, across categories and channels, and it is not promotionally led. We had a very strong Easter. West Elm is well positioned versus the competition and we believe its performance is sustainable. Pottery Barn continues to improve and is resonating with customers; we have only begun to implement that strategy and I think you'll see continuing improvements in Pottery Barn comps as we go.
And then Jeffrey, on the supply chain, you mentioned another 50 basis points of improvement there to help offset some of the merchandise margin pressure. Can you walk through some of the KPIs across the metrics you follow to give us a sense of where you are on that journey and the visibility you have to continue to gain on the supply chain side?
Absolutely, Chuck. Supply chain efficiencies continue to be a big benefit for us. Our goal remains the same: a perfect order on time, damage-free every time. Those are the key KPIs we track — is the order on time, is it damage-free, are there no issues with it, is the customer satisfied. At the end of the day, it is about making sure the customer is satisfied. We have an incredible supply chain team that makes a difference in terms of customer service. We do not just compete on price; we compete on service in our stores with free interior design services, and we compete on in-home delivery. We make 2.4 million in-home deliveries a year, about 7,000 a day, and we focus on delivering that better than just about anybody else. We ensure the customer signs and acknowledges they are happy with the delivery, we take pictures of the order, and we make sure it is what they want. That customer service differentiates us, and the more we service our customer, the better our results are.
Great. Thank you, both.
Next question comes from the line of Jonathan Matuszewski of Jefferies. Your line is open. Please go ahead.
Great. Good morning, and thanks for the time. My question was on the trade channel. It is promotional in the industry for consumers, but it is also increasingly promotional in the industry for the trade channel. Many retailers are trying to court the interior design community. It looks like your trade channel business was strong this quarter, up around 9%. What is on the horizon in terms of initiatives to maintain that momentum and neutralize maybe some of the higher promotions some competitors are doing to court those designers? Thanks.
Good morning, Jonathan. We continue to believe in our B2B business; it had another really strong quarter of 13.7%, our largest quarter ever to date for B2B. Trade was up 9% in the quarter and that is not being driven by price — we are not changing pricing or promotional activity for our trade customers. We work on service and relationships through our local stores, building relationships and executing on product, service, and delivery. The place we are really focused with B2B is the contract side, which had a 22% increase in the quarter. We continue to have an incredibly robust pipeline and are making big inroads. Earlier this month I joined our B2B team down in Las Vegas at the Hospitality Design Expo where we won Best Booth. It was incredible; the team is motivated and there was so much activity and customer interest. It left me incredibly excited about our ability to achieve our goals and drive B2B to $2 billion.
Your next question comes from the line of Christopher Horvers of J.P. Morgan. Your line is open. Please go ahead.
Thanks for taking my question. Can Laura talk about the West Elm acceleration a bit more? There's a lot going on at the brand. You are running that Pottery Barn playbook of category expansion — rooms, outdoor, kids. You have the B2B side which I think is a big driver of West Elm. And then the Emma collaboration. As we think about that sequential improvement, could you qualitatively bucket which of these drivers has been more significant?
Thank you. I apologize for any audio distractions earlier. West Elm's performance is driven by multiple things; it's not one thing. The Emma Chamberlain collaboration added energy and connected with a younger customer and brought new customers to the brand — it was a beautiful line of product across categories. That collaboration is one example of how collaborators can bring new energy, and when you have one hit like that, many other partners want to work with you. At the same time, we've been filling white space in the market with West Elm's unique designs and modern aesthetic, and we've made progress in furniture and core categories such as textiles, rugs, décor, and tabletop. We have wins across the board. There is still room to develop versus Pottery Barn and other brands, and we are focused on that. We will keep driving the business and pushing for even higher comps. I think this brand has a lot of growth potential in its positioning and we are going to go get it.
Excellent. And then, Jeffrey, as a follow-up, can you help us with the price-cost lap? You mentioned gross margin trough year-over-year in the second quarter. How much did 2Q25 have the price-cost benefit? And does that $60 million of tariff cost that is hung up in inventory right now essentially flow through in the second quarter?
Good morning, Christopher. Not all of the $60 million flows through in the second quarter, but some of it does. As I said earlier, Q2 will be the peak impact of the tariffs as they flow through the P&L. The tariffs will moderate throughout the year after Q2. Q2 will feel the pressure and then it will moderate across the back half. Thank you.
Your next question comes from the line of Peter Benedict of Baird. Your line is open. Please go ahead.
Hey guys, thanks for taking the question. Jeffrey, the full-year guide still embeds about a 70 basis point gap between your comp brand revenue growth and your total revenue growth. The first quarter was a 40 basis point negative. Just help us understand the cadence and what is going to drive that over the balance of the year.
Good morning, Peter. It really comes down to our store opening schedule. As we talked about on the last call, we said the full-year benefit of the retail investments would be about 70 basis points. We will realize more of that benefit later in the year because of the timing of openings and repositionings. We anticipate the full year benefit of 70 basis points to revenues from all this retail activity, and it will accelerate as we go throughout the year.
Okay. Makes sense. And then another question on the shrink accrual. I do not recall if you framed the size of that in the quarter or if that was part of one of the other buckets. Can you talk about shrink accrual in the first quarter and if we should expect that to continue to be a benefit over the balance of the next couple of quarters before we cycle the positive in the fourth quarter of last year? Thank you.
Happy to. Our physical inventory results came in lower than expected in the prior period, and that produced a benefit relative to last year. In Q1, the shrink accrual benefit was about half of the overall supply chain benefit we reported. You never know exactly what will happen until you take physical inventories, but we think we have the right accrual for this year and all of this is embedded in our guidance.
Your next question comes from Christina Fernandez of Telsey Advisory Group. Your line is open. Please go ahead.
Thank you. Good morning. I wanted to ask about the accelerating trends in DTC. Can you talk perhaps what you are doing on the advertising that is different in driving traffic to the website, in an environment that has seemed more promotional for the competition?
We are always looking at where we can tweak our marketing mix to drive incremental traffic and conversion. We use brand heat to fuel social, organic, and paid channels. Influencers are doing a great job for us with partners, and we continue to invest in high-ROIC ad costs, terms, and programs. We are doing a lot of testing to find what will matter in the current environment and how we can feed our models. I will turn this over to Sameer to talk a bit more about AI and how we are using it to accelerate those strategies.
I appreciate it. You heard in our prepared remarks how we are accelerating the AI impact and the benefits we are seeing. We are using generative AI across the business. One example is our room planner and Design Crew tools, which help customers visualize a room plan and how products will come together — an AI-enabled way to complete an interior design experience. In supply chain and operations we've seen productivity improvements from AI in code generation and documentation, and we are moving from users of AI to builders of AI-driven capabilities. It's driving efficiencies and enabling more sophisticated personalization and product discovery.
And then as a second question, could you talk about Pottery Barn? It was good to see the improvement this quarter, but what areas are you focused on for the rest of the year to even accelerate growth in that brand?
We continue to make improvements in the DTC channel, particularly in how customers find products and shop. We have focused on photography and presentation; if you visit the site you'll see some of the best photography we've had and it will get even better into the fall season. Creatively, we are excited about upcoming fall product and campaigns which we believe will be very appealing and fresh while authentic to Pottery Barn's heritage. The stores have looked great and we've done well with store execution. From a product perspective, we are seeing new looks work across textiles and furniture and will continue to develop those assortments. There are many incremental efforts in the store experience and digital that will collectively improve performance, and we are confident.
Thank you. There are no further questions at this time. I would now like to pass the call back to Laura J. Alber, Chief Executive Officer, for closing remarks.
Well, thank you all for your patience on this call. I hope you could hear everything, and we appreciate your support. We are confident in our business, and we cannot wait to talk to you next time.
This concludes today's call. Thank you for attending. You may now disconnect.