Edgar Filing: WILLIAMS SONOMA INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2006.

¨	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)


California		94-2203880
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3250 Van Ness Avenue, San Francisco, CA		94109
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code (415) 421-7900


(Former name, former address and former fiscal year, if changed since last report)

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 ü No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ü		Accelerated filer		Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ü

As of November 26, 2006, 112,151,147 shares of the registrant’s Common Stock were outstanding.

WILLIAMS-SONOMA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED OCTOBER 29, 2006

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


		PAGE
Item 1.	Financial Statements	2

	Condensed Consolidated Balance Sheets as of October 29, 2006, January 29, 2006 and October 30, 2005

	Condensed Consolidated Statements of Earnings for the Thirteen Weeks and Thirty-Nine Weeks Ended October 29, 2006 and October 30, 2005

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2006 and October 30, 2005

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 6.	Exhibits	37

ITEM 1.

FINANCIAL STATEMENTS

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


Dollars and shares in thousands, except per share amounts	October 29, 2006		January 29, 2006		October 30, 2005
ASSETS
Current assets
Cash and cash equivalents	$	108,706	$	360,982	$	91,811
Accounts receivable – net		57,874		51,020		60,238
Merchandise inventories – net		661,248		520,292		587,415
Prepaid catalog expenses		78,702		53,925		67,492
Prepaid expenses		38,538		31,847		36,510
Deferred income taxes		57,291		57,267		39,051
Other assets		7,645		7,831		6,450
Total current assets		1,010,004		1,083,164		888,967
Property and equipment – net		930,307		880,305		879,722
Other assets – net		16,975		18,151		21,186
Total assets	$	1,957,286	$	1,981,620	$	1,789,875
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	218,832	$	196,074	$	196,606
Accrued salaries, benefits and other		86,113		93,434		78,039
Customer deposits		181,536		172,775		168,171
Income taxes payable		13,533		83,589		9,300
Current portion of long-term debt		15,914		18,864		19,385
Other liabilities		24,735		25,656		18,816
Total current liabilities		540,663		590,392		490,317
Deferred rent and lease incentives		239,001		218,254		221,681
Long-term debt		13,037		14,490		14,750
Deferred income tax liabilities		10,134		18,455		21,152
Other long-term obligations		18,396		14,711		14,685
Total liabilities		821,231		856,302		762,585
Commitments and contingencies
Shareholders’ equity
Preferred stock, $.01 par value, 7,500 shares authorized, none issued		-		-		-
Common stock, $.01 par value, 253,125 shares authorized, issued and outstanding: 112,848, 114,779 and 115,239 shares at October 29, 2006, January 29, 2006 and October 30, 2005, respectively		1,128		1,148		1,152
Additional paid-in capital		359,076		325,146		317,689
Retained earnings		766,179		791,329		701,184
Accumulated other comprehensive income		9,672		7,695		7,265
Total shareholders’ equity		1,136,055		1,125,318		1,027,290
Total liabilities and shareholders’ equity	$	1,957,286	$	1,981,620	$	1,789,875

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Dollars and shares in thousands, except per share amounts		October 29, 2006			October 30, 2005			October 29, 2006			October 30, 2005
Net revenues	$	852,758		$	827,623		$	2,472,580		$	2,324,550
Cost of goods sold		527,020			501,546			1,526,861			1,418,716
Gross margin		325,738			326,077			945,719			905,834
Selling, general and administrative expenses		282,412			266,727			813,455			753,574
Interest income		(1,841	)		(1,101	)		(9,220	)		(3,084	)
Interest expense		523			493			1,593			1,462
Earnings before income taxes		44,644			59,958			139,891			153,882
Income taxes		15,502			22,871			52,087			59,800
Net earnings	$	29,142		$	37,087		$	87,804		$	94,082
Basic earnings per share	$	0.26		$	0.32		$	0.77		$	0.81
Diluted earnings per share	$	0.25		$	0.31		$	0.75		$	0.79
Shares used in calculation of earnings per share:
Basic		113,268			116,070			114,423			115,671
Diluted		115,849			118,900			117,210			118,454

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Thirty-Nine Weeks Ended
Dollars in thousands		October 29, 2006			October 30, 2005
Cash flows from operating activities:
Net earnings	$	87,804		$	94,082
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		99,457			91,159
Net loss on disposal of assets		4,189			3,494
Amortization of deferred lease incentives		(21,415	)		(18,131	)
Deferred income taxes		(8,340	)		117
Tax benefit from exercise of stock-based compensation		2,048			12,961
Stock-based compensation expense		22,932			-
Changes in:
Accounts receivable		(6,388	)		(16,025	)
Merchandise inventories		(140,807	)		(134,651	)
Prepaid catalog expenses		(24,777	)		(13,972	)
Prepaid expenses and other assets		(5,640	)		2,763
Accounts payable		2,940			22,511
Accrued salaries, benefits and other		(4,609	)		(6,229	)
Customer deposits		8,691			19,522
Deferred rent and lease incentives		41,993			24,987
Income taxes payable		(70,080	)		(62,706	)
Net cash (used in) provided by operating activities		(12,002	)		19,882
Cash flows from investing activities:
Purchases of property and equipment		(144,401	)		(119,357	)
Net cash used in investing activities		(144,401	)		(119,357	)
Cash flows from financing activities:
Repayments of long-term obligations		(4,404	)		(8,454	)
Proceeds from exercise of stock options		11,201			21,856
Excess tax benefit from exercise of stock options		4,649			-
Repurchase of common stock		(85,438	)		(61,366	)
Payment of dividends		(23,061	)		-
Credit facility renewal costs		(218	)		(654	)
Net cash used in financing activities		(97,271	)		(48,618	)
Effect of exchange rates on cash and cash equivalents		1,398			694
Net decrease in cash and cash equivalents		(252,276	)		(147,399	)
Cash and cash equivalents at beginning of period		360,982			239,210
Cash and cash equivalents at end of period	$	108,706		$	91,811

See Notes to Condensed Consolidated Financial Statements.

WILLIAMS-SONOMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Thirty-Nine Weeks Ended October 29, 2006 and October 30, 2005

(Unaudited)

NOTE A. FINANCIAL STATEMENTS - BASIS OF PRESENTATION

These financial statements include Williams-Sonoma, Inc. and its wholly owned subsidiaries (“we,” “us” or “our”). The condensed consolidated balance sheets as of October 29, 2006 and October 30, 2005, the condensed consolidated statements of earnings for the thirteen and thirty-nine weeks ended October 29, 2006 and October 30, 2005, and the condensed consolidated statements of cash flows for the thirty-nine weeks ended October 29, 2006 and October 30, 2005 have been prepared by us, without audit. In our opinion, the financial statements include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. Significant intercompany transactions and accounts have been eliminated. The balance sheet as of January 29, 2006, presented herein, has been derived from our audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2006.

The results of operations for the thirteen and thirty-nine weeks ended October 29, 2006 are not necessarily indicative of the operating results of the full year.

Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2006.

In January 2006, we decided to transition the merchandising strategies of our Hold Everything brand into our other existing brands by the end of fiscal 2006. In connection with this transition, we incurred a pre-tax charge of approximately $13,500,000, or $0.07 per diluted share, in the fourth quarter of fiscal 2005. In the third quarter of fiscal 2006, we incurred an additional charge of approximately $225,000, or less than $0.01 per diluted share. Of this pre-tax charge, approximately $269,000 is included in cost of goods sold, offset by a benefit of approximately $44,000 in selling, general and administrative expenses. For the thirty-nine weeks ended October 29, 2006, we incurred a total charge of $4,359,000, or $0.02 per diluted share. Of this pre-tax charge, approximately $2,695,000 is included in cost of goods sold and approximately $1,664,000 is included in selling, general and administrative expenses. All of our Hold Everything retail stores were closed during the first quarter of fiscal 2006. The final phase of our operational shutdown was completed in the second quarter of fiscal 2006, with our final Hold Everything catalog mailed on May 16, 2006 and our website ceasing operations on June 30, 2006. Our Outlet stores are being used for the final clearance of inventory and the merchandising categories the brand represented are being transitioned into our other brands.

NOTE B. ACCOUNTING POLICIES

Customer Deposits

During the second quarter of fiscal 2006, we completed an analysis of our historical gift certificate and gift card redemption patterns, which included an independent actuarial study based on our historical redemption data. As a result of this analysis, we concluded that the likelihood of our gift certificates and gift cards being redeemed beyond four years from the date of issuance is remote. As a result, we changed our estimate of the elapsed time for recording income associated with unredeemed gift certificates and gift cards to four years from our prior

estimate of seven years. This change in estimate resulted in the recording of income in selling, general and administrative expense in the second quarter of fiscal 2006 of approximately $12,400,000.

Recent Accounting Pronouncements

On January 30, 2006, we adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” which requires us to expense all rental costs associated with our operating leases that are incurred during a construction period. The adoption of this Staff Position resulted in after-tax occupancy expense being recorded as a component of cost of goods sold of approximately $445,000, or less than $0.01 per diluted share, and $1,307,000, or $0.01 per diluted share, in the thirteen and thirty-nine weeks ended October 29, 2006, respectively.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, transition and disclosure requirements for uncertain tax positions. We will adopt the provisions of FIN 48 beginning in the first quarter of fiscal 2007. We are currently in the process of determining the effect, if any, the adoption of FIN 48 will have on our consolidated financial statements.

In June 2006, the FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes and the amount of assessed taxes that are included in revenues if they are accounted for under the gross method. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006. We do not expect the adoption of EITF 06-3 to have a material impact on our consolidated financial position, results of operation or cash flows.

In September 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,” which provides the Staff’s views regarding the process of quantifying financial statement misstatements, such as assessing both the carryover and reversing effects of prior year misstatements on the current year financial statements. The evaluation requirements of SAB No. 108 are effective for fiscal years ending after November 15, 2006. We do not expect the adoption of SAB No. 108 to have a material impact on our consolidated financial position, results of operation or cash flows.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measures,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair-value measurements. SFAS No. 157 only applies to fair-value measurements that are already required or permitted by other accounting standards, except for measurements of share-based payments, and measurements that are similar to, but not intended to be, fair value. This Statement is effective for fiscal years beginning after November 15, 2007 and will require additional disclosures in our financial statements. We do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position, results of operation or cash flows.

NOTE C. STOCK-BASED COMPENSATION

We maintain the 1993 Stock Option Plan (the “1993 Plan”), as amended, the 2000 Nonqualified Stock Option Plan (the “2000 Plan”), as amended, and the amended and restated 2001 Long-Term Incentive Plan (the “2001

Plan”) (collectively the “Plans”), to award stock options and stock-settled stock appreciation rights (collectively “stock awards”) and other forms of equity compensation, including restricted stock and restricted stock units, to our key employees and Board members and those of any parent or subsidiary. All stock award grants have a maximum term of ten years, except incentive stock options issued to shareholders with greater than 10% of the voting power of all of our stock, which have a maximum term of five years. The exercise price is not less than 100% of the fair market value of our stock on the date of the stock award grant or not less than 110% of such fair market value for an incentive stock option granted to a 10% shareholder. Shares issued as a result of stock award exercises will be funded with the issuance of new shares. Stock awards granted to employees generally vest over five years. Stock awards granted to non-employee Board members generally vest in one year. In May 2006, our shareholders approved the amendment and restatement of our 2001 Plan to increase the shares issuable under the Plan by 6,000,000 shares and to include in the 2001 Plan shares that remained available under the 1993 Plan and 2000 Plan as well as shares subject to outstanding options under these plans that subsequently expire unexercised. The 1993 Plan and the 2000 Plan will no longer be used to grant future awards. The Plans now provide for grants of stock awards, restricted stock or restricted stock units, dividend equivalents, deferred stock awards and other equity compensation awards up to an aggregate of 34,500,000 shares. As of October 29, 2006, there were 6,976,000 shares available for future grant.

Effective January 30, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” which requires us to measure and record compensation expense in our consolidated financial statements for all employee stock-based awards using a fair value method. Accordingly, at the beginning of fiscal 2006, we began recording compensation expense for all stock-based awards under the modified prospective transition method.

Prior to January 30, 2006, we accounted for stock-based awards granted to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, no compensation expense was recognized prior to fiscal 2006 for stock awards with an exercise price equal to the fair value on the date of grant. The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to all of our stock-based compensation arrangements for the thirteen and thirty-nine weeks ended October 30, 2005:


	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
Dollars in thousands, except per share amounts	October 30, 2005		October 30, 2005
Net earnings, as reported	$ 37,087		$ 94,082
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect	(4,336	)	(12,237	)
Pro forma net earnings	$ 32,751		$ 81,845
Basic earnings per share
As reported	$ 0.32		$ 0.81
Pro forma	0.28		0.71
Diluted earnings per share
As reported	$ 0.31		$ 0.79
Pro forma	0.28		0.70

As a result of adopting SFAS No. 123R, during the thirteen and thirty-nine weeks ended October 29, 2006, our compensation expense recognized was based on the following:

Stock Awards: Amortization related to the remaining unvested portion of all stock awards granted prior to January 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123, as amended by SFAS No. 148, and all new stock awards granted during the thirteen and

thirty-nine weeks ended October 29, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R;

Restricted Stock Units: Amortization related to the unvested portion of all restricted stock units granted to-date based on the market value of our stock on the date of grant.

Stock Awards

During the thirteen and thirty-nine weeks ended October 29, 2006, we granted stock awards for 648,400 and 1,831,550 shares, respectively.

The following table summarizes our stock award activity during the thirty-nine weeks ended October 29, 2006:


	Shares		Weighted Average Exercise Price		Weighted Average Contractual Term Remaining (In Years)	Intrinsic Value¹
Balance at January 29, 2006	10,309,909		$	22.63
Granted (weighted average fair value of $12.63)	1,831,550			36.93
Exercised	(768,768	)		14.57		$	18,634,000
Canceled	(453,001	)		34.22
Balance at October 29, 2006	10,919,690		$	25.12	6.06	$	114,376,000
Exercisable at October 29, 2006	6,753,794		$	19.00	4.55	$	104,799,000

¹ Intrinsic value is defined as the difference between the current market value and the grant price.

The fair value of each stock award was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

Expected term – For the thirteen and thirty-nine weeks ended October 29, 2006, the expected term of the awards represents the period of time between the grant date of the award and the time the award is either exercised or canceled including an estimate for those awards still outstanding. For the thirteen and thirty-nine weeks ended October 30, 2005, the expected term of the awards represents only the period of time between the grant date of the award and the time the award is either exercised or canceled.

Expected volatility – For the thirteen and thirty-nine weeks ended October 29, 2006, the expected volatility is based on an average of the historical volatility of our stock price, for a period approximating our expected term, and the implied volatility based on externally traded options of our stock that were entered into during the quarter. For the thirteen and thirty-nine weeks ended October 30, 2005, the expected volatility was based only on the historical volatility of our stock price.

Risk-free interest rate – The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximates the expected term.

Dividend yield – The dividend yield is based on the initiation of our quarterly cash dividend, authorized by our Board of Directors in March 2006, and its anticipated dividend payout over the expected term of the award.

The weighted average assumptions for the thirteen and thirty-nine weeks ended October 29, 2006 and October 30, 2005 are as follows:


	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	October 29, 2006	October 30, 2005	October 29, 2006	October 30, 2005
Expected term (years)	5.0	6.5	5.0	6.5
Expected volatility	32.4%	58.0%	33.7%	59.4%
Risk-free interest rate	4.7%	4.2%	4.7%	4.2%
Dividend yield	1%	-	1%	-

The total after-tax expense recognized during the thirteen and thirty-nine weeks ended October 29, 2006 on all stock awards was $2,832,000 and $11,269,000, respectively, leaving a remaining unamortized balance as of October 29, 2006 of $48,903,000 (net of estimated forfeitures), which we expect to recognize on a straight-line basis over an average remaining life of approximately two years.

Restricted Stock Units

Prior to fiscal year 2006, we issued restricted stock units for 840,000 shares of our common stock. In September 2006, we issued additional restricted stock units for 70,000 shares of our common stock. The fair market value of these additional restricted stock units awarded was based on a stock price of $30.34 per share for a total value of $2,124,000. The total value of all restricted stock units is being amortized on a straight-line basis over the vesting period, with fifty percent of the restricted stock units vesting on January 31, 2010, and the remaining fifty percent vesting on January 31, 2011, based upon the employees’ continued employment throughout the vesting period.

The following table summarizes restricted stock unit activity during the thirty-nine weeks ended October 29, 2006:


	Shares			Intrinsic Value¹
Unvested balance at January 29, 2006	840,000
Granted	70,000
Vested	-
Canceled	(20,000	)
Unvested balance at October 29, 2006	890,000		$	30,491,000

¹ Intrinsic value for restricted stock units is defined as the current market value.

The total after-tax expense recognized during the thirteen and thirty-nine weeks ended October 29, 2006 on all restricted stock units was $1,105,000 and $3,100,000, respectively, leaving a remaining unamortized balance as of October 29, 2006 of $25,979,000 (net of estimated forfeitures), which we expect to recognize on a straight-line basis over an average remaining life of approximately four years.

Total Stock-Based Compensation Expense

For the thirteen and thirty-nine weeks ended October 29, 2006, we recognized total stock-based compensation expense (net of tax), including the impact of SFAS No. 123R and the expense associated with the issuance of restricted stock units, as a component of selling, general and administrative expense, of $3,937,000 and $14,369,000, respectively, or approximately $0.03 and $0.12 per diluted share, respectively.

Tax Effect

Prior to the adoption of SFAS No. 123R, we presented all tax benefits resulting from the exercise of stock-based awards as operating cash flows in the Condensed Consolidated Statements of Cash Flows. SFAS No. 123R requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for stock-based compensation awards exercised be classified as financing cash flows. For the thirteen and thirty-nine weeks ended October 29, 2006, cash received from stock-based awards exercised was $1,620,000 and $11,201,000, respectively, and the tax benefit associated with such exercises totaled $336,000 and $7,026,000, respectively.

NOTE D. BORROWING ARRANGEMENTS

Credit Facility

On October 4, 2006, we entered into the Fourth Amended and Restated Credit Agreement that amends and replaces our existing credit facility and provides for a $300,000,000 unsecured revolving line of credit that may be used for loans or letters of credit. The credit facility contains certain financial covenants, including a maximum leverage ratio (funded debt adjusted for lease and rent expense to EBITDAR). Prior to April 4, 2011, we may, upon notice to the lenders, request an increase in the new credit facility of up to $200,000,000, to provide for a total of $500,000,000 of unsecured revolving credit. The new credit facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to certain other indebtedness and events constituting a change of control. The occurrence of an event of default will increase the applicable rate of interest by 2.0% and could result in the acceleration of our obligations under the new credit facility, and an obligation of any or all of the Company’s U.S. subsidiaries to pay the full amount of the Company’s obligations under the new credit facility. The new credit facility matures on October 4, 2011, at which time all outstanding borrowings must be repaid and all outstanding letters of credit must be cash collateralized.

We may elect interest rates calculated at Bank of America’s prime rate (or, if greater, the average rate on overnight federal funds plus one-half of one percent) or LIBOR plus a margin based on our leverage ratio. During the thirty-nine weeks ended October 29, 2006 and October 30, 2005, no amounts were borrowed under the credit facility. However, as of October 29, 2006, $37,473,000 in issued but undrawn standby letters of credit was outstanding under the credit facility. The standby letters of credit were issued to secure the liabilities associated with workers’ compensation, other insurance programs and certain debt transactions. As of October 29, 2006, we were in compliance with our financial covenants under the credit facility.

Letter of Credit Facilities

We have five unsecured commercial letter of credit reimbursement facilities for an aggregate of $165,000,000, each of which expires on September 8, 2007. As of October 29, 2006, an aggregate of $118,251,000 was outstanding under the letter of credit facilities. Such letters of credit represent only a future commitment to fund inventory purchases to which we had not taken legal title as of October 29, 2006. The latest expiration possible for any future letters of credit issued under the facilities is February 5, 2008.

NOTE E. COMPREHENSIVE INCOME

Comprehensive income for the thirteen and thirty-nine weeks ended October 29, 2006 and October 30, 2005 was as follows:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006		October 30, 2005		October 29, 2006		October 30, 2005
Net earnings	$	29,142	$	37,087	$	87,804	$	94,082
Other comprehensive income
Foreign currency translation adjustment		503		1,221		1,929		2,096
Net unrealized gain on investment		47		-		47		-
Comprehensive income	$	29,692	$	38,308	$	89,780	$	96,178

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 for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of common shares for the period.

The following is a reconciliation of net earnings and the number of shares used in the basic and diluted earnings per share computations:


Dollars and amounts in thousands, except per share amounts	Net Earnings		Weighted Average Shares	Per Share Amount
Thirteen weeks ended October 29, 2006
Basic	$	29,142	113,268	$	0.26
Effect of dilutive stock-based awards			2,581
Diluted	$	29,142	115,849	$	0.25
Thirteen weeks ended October 30, 2005
Basic	$	37,087	116,070	$	0.32
Effect of dilutive stock-based awards			2,830
Diluted	$	37,087	118,900	$	0.31
Thirty-Nine weeks ended October 29, 2006
Basic	$	87,804	114,423	$	0.77
Effect of dilutive stock-based awards			2,787
Diluted	$	87,804	117,210	$	0.75
Thirty-Nine weeks ended October 30, 2005
Basic	$	94,082	115,671	$	0.81
Effect of dilutive stock-based awards			2,783
Diluted	$	94,082	118,454	$	0.79

Stock-based awards outstanding with an exercise price greater than the average market price of common shares were 3,435,000 and 264,000 for the thirteen weeks ended and 2,496,000 and 1,491,000 for the thirty-nine weeks ended October 29, 2006 and October 30, 2005, respectively, and were not included in the computation of diluted earnings per share, as their inclusion would be anti-dilutive.

NOTE G. 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 larger. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, 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 H. SEGMENT REPORTING

We have two reportable segments, retail and direct-to-customer. The retail segment has five merchandising concepts which sell products for the home (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). The five retail merchandising concepts are operating segments, which have been aggregated into one reportable segment, retail. The direct-to-customer segment has six merchandising concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home) and sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com, and wshome.com). All of our Hold Everything retail stores were closed during the first quarter of fiscal 2006. The final phase of our operational shutdown was completed in the second quarter of fiscal 2006, with our final Hold Everything catalog mailed on May 16, 2006 and our website ceasing operations on June 30, 2006. Management’s expectation is that the overall economics of each of our major concepts within each reportable segment will be similar over time.

These reportable segments are strategic business units that offer similar home-centered products. They are managed separately because the business units utilize two distinct distribution and marketing strategies. It is not practicable for us to report revenue by product group.

We use earnings before unallocated corporate overhead, interest and taxes to evaluate segment profitability. Unallocated costs before income taxes include corporate employee-related costs, other occupancy expense, depreciation expense and administrative costs, primarily in our corporate systems, corporate facilities and other administrative departments. Unallocated assets include corporate cash and cash equivalents, the net book value of corporate facilities and related information systems, deferred income taxes and other corporate long-lived assets.

Income tax information by segment has not been included as taxes are calculated at a company-wide level and are not allocated to each segment.

Segment Information


Dollars in thousands	Retail¹		Direct-to- Customer		Unallocated			Total
Thirteen weeks ended October 29, 2006
Net revenues	$	470,885	$	381,873		-		$	852,758
Depreciation and amortization expense		22,760		4,963	$	5,904			33,627
Earnings (loss) before income taxes²		33,451		60,987		(49,794	)		44,644

Capital expenditures		43,494		6,571		9,855			59,920
Thirteen weeks ended October 30, 2005
Net revenues	$	444,674	$	382,949		-		$	827,623
Depreciation and amortization expense		20,742		4,341	$	5,317			30,400
Earnings (loss) before income taxes		37,368		61,605		(39,015	)		59,958

Capital expenditures		31,515		2,523		8,177			42,215
Thirty-Nine weeks ended October 29, 2006
Net revenues	$	1,368,166	$	1,104,414		-		$	2,472,580
Depreciation and amortization expense		67,907		14,427	$	17,123			99,457
Earnings (loss) before income taxes²		109,207		164,194		(133,510	)		139,891

Assets³		1,155,544		347,938		453,804			1,957,286
Capital expenditures		97,232		21,512		25,657			144,401
Thirty-Nine weeks ended October 30, 2005
Net revenues	$	1,276,009	$	1,048,541		-		$	2,324,550
Depreciation and amortization expense		61,497		13,211	$	16,451			91,159
Earnings (loss) before income taxes		115,095		158,875		(120,088	)		153,882

Assets³		1,046,186		329,082		414,607			1,789,875
Capital expenditures		77,893		16,670		24,794			119,357

¹ Includes revenues of $18.0 million and $14.9 million for the thirteen weeks ended October 29, 2006 and October 30, 2005, respectively, and $50.2 million and $37.7 million for the thirty-nine weeks ended October 29, 2006 and October 30, 2005, respectively, related to our foreign operations.

² Includes a loss of $0.2 million in the retail segment for the thirteen weeks ended October 29, 2006, and losses of $2.4 million, $1.6 million and $0.4 million in the retail, direct-to-customer and corporate unallocated segments, respectively, for the thirty-nine weeks ended October 29, 2006, related to the transitioning of the merchandising strategies of our Hold Everything brand into our other existing brands.

³ Includes $24.8 million and $27.1 million of long-term assets as of October 29, 2006 and October 30, 2005, respectively, related to our foreign operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include projections of earnings, revenues or financial items, including the impact of accounting changes, statements of the plans, strategies and objectives of management for future operations, statements related to the future performance of our brands, statements related to refining our merchandising strategies, statements related to our plans to increase retail leased square footage, statements related to expanding catalog circulation, statements related to increasing electronic direct marketing and paid search, statements relating to implementing the ability to issue and redeem gift cards in our direct-to-customer channel, statements related to implementing initiatives throughout the supply chain to reduce returns, replacements and damages, statements relating to enhancing our daily store replenishment program, statements relating to leveraging the in-sourced east coast furniture hub to enhance the furniture delivery experience for our customers and reduce our furniture delivery costs, statements related to implementing new marketing initiatives and expanding on-line and electronic direct marketing initiatives, statements related to our plans to open new retail stores and remodel other retail stores, statements related to systems development projects, statements related to distribution and facility infrastructure projects, statements related to transitioning our Hold Everything brand, statements related to the use of our available cash, including the payment of a dividend, statements related to our projected capital expenditures, statements related to our stock repurchase program, 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 “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 those discussed under the heading “Risk Factors” in this document 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.

OVERVIEW

We are a specialty retailer of products for the home. The retail segment of our business sells our products through our five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home). The direct-to-customer segment of our business sells similar products through our seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed + Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com). All of our Hold Everything retail stores were closed during the first quarter of fiscal 2006. The final phase of our operational shutdown was completed in the second quarter of fiscal 2006, with our final Hold Everything catalog mailed on May 16, 2006 and our website ceasing operations on June 30, 2006. Based on net revenues in fiscal 2005, retail net revenues accounted for 57.4% of our business and direct-to-customer net revenues accounted for 42.6% of our business. Based on their contribution to our net revenues in fiscal 2005 (representing approximately 90%), the core brands in both retail and direct-to-customer are: Pottery Barn, which sells casual home furnishings; Williams-Sonoma, which sells cookware essentials; and Pottery Barn Kids, which sells stylish children’s furnishings. The following discussion and analysis of financial condition, results of operations, and liquidity and capital resources should be read in conjunction with our condensed consolidated financial statements and the notes thereto.

Third Quarter of Fiscal 2006 Financial Results

In the third quarter of fiscal 2006, our net revenues increased 3.0% to $852,758,000 from $827,623,000 in the third quarter of fiscal 2005, primarily driven by increases in the West Elm, Pottery Barn Kids, Williams-Sonoma and Williams-Sonoma Home brands. Despite this increase in revenues during the quarter, we have seen continuing softness in the Pottery Barn brand and increasing volatility in our other home furnishings brands.

Including a $0.04 per diluted share impact from the implementation of two new accounting pronouncements (SFAS No. 123R, “Share-Based Payment” and Financial Accounting Standards (“FAS”) FSP 13-1, “Accounting for Rental Costs Incurred During a Construction Period”) and the Hold Everything transition charge, diluted earnings per share for the third quarter of fiscal 2006 decreased 19.4% to $0.25 per diluted share versus $0.31 per diluted share in the third quarter of fiscal 2005.

In our retail channel, net revenues increased 5.9% during the third quarter of fiscal 2006 versus the third quarter of fiscal 2005. This increase was primarily driven by a 7.7% year-over-year increase in retail leased square footage, including 11 net new stores. Net revenues generated in the West Elm, Williams-Sonoma, Williams-Sonoma Home and Pottery Barn Kids brands were the primary contributors to the year-over-year revenue increase, partially offset by the closure of all of the Hold Everything brand stores in late 2005 and the first quarter of 2006.

In our direct-to-customer channel, net revenues decreased 0.3% during the third quarter of fiscal 2006 versus the third quarter of fiscal 2005. This decrease was primarily driven by the transition of the Hold Everything brand earlier this year and a reduction in year-over-year revenues in the Pottery Barn brand. These decreases were partially offset by increases in net revenues generated in the Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma brands.

In our core brands, net revenues increased 2.7% in the third quarter of fiscal 2006 versus the third quarter of fiscal 2005, primarily driven by a positive consumer response to our core and seasonal merchandise in the Pottery Barn Kids and Williams-Sonoma brands. In the Williams-Sonoma brand, we saw a positive response to our fall merchandising themes, and year-over-year merchandising margins improved due to increased full price selling and successful sourcing initiatives. In the Pottery Barn Kids brand, revenue growth was positive in all key categories, with particular strength in textiles and decorative accessories. Within the Pottery Barn brand, however, we saw a weakening in consumer response to our core merchandising strategy, which we believe was partially driven by further softening in the home-related retail environment and increased levels of competitive promotional activity.

In our emerging brands (West Elm, PBteen and Williams-Sonoma Home), net revenues increased 30.5% in the third quarter of fiscal 2006 versus the third quarter of fiscal 2005, primarily driven by the performance in the West Elm and Williams-Sonoma Home brands.

In the West Elm brand, we continued to see year-over-year revenue growth, driven by incremental revenue from our new stores, improved catalog response, and increased traffic in e-commerce. In the retail channel, we opened six new stores during the third quarter, bringing our store count to 20 stores, with an average square footage of approximately 17,100 square feet. In the direct-to-customer channel, revenue growth was driven by increased catalog circulation and electronic direct marketing, in addition to successful e-mail capture initiatives in our retail stores, which supported an increase in customer e-mail contacts. From a merchandising perspective, we saw continued strength in furniture, textiles, and decorative accessories.

In the Williams-Sonoma Home brand, growth in the third quarter was driven by incremental sales from new stores. During the third quarter, we opened two new stores, and ended the quarter with seven stores averaging approximately 14,500 square feet. In the direct-to-customer channel, we continue to capitalize on our multi-channel strategy and our newly launched e-commerce website, which continued to gain momentum throughout

the quarter, as customer awareness increased. From a merchandising perspective, furniture continued to be a driver of sales growth, particularly custom upholstery and case goods.

In the PBteen brand, year-over-year revenue growth was 14.1%, on top of a 28.1% increase last year. From a merchandising perspective during the quarter, revenue growth was positive in all key categories, with particular strength in furniture.

Third Quarter of Fiscal 2006 Operational Results

During the third quarter, we continued to make considerable progress in our supply chain operations. In our newly in-sourced East coast furniture hub, our customer return rates were less than half of the return rates at our outsourced hubs. In our Memphis-based operations, we continued to make significant progress on our customer return inventory management initiatives.

Remainder of Fiscal 2006

As we look forward to the fourth quarter, we are continuing to see softness in our Pottery Barn brand, and increased volatility in our other home furnishings brands. Therefore, we are focused on driving sales to both our channels by continuing to execute against the initiatives that will drive increased traffic and consumer response.

The initiatives in the retail channel include: leveraging our strong in-stock position, maximizing conversion in our stores by maintaining a high level of customer service and visual merchandising, and utilizing markdown strategies to drive increased traffic.

The growth initiatives in the direct-to-customer channel include: increasing catalog circulation by approximately 9% in the fourth quarter, increasing electronic direct marketing and paid search, and implementing gift card issuance and redemption in the Pottery Barn and Pottery Barn Kids brands.

We are also focused on executing against the following supply chain initiatives: generating further cost reduction and operational efficiencies in our daily store replenishment program by combining store replenishment with local customer deliveries in the New York market; capitalizing on new technologies in our monogramming operations to reduce product damage and improve labor productivity; and replicating the process improvements that we implemented in our in-sourced furniture hub to our outsourced hubs.

Finally, we are focused on driving shareholder value by optimizing profitability, delivering on our financial commitments, and returning excess capital to our shareholders through dividends and share repurchases.

NET REVENUES

Net revenues consist of retail sales, direct-to-customer sales and shipping fees. Retail sales include sales of merchandise to customers at our retail stores. Direct-to-customer sales include sales of merchandise to customers through our catalogs and the Internet. Shipping fees consist of revenue received from customers for delivery of merchandise. Revenues are net of sales returns and other discounts.

The following table summarizes our net revenues for the thirteen weeks ended October 29, 2006 (“third quarter of fiscal 2006”) and October 30, 2005 (“third quarter of fiscal 2005”), and the thirty-nine weeks ended October 29, 2006 (“year-to-date 2006”) and October 30, 2005 (“year-to-date 2005”):


	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006		% Total		October 30, 2005		% Total		October 29, 2006		% Total		October 30, 2005		% Total
Retail revenues	$	470,885	55.2	%	$	444,674	53.7	%	$	1,368,166	55.3	%	$	1,276,009	54.9	%
Direct-to-customer revenues		381,873	44.8	%		382,949	46.3	%		1,104,414	44.7	%		1,048,541	45.1	%
Net revenues	$	852,758	100.0	%	$	827,623	100.0	%	$	2,472,580	100.0	%	$	2,324,550	100.0	%

Net revenues for the third quarter of fiscal 2006 increased by $25,135,000, or 3.0%, over the third quarter of fiscal 2005. The increase was primarily driven by a year-over-year increase in store leased square footage of 7.7% (including 26 new store openings and the remodeling and expansion of an additional 22 stores, partially offset by the temporary closure of 22 stores and the permanent closure of 15 stores, for a net of 11 new store openings). This increase was further driven by continued strength in our Internet business, primarily due to our efforts associated with electronic direct marketing and on-line advertising initiatives.

Net revenues for year-to-date 2006 increased by $148,030,000, or 6.4%, over net revenues for year-to-date 2005. This was primarily due to a year-over-year increase in store leased square footage of 7.7% (including 26 new store openings and the remodeling and expansion of an additional 22 stores, partially offset by the temporary closure of 22 stores and the permanent closure of 15 stores, for a net of 11 new store openings) and a comparable store sales increase of 0.8%. This increase was further driven by increased catalog page circulation of 2.2% and continued strength in our Internet business, primarily due to our efforts associated with electronic direct marketing and on-line advertising initiatives.

RETAIL REVENUES AND OTHER DATA


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006			October 30, 2005			October 29, 2006			October 30, 2005
Retail revenues	$	470,885		$	444,674		$	1,368,166		$	1,276,009
Percent growth in retail revenues		5.9%			12.8%			7.2%			13.1%
Percent increase in comparable store sales		0.0%			4.4%			0.8%			4.3%
Number of stores - beginning of period		573			559			570			552
Number of new stores		11			14			20			24
Number of new stores due to remodeling¹^,2		7			3			22			8
Number of closed stores due to remodeling¹		(9	)		(5	)		(22	)		(12	)
Number of permanently closed stores³		-			-			(8	)		(1	)
Number of stores - end of period		582			571			582			571
Store selling square footage at period-end		3,320,000			3,096,000			3,320,000			3,096,000
Store leased square footage (“LSF”) at period-end		5,349,000			4,967,000			5,349,000			4,967,000

¹ Remodeled stores are defined as those stores temporarily closed and subsequently reopened during the period due to square footage expansion, store modification or relocation.

² Fiscal year 2006 remodeled stores include one Williams-Sonoma, two Pottery Barn and one Pottery Barn Kids store reopenings after having been temporarily closed due to Hurricane Katrina.

³ Fiscal year 2006 permanently closed stores represent the closure of all eight of our remaining Hold Everything stores.


	Store Count					Store Count	Avg. LSF Per Store	Avg. LSF Per Store
	July 30, 2006	Openings	Closings		October 29, 2006	October 30, 2005	October 29, 2006	October 30, 2005
Williams-Sonoma	256	5	(6	)	255	256	5,900	5,700
Pottery Barn	191	5	(3	)	193	188	12,200	12,000
Pottery Barn Kids	91	-	-		91	88	7,800	7,800
Hold Everything	-	-	-		-	11	-	6,600
West Elm	14	6	-		20	10	17,100	15,900
Williams-Sonoma Home	5	2	-		7	3	14,500	13,900
Outlets	16	-	-		16	15	20,400	19,500
Total	573	18	(9	)	582	571	9,200	8,700

Retail revenues in the third quarter of fiscal 2006 increased by $26,211,000, or 5.9%, over the third quarter of fiscal 2005. The increase was primarily driven by a year-over-year increase in store leased square footage of 7.7% (including 26 new store openings and the remodeling and expansion of an additional 22 stores, partially offset by the temporary closure of 22 stores and the permanent closure of 15 stores, for a net of 11 new store openings). Net revenues generated in the West Elm, Williams-Sonoma, Williams-Sonoma Home and Pottery Barn Kids brands were the primary contributors to the year-over-year revenue increase, partially offset by the closure of all of the Hold Everything brand stores in late 2005 and the first quarter of 2006.

Retail revenues for year-to-date 2006 increased $92,157,000, or 7.2%, over year-to-date 2005. The increase was primarily driven by a year-over-year increase in store leased square footage of 7.7% (including 26 new store openings and the remodeling and expansion of an additional 22 stores, partially offset by the temporary closure of 22 stores and the permanent closure of 15 stores, for a net of 11 new store openings) and a comparable store sales increase of 0.8%. Net revenues generated in the West Elm, Williams-Sonoma, Pottery Barn Kids, Pottery Barn and Williams-Sonoma Home brands were the primary contributors to the year-over-year revenue increase, partially offset by the closure of all of the Hold Everything brand stores in late 2005 and the first quarter of 2006.

Comparable Store Sales

Comparable stores are defined as those stores in which 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. Comparable stores exclude new retail concepts until such time as we believe that comparable store results in those concepts are meaningful to evaluating the performance of the retail strategy. For the third quarter of fiscal 2006 and 2005 and year-to-date 2006 and 2005, our total comparable store sales exclude the West Elm concept. In fiscal 2006, we expect to exclude West Elm and Williams-Sonoma Home. By measuring the year-over-year sales of merchandise in the stores that have a history of being open for a full comparable 12 months or more, we can better gauge how the core store base is performing since it excludes store remodelings, expansions and closings.

Percentages represent changes in comparable store sales versus the same period in the prior year.


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Percent increase (decrease) in comparable store sales	October 29, 2006		October 30, 2005		October 29, 2006		October 30, 2005
Williams-Sonoma	4.3%		1.3%		2.8%		0.2%
Pottery Barn	(2.5%	)	5.5%		(0.6%	)	5.7%
Pottery Barn Kids	2.3%		3.8%		4.5%		5.8%
Outlets	(6.7%	)	16.0%		(6.5%	)	16.0%
Hold Everything¹	-		(7.4%	)	-		(13.7%	)
Total	0.0%		4.4%		0.8%		4.3%

¹ Hold Everything stores are excluded from the 2006 comparable store sales calculation as this brand’s remaining eight stores were closed during the first quarter of fiscal 2006.

Various factors affect comparable store sales, including the number, size and location of stores we open, close, remodel or expand in any period, the general retail sales environment, consumer preferences and buying trends, changes in sales mix between distribution channels, our ability to efficiently source and distribute products, changes in our merchandise mix, competition, 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, increased catalog circulation, and continued strength in our Internet business. Among other things, weather conditions can affect comparable store sales because inclement weather can alter consumer behavior or require us to close certain stores temporarily and thus reduce store traffic. Even if stores are not closed, many customers may decide to avoid going to stores in bad weather. These factors have caused our comparable store sales to fluctuate significantly in the past on an annual, quarterly and monthly basis and, as a result, we expect that comparable store sales will continue to fluctuate in the future.

DIRECT-TO-CUSTOMER REVENUES


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006			October 30, 2005			October 29, 2006			October 30, 2005
Catalog revenues¹	$	154,581		$	185,447		$	462,342		$	524,743
Internet revenues¹		227,292			197,502			642,072			523,798
Total direct-to-customer revenues¹	$	381,873		$	382,949		$	1,104,414		$	1,048,541
Percent growth in direct-to-customer revenues		(0.3%	)		16.5%			5.3%			13.3%
Percent (decrease) increase in number of catalogs circulated		(11.6%	)		(5.3%	)		(3.9%	)		3.7%
Percent (decrease) increase in number of pages circulated		(5.6%	)		0.7%			2.2%			11.7%

¹Approximately 55% of our company-wide non-gift registry Internet revenues are driven by customers who recently received a catalog and approximately 45% are incremental to the direct-to-customer channel.

Direct-to-customer revenues in the third quarter of fiscal 2006 decreased by $1,076,000, or 0.3%, over the third quarter of fiscal 2005. This decrease was primarily driven by the transition of the Hold Everything brand earlier this year and a reduction in year-over-year revenues in the Pottery Barn brand. This decrease was partially offset by increases in net revenues generated in the Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma brands primarily due to continued strength in our Internet business, resulting from our expanded efforts associated with electronic direct marketing and our on-line advertising initiatives.

Direct-to-customer revenues for year-to-date 2006 increased $55,873,000, or 5.3%, over year-to-date 2005. This increase was primarily driven by net revenues generated in the Pottery Barn Kids, Pottery Barn, PBteen and West Elm brands due to an overall increase in catalog page circulation of 2.2% and continued strength in our Internet business, resulting from our expanded efforts associated with electronic direct marketing and our on-line

advertising initiatives. This increase was partially offset by the transition of the Hold Everything brand earlier this year.

COST OF GOODS SOLD


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006		% Net Revenues	October 30, 2005		% Net Revenues	October 29, 2006		% Net Revenues	October 30, 2005		% Net Revenues
Cost of goods sold	$	527,020	61.8%	$	501,546	60.6%	$	1,526,861	61.8%	$	1,418,716	61.0%

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 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.

Within our reportable segments, the direct-to-customer channel does not incur freight-to-store or store occupancy expenses, and typically operates with lower markdowns and inventory shrinkage than the retail channel. However, the direct-to-customer channel incurs higher customer shipping, damage and replacement costs than the retail channel.

Third Quarter of Fiscal 2006 vs. Third Quarter of Fiscal 2005

Cost of goods sold increased by $25,474,000, or 5.1%, in the third quarter of 2006 compared to the third quarter of 2005. Including expense of approximately $1,000,000 associated with the implementation of FSP FAS 13-1 and the Hold Everything transition, cost of goods sold as a percentage of net revenues increased 120 basis points in the third quarter of fiscal 2006 from the third quarter of fiscal 2005. This increase was primarily driven by fixed occupancy expenses in the retail channel increasing at a faster rate than net revenue growth, including the costs associated with the retail rollout of our emerging brands. It was also driven by a greater percentage of total company net revenues being generated in the retail channel, which carries a substantially higher occupancy expense rate as a percentage of net revenues than the direct-to-customer channel, the implementation of FSP FAS 13-1 and the Hold Everything transition.

In the retail channel, cost of goods sold as a percentage of retail net revenues increased 140 basis points in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 primarily driven by fixed occupancy expenses increasing at a faster rate than net revenue growth, including the costs associated with the retail rollout of our emerging brands. This increase was further driven by an increase in cost of merchandise, the implementation of FSP FAS 13-1 and the Hold Everything transition.

In the direct-to-customer channel, cost of goods sold as a percentage of direct-to-customer net revenues increased 10 basis points in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. This increase was primarily due to an increase in occupancy expenses and higher direct-to-customer shipping costs, partially offset by an improvement in cost of merchandise.

Year-to-Date 2006 vs. Year-to-Date 2005

Cost of goods sold for year-to-date 2006 increased by $108,145,000, or 7.6%, over year-to-date 2005. Including expense of approximately $4,800,000 associated with the Hold Everything transition and the implementation of FSP FAS 13-1, cost of goods sold as a percentage of net revenues increased 80 basis points for year-to-date 2006 compared to year-to-date 2005. This increase was primarily driven by fixed occupancy expenses in the retail channel increasing at a faster rate than net revenue growth, including the costs associated with the retail rollout of our emerging brands. This increase was further driven by the charge associated with the Hold Everything transition and the implementation of FSP FAS 13-1.

In the retail channel, cost of goods sold as a percentage of retail net revenues increased 100 basis points for year-to-date 2006 compared to year-to-date 2005 primarily driven by fixed occupancy expenses in the retail channel increasing at a faster rate than net revenue growth, including the costs associated with the retail rollout of our emerging brands. This increase was further driven by the charge associated with the Hold Everything transition and the implementation of FSP FAS 13-1.

In the direct-to-customer channel, cost of goods sold as a percentage of direct-to-customer net revenues increased 40 basis points for year-to-date 2006 compared to year-to-date 2005. This increase was primarily due to an increase in other occupancy expenses and higher direct-to-customer shipping costs, partially offset by an improvement in cost of merchandise.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Dollars in thousands	October 29, 2006		% Net Revenues	October 30, 2005		% Net Revenues	October 29, 2006		% Net Revenues	October 30, 2005		% Net Revenues
Selling, general and administrative expenses	$	282,412	33.1%	$	266,727	32.2%	$	813,455	32.9%	$	753,574	32.4%

Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail stores, distribution warehouses, 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.

Due to their distinct distribution and marketing strategies, we experience differing employment and advertising costs as a percentage of net revenues within the retail and direct-to-customer segments. Store employment costs represent a greater percentage of retail net revenues than employment costs as a percentage of net revenues within the direct-to-customer segment. However, catalog advertising expenses are greater within the direct-to-customer channel than the retail channel.

Third Quarter of Fiscal 2006 vs. Third Quarter of Fiscal 2005

Selling, general and administrative expenses increased by $15,685,000, or 5.9%, in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. Including expense of approximately $6,000,000 associated with the implementation of SFAS 123R, selling, general and administrative expenses as a percentage of net revenues increased 90 basis points in the third quarter of fiscal 2006 from the third quarter of fiscal 2005. This increase was primarily driven by higher employment costs due to the recognition of stock-based compensation expense from the implementation of SFAS 123R, ongoing investments in the growth of the emerging brands, in addition to retail labor costs in our core brands increasing at a faster rate than revenue growth. Employment costs were also higher due to a greater percentage of total company net revenues being generated in the retail channel, which carries a substantially higher employment expense rate as a percentage of net revenues than the direct-to-customer channel. This increase was partially offset by lower advertising costs as a percentage of net revenues

primarily driven by the elimination of unproductive catalog circulation in the Hold Everything brand, which was transitioned in the second quarter of fiscal 2006.

In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues decreased 10 basis points in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 due to an increase in other income. This decrease was partially offset by ongoing investments in the growth of the emerging brands, in addition to retail labor costs in our core brands increasing at a faster rate than revenue growth.

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of direct-to-customer net revenues remained flat in the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005 due to lower advertising costs as a percentage of net revenues, primarily driven by the elimination of unproductive catalog circulation in the Hold Everything brand, and reductions in other general expenses. This was offset by higher employment costs due to direct-to-customer labor costs in our core brands increasing at a faster rate than revenue growth.

Year-to-Date 2006 vs. Year-to-Date 2005

Selling, general and administrative expenses for year-to-date 2006 increased by $59,881,000, or 7.9%, over year-to-date 2005. Including expense of approximately $12,200,000 associated with the implementation of SFAS 123R, net of the impact of unusual business events (unredeemed gift certificate income due to a change in estimate, the expense associated with the departure of our Chief Executive Officer, litigation settlement income and the expense associated with the Hold Everything transition), selling, general and administrative expenses as a percentage of net revenues increased 50 basis points for year-to-date 2006 from year-to-date 2005. This increase was primarily driven by increased employment costs due to the recognition of stock-based compensation expense from the implementation of SFAS 123R, in addition to expense incurred in connection with the departure of our Chief Executive Officer, ongoing investments in the growth of the emerging brands as well as retail labor costs in our core brands increasing at a faster rate than revenue growth. Employment costs were also higher due to a greater percentage of total company net revenues being generated in the retail channel, which carries a substantially higher employment expense rate as a percentage of net revenues than the direct-to-customer channel. This increase was partially offset by the recording of income associated with unredeemed gift certificates resulting from a change in estimate and the settlement of certain litigation.

In the retail channel, selling, general and administrative expenses as a percentage of retail net revenues increased 10 basis points for year-to-date 2006 compared to year-to-date 2005. This resulted from an increase in employment costs related to ongoing investments in the growth of the emerging brands as well as retail labor costs in our core brands increasing at a faster rate than revenue growth, partially offset by a change in estimate for recording income associated with unredeemed gift certificates.

In the direct-to-customer channel, selling, general and administrative expenses as a percentage of direct-to-customer net revenues decreased 10 basis points for year-to-date 2006 compared to year-to-date 2005. This decrease was primarily driven by a rate decrease in advertising costs resulting from the elimination of unproductive catalog circulation in the Hold Everything brand, which was transitioned during the second quarter of fiscal 2006, and a greater percentage of total company net revenues being generated in the e-commerce channel, which incurs advertising expense at a lower rate than the company average. This decrease was partially offset by reduced catalog productivity in the Pottery Barn brand.

INTEREST INCOME

Interest income was $1,841,000 in the third quarter of fiscal 2006, compared to $1,101,000 in the third quarter of fiscal 2005, comprised primarily of income from short-term investments classified as cash and cash equivalents. For year-to-date 2006, interest income was $9,220,000 compared to $3,084,000 for year-to-date 2005. The increase in interest income during the third quarter of fiscal 2006 and year-to-date 2006 compared to the third

quarter of fiscal 2005 and year-to-date 2005 resulted from an increase in the interest rates associated with these short-term investments, as well as higher cash balances during fiscal 2006 compared to fiscal 2005.

INCOME TAXES

Our effective tax rate was 34.7% for the third quarter of fiscal 2006 and 38.2% for the third quarter of fiscal 2005. Our third quarter of fiscal 2006 income tax rate decreased over the third quarter of fiscal 2005 due to certain income tax benefits that were favorably resolved under audit in the third quarter of 2006.

Our effective tax rate was 37.2% for year-to-date 2006 and 38.9% for year-to-date 2005. Our year-to-date 2006 tax rate decreased primarily due to certain income tax benefits that were favorably resolved under audit in the third quarter of 2006, as well as an increase in reserves for potential state income tax exposure in 2005, resulting in a higher year-to-date 2005 tax rate. We expect our effective tax rate to be in the range of 38.0% to 38.2% in fiscal 2006. Throughout the year, we expect that there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated.

LIQUIDITY AND CAPITAL RESOURCES

As of October 29, 2006, we held $108,706,000 in cash and cash equivalents. As is consistent with our industry, our cash balances are seasonal in nature, with the fourth quarter representing a significantly higher level of cash than in 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 the remainder of fiscal 2006, we plan to utilize our cash resources to fund our inventory and inventory-related purchases, catalog advertising and marketing initiatives, current store development and infrastructure strategies, share repurchases and the payment of dividends. In addition to the current cash balances on-hand, we have a $300,000,000 credit facility that may be used for loans or letters of credit. No amounts were borrowed by us under the credit facility in year-to-date 2006 or year-to-date 2005. However, as of October 29, 2006, $37,473,000 in issued but undrawn standby letters of credit was outstanding 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 and growth opportunities over the upcoming twelve-month period.

For year-to-date 2006, net cash used in operating activities was $12,002,000 compared to net cash provided by operating activities of $19,882,000 for year-to-date 2005. Net cash used for year-to-date 2006 was primarily attributable to the purchase of merchandise inventories in preparation for our fourth quarter holiday sales and the payment of income taxes. This was partially offset by an increase in deferred lease incentives due to the construction of additional retail stores during the year.

For year-to-date 2006, net cash used in investing activities was $144,401,000 compared to net cash used in investing activities of $119,357,000 for year-to-date 2005. For year-to-date 2006, purchases of property and equipment were comprised of $92,546,000 for stores, $34,957,000 for systems development projects (including e-commerce websites) and $16,898,000 for distribution and facility infrastructure projects.

In fiscal 2006, we anticipate investing $185,000,000 to $205,000,000 in the purchase of property and equipment, primarily for the construction of 28 new stores and 28 remodeled stores, systems development projects (including e-commerce websites), and distribution and facility infrastructure projects.

For year-to-date 2006, net cash used in financing activities was $97,271,000 compared to net cash used in financing activities of $48,618,000 for year-to-date 2005. Net cash used in financing activities was primarily due to the repurchase of common stock and the payment of dividends.

Stock Repurchase Program

In August 2006, our Board of Directors authorized a stock repurchase program to acquire up to 5,000,000 shares of our outstanding common stock. During the third quarter of fiscal 2006, we repurchased and retired 680,400 shares of our common stock under this program at a weighted average cost of $29.41 per share and an aggregate cost of approximately $20,008,000.

The following table summarizes our repurchases of shares of our common stock during the third quarter of fiscal 2006:


Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Plan	Maximum Number of Shares that May Yet be Purchased Under Any Plan
July 31, 2006 – August 27, 2006	-	-	-	5,000,000
August 28, 2006 – September 24, 2006	680,400	$ 29.41	680,400	4,319,600
September 25, 2006 – October 29, 2006	-	-	-	4,319,600
Total	680,400	$ 29.41	680,400	4,319,600

Dividend Policy

Prior to March 2006, no cash dividend had ever been declared or paid on our common stock. In March 2006, our Board of Directors authorized the initiation of a quarterly cash dividend. On September 22, 2006, we declared a quarterly dividend of $0.10 per common share, or approximately $11,400,000, payable to shareholders of record as of the close of business on October 27, 2006. The indicated annual cash dividend, subject to capital availability, is $0.40 per common share, or approximately $46,000,000 in fiscal 2006 based on the current number of common shares outstanding.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

Impact of Inflation

The impact of inflation on results of operations was not significant for year-to-date 2006 or for year-to-date 2005.

Seasonality

Our business is subject to substantial seasonal variations in demand. Historically, a significant portion of our revenues and net earnings have been realized during the period from October through December, and levels of net revenues and net earnings have generally been significantly lower during the period from January through September. We believe this is the general pattern associated with the retail and direct-to-customer industries, and we expect this to continue going forward. In anticipation of our peak season, we hire a substantial number of additional employees in our retail stores and direct-to-customer processing and distribution areas, and incur significant fixed catalog production and mailing costs.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include changes in U.S. interest rates and foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

The interest payable on our credit facility, industrial development bond and the bond-related debt associated with our Memphis-based distribution facilities is based on variable interest rates and is, therefore, affected by changes in market interest rates. If interest rates on existing variable rate debt rose 52 basis points (an approximate 10% increase in the associated variable rates as of October 29, 2006), our results from operations and cash flows would not be materially affected.

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. An increase in interest rates of 10% would have an immaterial effect on the value of these investments. Declines in interest rates would, however, decrease the income derived from these investments.

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. Approximately 5% of our international purchase transactions are in currencies other than the U.S. dollar. As of October 29, 2006, any currency risks related to these transactions are not significant to us. A material decline in the relative value of the U.S. dollar to other foreign currencies could, however, lead to increased purchasing costs.

As of October 29, 2006, we had 14 retail stores in Canada, which expose us to market risk associated with foreign currency exchange rate fluctuations. Any gain or loss from these currency exchange rate fluctuations is recorded in selling, general and administrative expenses each reporting period and has not been material to us.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of October 29, 2006, an evaluation was performed by management, with the participation of our Chief Executive Officer (“CEO”) and our Executive Vice President, Chief Operating and 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 timely discussions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is contained in Note G to our Consolidated Financial Statements within Part I of this Form 10-Q.

ITEM 1A. RISK FACTORS

A description of the risks and uncertainties associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risks and uncertainties associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2006 and our subsequent Quarterly Reports on Form 10-Q. You should carefully consider such risks and uncertainties, together with the other information contained in this report, our Annual Report on Form 10-K for the fiscal year ended January 29, 2006 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 and releases. 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.

We must successfully anticipate changing consumer preferences and buying trends, and manage our inventory commensurate with customer demand.

Our success depends, in large part, upon our ability to anticipate and respond in a timely manner to changing merchandise trends and customer demands. Consumer preferences cannot be predicted with certainty and may change between selling seasons. Changes in customer preferences and buying trends may also affect our brands differently. If we misjudge either the market for our merchandise or our customers’ purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to sell the resulting 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, either 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 the U.S. Thus, we usually must order merchandise, and enter into contracts for the purchase and manufacture of such merchandise, up to twelve months 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 may also not have the capacity to handle our demands. 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.

Our business depends, in part, on factors affecting consumer spending that are out of our control.

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, disposable consumer income, fuel prices, recession and fears of recession, war and fears of war, inclement weather, consumer debt, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. These factors may also affect our various brands and channels differently. Adverse changes in factors affecting discretionary consumer spending could reduce consumer demand for our products, thus reducing our sales and harming our business and operating results. For example, the August 2005 natural disaster caused by Hurricane Katrina will likely continue to affect consumer spending in the vicinity of the disaster.

We face intense competition from companies with brands or products similar to ours.

The specialty retail and direct-to-customer business is highly competitive. Our specialty retail stores, mail order catalogs and e-commerce websites compete with other retail stores, other mail order catalogs and other e-commerce websites that market lines of merchandise similar to ours. We compete with national, regional and local businesses utilizing a similar retail store strategy, as well as traditional furniture stores, department stores and specialty stores. The substantial sales growth in the direct-to-customer industry within the last decade has encouraged the entry of many new competitors and an increase in competition from established companies.

The competitive challenges facing us include:

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anticipating and quickly responding to changing consumer demands better than our competitors;

•

maintaining favorable brand recognition and achieving customer perception of value;

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effectively marketing and competitively pricing our products to consumers in several diverse market segments;

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developing innovative, high-quality products in colors and styles that appeal to consumers of varying age groups and tastes, 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.

In light of the many competitive challenges facing us, we may not be able to compete successfully. Increased competition could harm our sales, operating results and business.

We depend on key domestic and foreign vendors for timely and effective sourcing of our merchandise, and we are subject to various risks and uncertainties that might affect our vendors’ ability to produce quality merchandise.

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 have no contractual assurances of continued supply, pricing or access to new products, and any vendor could change the terms upon which they sell to us, or discontinue selling to us, at any time. We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Better than expected sales demand may also lead to customer backorders and lower in-stock positions of our merchandise.

Any inability to acquire suitable merchandise on acceptable terms or the loss of one or more key vendors 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, 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, including availability of raw materials, labor disputes, union organizing activities, vendor financial liquidity, inclement weather, natural disasters, and general economic and political conditions, that could limit our vendors’ ability to provide us with quality merchandise on a timely basis and at a price that is commercially acceptable. For these or other reasons, one or more of 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. In addition, our vendors may have difficulty adjusting to our changing demands and growing business. 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 litigation against us and an attendant increase in our routine litigation costs. Further, any merchandise that does not meet our quality standards could become subject to a recall, which would damage our reputation and brands, and harm our business.

Our dependence on foreign vendors subjects us to a variety of risks and uncertainties.

In fiscal 2005, we sourced our products from manufacturers in 35 countries outside of the United States. Approximately 63% of our merchandise purchases were foreign-sourced, primarily from Asia and Europe. Our dependence on foreign vendors means that we may be affected by declines in the relative value of the U.S. dollar to other foreign currencies. For example, any upward valuation in the Chinese Yuan against the U.S. Dollar may result in higher costs to us for those goods that we source from mainland China. Although approximately 95% 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, delay merchandise shipments to us, or discontinue selling to us, any of which could ultimately reduce our sales or increase our costs.

We are also subject to other risks and uncertainties associated with changing economic and political conditions in foreign countries. These risks and uncertainties include import duties and quotas, concerns over anti-dumping, work stoppages, economic uncertainties (including inflation), foreign government regulations, wars and fears of war, political unrest, natural disasters and other trade restrictions. We cannot predict whether any of the countries 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 or the likelihood, type or effect of any such restrictions. Any event causing a disruption or delay of imports from foreign vendors, including the imposition of additional import restrictions, restrictions on the transfer of funds and/or increased tariffs or quotas, or both, could increase the cost or reduce the supply of merchandise available to us and 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 other trade disruptions.

In addition, although we continue to improve 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 on child labor. Non-governmental organizations might attempt to create an unfavorable impression of our sourcing practices or the practices of some of our vendors that could harm our image. If either of these occurs, we could lose customer goodwill and favorable brand recognition, which could negatively affect our business and operating results.

The growth of our sales and profits depends, in large part, on our ability to successfully open new stores.

In each of the past three fiscal years, the majority of our net revenues have been generated by our retail stores. Our ability to open additional stores successfully will depend upon a number of factors, including:

•

our identification and availability of suitable store locations;

•

our success in negotiating leases on acceptable terms;

•

our ability to secure required governmental permits and approvals;

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our hiring and training of skilled store operating personnel, especially management;

•

our timely development of new stores, including the availability of construction materials and labor and the absence of significant construction and other delays in store openings based on weather or other events;

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the availability of financing on acceptable terms, if at all; and

•

general economic conditions.

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 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 the information sources cannot predict future consumer preferences and buying trends with complete accuracy. In addition, changes in demographics, in the types of merchandise that we sell and in the pricing of our products may reduce the number of suitable store locations. Further, time frames for lease negotiations and store development vary from location to location and can be subject to unforeseen delays. Construction and other delays in store openings could have a negative impact on our business and operating results. We may not be able to open new stores or, if opened, operate those stores profitably.

We must timely and effectively deliver merchandise to our stores and customers.

We cannot control all of the various factors that might affect our fulfillment rates in direct-to-customer sales 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 all of our stores. In addition, we are heavily dependent upon two carriers for the delivery of our merchandise to our customers. Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather, natural disasters, and possible acts of terrorism associated with such carriers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise in a timely and effective manner could damage our reputation and brands. In addition, fuel costs have increased substantially and airline companies struggle to operate profitably, which could lead to increased fulfillment expenses. The increased fulfillment costs could negatively affect our business and operating results by increasing our transportation costs and, therefore, decreasing the efficiency of our shipments.

Our failure to successfully manage our order-taking and fulfillment operations could have a negative impact on our business.

The operation of our direct-to-customer business depends on our ability to maintain the efficient and uninterrupted operation of our order-taking and fulfillment operations and our e-commerce websites. Disruptions or slowdowns in these areas could result from disruptions in telephone service or power outages, inadequate system capacity, system issues, computer viruses, security breaches, human error, changes in programming, union organizing activity, disruptions in our third party labor contracts, natural disasters or adverse weather conditions. These problems could result in a reduction in sales as well as increased selling, general and administrative expenses.

In addition, we face the risk that we cannot hire enough qualified employees, or that there will be a disruption in the labor we hire from our third party providers, especially during our peak season, to support our direct-to-customer operations, due to circumstances that reduce the relevant workforce. 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 and other unexpected events, and any of these events could result in an interruption in our business.

Our retail stores, corporate offices, distribution centers, infrastructure projects and direct-to-customer operations, as well as the operations of vendors from which we receive goods and services, are vulnerable to damage from earthquakes, hurricanes, fires, floods, 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.

We experience fluctuations in our comparable store sales.

Our success depends, in part, upon our ability to increase sales at our existing stores. Various factors affect comparable store sales, including the number, size and location of stores we open, close, remodel or expand in any period, the 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, 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, increased catalog circulation, and continued strength in our Internet business. Among other things, weather conditions can affect comparable store sales because inclement weather can alter consumer behavior or require us to close certain stores temporarily and thus reduce 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 store sales results to differ materially from prior periods and from earnings guidance we have provided. For example, the August 2005 natural disaster caused by Hurricane Katrina resulted in five temporary store closures. As of July 30, 2006, all five stores had been reopened.

Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in the future. Our comparable store sales increases for fiscal years 2005, 2004 and 2003 were 4.9%, 3.5% and 4.0%, respectively. Past comparable store sales are no indication of future results, and comparable store sales may decrease in the future. Our ability to maintain and improve our comparable store sales results depends, in large part, on maintaining and improving our forecasting of customer demand and buying trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using effective pricing strategies. Any failure to meet the comparable store sales expectations of investors and security analysts in one or more future periods could significantly reduce the market price of our common stock.

Our failure to successfully manage the costs and performance of our catalog mailings might have a negative impact on our business.

Postal rate increases, paper costs, printing costs and other catalog distribution costs 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. Our cost of paper has fluctuated significantly during the past three fiscal years, and our paper costs are expected to increase in the future. Future increases in postal rates, paper or printing costs would have a negative impact on our operating results to the extent that we are unable to pass such increases on directly to customers or offset such increases by raising prices or by implementing more efficient printing, mailing, delivery and order fulfillment systems.

We have historically experienced fluctuations in customer 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, and the sizing and timing of delivery of the catalogs. In addition, environmental organizations may attempt to create an unfavorable impression of our paper use in 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. For example, the August 2005 natural disaster caused by Hurricane Katrina created domestic ground and rail transportation capacity constraints that resulted in late catalog delivery. Any delays in the timing of catalog delivery could cause customers to forego or defer purchases.

We must successfully manage our Internet business.

The success of our Internet business depends, in part, on factors over which we have limited control. In addition to changing consumer preferences and buying trends relating to Internet usage, we are vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulation, security breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our Internet business, as well as damage our reputation and brands.

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 by management, additional sales returns might be recorded in the future. Actual merchandise returns may exceed our reserves. 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 exceed merchandise return reserves. Any significant increase in merchandise returns that exceeds our reserves could harm our business and operating results.

We must successfully manage the complexities associated with a multi-channel and multi-brand business.

During the past few years, with the launch and expansion of our Internet business, new 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 Internet business might cannibalize a significant portion of our retail and catalog businesses, and we face the risk of increased catalog circulation cannibalizing our retail sales. While we recognize that our Internet sales cannot be entirely incremental to sales through our retail and catalog channels, we seek to attract as many new customers as possible to our e-commerce websites. We continually analyze the business results of our three

channels and the relationships among the channels, in an effort to find opportunities to build incremental sales. However, as our Internet business grows and as we add e-commerce websites for more of our concepts, these increased Internet sales may cannibalize a portion of our retail and catalog businesses.

We may not be able to introduce new brands and brand extensions, or to reposition existing brands, to improve our business.

We have recently introduced three new brands – West Elm, PBteen and Williams-Sonoma Home, and may introduce new brands and brand extensions, or reposition existing brands, in the future. All of these brands, however, may not be successful growth vehicles. For example, in January 2006, we announced our decision to transition the merchandising strategies of our Hold Everything brand into our other existing brands by the end of fiscal 2006. Further, if we devote time and resources to new brands, brand extensions or brand repositioning, and those businesses are not as successful as we planned, then we risk damaging our overall business results. Alternatively, if our new brands, brand extensions or repositioned brands prove to be very successful, we risk hurting our other existing brands through the potential migration of existing brand customers to the new businesses. In addition, we may not be able to introduce new brands and brand extensions, or to reposition brands in a manner that improves our overall business and operating results.

Our inability to obtain commercial insurance at acceptable prices or our failure to adequately reserve for self-insured exposures might have a negative impact on our business.

Insurance costs continue to increase, affected by natural catastrophes, fear of terrorism and financial irregularities and other fraud at publicly traded companies. We believe that commercial insurance coverage is prudent for risk management, and insurance costs may increase substantially in the future. In addition, for certain types or levels of risk, such as risks associated with earthquakes, hurricanes or terrorist attacks, we may determine that we cannot obtain commercial insurance at acceptable prices, 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, employee health benefits and product and general liability claims. If we suffer a substantial loss that is not covered by commercial insurance or our self-insurance reserves, the loss and attendant 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 business.

Our trademarks, service marks, copyrights, patents, trade dress rights, trade secrets, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales. We may not be able to adequately protect our intellectual property. In addition, the costs of defending our intellectual property may adversely affect our operating results.

We have been sued and may be named in additional lawsuits in a growing number of industry-wide business method patent litigation cases relating to our business operations.

There appears to be a growing number of business method patent infringement lawsuits instituted against companies such as ours. The plaintiff in each case claims to hold a patent that covers certain technology or methodologies which are allegedly infringed by the operation of the defendants’ business. We are currently a defendant in such patent infringement cases and may be named in others in the future, as part of an industry-wide trend. Even in cases where a plaintiff’s claim lacks merit, the defense costs in a patent infringement case can be high. Additional patent infringement claims may be brought against us, and the cost of defending such claims or the ultimate resolution of such claims may harm our business and operating results.

We need to successfully manage our employment, occupancy and other operating costs.

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 in peak sales seasons, and incur other expenses to support new brands and brand extensions, as well as the opening of new stores and direct-to-customer growth of our existing brands. From time to time, we may also experience union organizing activity in currently non-union distribution facilities, stores and direct-to-customer operations. 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 against retail companies, especially in California. We are currently a defendant in one such case and may be named in others in the future.

Although we strive to secure long-term contracts with our service providers and other vendors and to otherwise limit our financial commitment to them, we may not be able to avoid unexpected operating cost increases in the future. Further, we incur substantial costs to warehouse and distribute our inventory. Significant increases in our inventory levels may result in increased warehousing and distribution costs. Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results.

We are undertaking certain systems changes that might disrupt our supply chain operations.

Our success depends, in part, on our ability to source and distribute merchandise efficiently through appropriate systems and procedures. We are in the process of substantially modifying our information technology systems supporting the product pipeline, including design, sourcing, merchandise planning, forecasting and purchase order, inventory, distribution, transportation and price management. Modifications will involve updating or replacing legacy systems with successor systems during the course of several years. There are inherent risks associated with replacing our core systems, including supply chain and merchandising systems disruptions that 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 may result in product pipeline disruptions. We are also subject to the risks associated with the ability of our vendors to provide information technology solutions to meet our needs. Any product pipeline disruptions could negatively impact our business and operating results.

We are implementing changes to our data center information technology infrastructure that might disrupt our business and cost more than expected.

We have engaged IBM to host and manage certain aspects of our data center information technology infrastructure. Accordingly, we are subject to the risks associated with IBM’s ability to provide information technology services to meet our needs. Our operations will depend significantly upon IBM’s and our ability to make our servers, software applications and websites available and to protect our data from damage or interruption from human error, computer viruses, intentional acts of vandalism, labor disputes, natural disasters and similar events. If the cost of IBM hosting and managing certain aspects of our data center information technology infrastructure is more than expected, or if IBM or we are unable to adequately protect our data and information is lost or our ability to deliver our services is interrupted, then our business and results of operations may be negatively impacted.

Our operating and financial performance in any given period might not meet the extensive guidance that we have provided to the public.

We provide extensive public guidance on our expected operating and financial results for future periods. 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 shareholders and potential shareholders, 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 guidance may not always be accurate. If, in the future, our operating or financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock could significantly decline.

Our quarterly results of operations might fluctuate due to a variety of factors, including seasonality.

Our quarterly results have fluctuated in the past and may fluctuate in the future, depending upon a variety of factors, including shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Halloween, Thanksgiving and Christmas, and the strategic importance of fourth quarter results. A significant portion of our revenues and net earnings have been realized during the period from October through December. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize significantly lower-than-expected revenues or net earnings during the October through December selling season, our business and results of operations would be materially adversely affected.

We may require external funding sources for operating funds.

We regularly review and evaluate our liquidity and capital needs. We currently believe that our available cash, cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next twelve months. However, as we continue to grow, we might experience peak periods for our cash needs during the course of our fiscal year, and we might need additional external funding to support our operations. Although we believe we would have access to additional debt and/or capital market funding if needed, such funds may not be available to us on acceptable terms. If the cost of such funds is greater than expected, it could adversely affect our expenses and our operating results.

We will require a significant amount of cash to pay quarterly dividends at intended levels and for our stock repurchase programs.

In March 2006, we initiated a quarterly cash dividend of $0.10 per common share. In addition, in August 2006, our Board of Directors authorized the repurchase of up to 5,000,000 shares of our common stock. The dividend and the share repurchase program may require a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to finance growth opportunities, new product development initiatives, unanticipated capital expenditures or to fund our operations. Our Board of Directors may, at its discretion, decrease the intended level of dividends 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 terminated at any time. Our ability to pay dividends and repurchase shares will depend on our ability to generate cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends or repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and negatively impact our stock price. In addition, we may be subject to lawsuits regarding the use of our cash for dividends or share repurchases.

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

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, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002. We have incurred, and expect to continue to incur, significant expenses and a diversion of management’s time to meet the requirements of Section 404. If we are not able to continue to meet the requirements of Section 404 in a timely manner or with adequate compliance, we would 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 Securities and Exchange Commission or the New York Stock Exchange. Any such action could negatively impact the perception of us in the financial market and our business. In addition, our internal controls may not prevent or detect all errors and fraud. 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.

Changes to accounting rules or regulations may adversely affect our results of operations.

Changes to existing accounting rules or regulations may impact our future results of operations. For example, on December 16, 2004, the FASB issued SFAS No. 123R, “Share Based Payment,” which requires us, starting in the first quarter of fiscal 2006, to measure compensation costs for all stock-based compensation at fair value and record compensation expense equal to that value over the requisite service period. This accounting rule is estimated to have a negative impact of approximately 10% on our fiscal 2006 diluted earnings per share. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective. Other new accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our results of operations.

Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges.

We make certain estimates and projections in connection with impairment analyses for certain of our store locations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We review for impairment all stores for which current cash flows from operations are negative or the construction costs are significantly in excess of the amount originally expected. An impairment charge is required when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the lease. These calculations require us to make a number of estimates and projections of future results, often up to 20 years into the future. If these estimates or projections change or prove incorrect, we may be, and have been, required to record impairment charges on certain of these store locations. If these impairment charges are significant, our results of operations would be adversely affected.

We must properly account for our unredeemed gift certificates and merchandise credits.

We maintain a liability for unredeemed gift certificates and merchandise credits until the earlier of redemption, escheatment or four years. After four years, the remaining unredeemed gift certificate or merchandise credit liability is relieved and recorded within selling, general and administrative expenses. In the event that a state or states were to require that these unredeemed certificates and credits be escheated to that state or states, then our business and operating results would be harmed.

We may experience fluctuations in our tax obligations and effective tax rate.

We are subject to income taxes in many U.S. and Canadian jurisdictions. We record tax expense based on our estimates of future payments which include reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit 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 on-going variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings.

We rely on the services of key personnel, whose knowledge of our business and expertise would be difficult to replace.

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 of our key employees leaves, is seriously injured or is unable to work, and we are unable to find a qualified replacement, we may be unable to execute our business strategy.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Information required by this Item is contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Stock Repurchase Program” within Part I of this Form 10-Q.

ITEM 6. EXHIBITS

(a)

Exhibits


Exhibit Number		Exhibit Description
10.1		Fourth Amended and Restated Credit Agreement, dated October 4, 2006, between the Company and Bank of America, N.A., as administrative agent, L/C Issuer and lender of swingline advances, Banc of America Securities LLC, as sole lead arranger and sole book manager, The Bank of New York and Wells Fargo Bank N.A., as co-syndication agents, JPMorgan Chase Bank, N.A. and Union Bank of California, N.A. as co-documentation agents and the lenders party hereto
10.2		Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006
10.3		First Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and JPMorgan Chase Bank, N.A., dated as of September 8, 2006
10.4		Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006
10.5		First Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and U.S. Bank National Association, dated as of September 8, 2006
10.6		Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005
10.7		Third Amendment, dated as of October 25, 2006, to the Reimbursement Agreement between the Company and Bank of America, N.A., dated as of July 1, 2005
10.8		Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and Wells Fargo Bank, N.A., dated as of July 1, 2005
10.9		Second Amendment, dated as of September 8, 2006, to the Reimbursement Agreement between the Company and The Bank of New York, dated as of July 1, 2005
10.10		Williams-Sonoma, Inc. 2001 Long-Term Incentive Plan
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

SIGNATURE

Pursuant to the requirements 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.


WILLIAMS-SONOMA, INC.

By:		/s/ Sharon L. McCollam
		Sharon L. McCollam Executive Vice President, Chief Operating and Chief Financial Officer

Date: December 8, 2006

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