Stephen C. Nelson - Director, Investor Relations W. Howard Lester - Chairman of the Board, Chief Executive Officer Sharon L. McCollam - Chief Financial Officer, Chief Operating Officer, Executive Vice President David DeMattei - Group President - Williams-Sonoma, Williams-Sonoma Home, West Elm Laura J. Alber - President Patrick J. Connolly - Executive Vice President, Chief Marketing Officer, Director

Colin McGranahan - Sanford Bernstein Dana Telsey - Telsey Advisory Group Matt Nemer - Thomas Weisel Partners Budd Bugatch - Raymond James Analyst for David Magee - Suntrust Robinson Humphrey Jack Murphy - William Blair David Strasser - Banc of America Securities Matthew Fassler - Goldman Sachs Chris Horvers - J.P. Morgan Janet Kloppenburg - JJK Research Laura Champine - Morgan Keegan & Company

Ladies and gentlemen, thank you for standing by. Welcome to the Williams-Sonoma Incorporated first quarter 2008 earnings call. (Operator Instructions) I would now like to turn the call over to Stephen Nelson, Director of Investor Relations at Williams-Sonoma Incorporated, to discuss non-GAAP measures and forward-looking statements. Stephen C. Nelson: -- earlier today. I would first like to discuss the non-GAAP financial measures that are contained in this morning’s earnings press release and conference call, which exclude the impact of unusual business events. For the remainder of today’s call, we will be discussing our first quarter results and our 2008 quarterly and fiscal year guidance, excluding the impacts of these items and will refer to these results as non-GAAP. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of how these non-GAAP financial measures are used by management are in Exhibit 1 of the press release. I would now like to discuss our forward-looking statements. The forward-looking statements included in this morning’s call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, guidance, and prospects of the company in 2008 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company’s current press release and SEC filings, including reports on Forms 10-K and 8-K for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. I will now turn the conference call over to Howard Lester, our Chairman and Chief Executive Officer. W. Howard Lester: Good morning. Thank you for joining us. With me today is Laura Alber, our President; Pat Connolly, our Chief Marketing Officer; Sharon McCollam, our Chief Operating and Chief Financial Officer; Dave DeMattei, our Group Vice President for the Williams-Sonoma, Williams-Sonoma Home, and West Elm brands. I am going to begin today with an overview of our first quarter 2008 business results and a high level outlook for the balance of the year. Then I will turn the call over to Sharon, Dave, and Laura for further details. In the first quarter net revenues, as expected, decreased 4.2%. The home furnishings environment, however, continued to be very challenging and industry growth rates continued to decline. But despite these pressures, we delivered diluted earnings per share of $0.10, including a $0.05 per share net benefit related to an incentive payment from a landlord for an early lease termination. Excluding this $0.05 benefit, non-GAAP diluted earnings per share were a better-than-expected $0.05 per share. It was driven by the strong performance of our emerging brands, aggressive management of our variable cost, and the successful rollout of our direct marketing and supply chain cost reduction initiatives. In our core brands, net revenues decreased 7%. This decline was driven by a 7.9% decrease in the Pottery Barn brand, an 11.1% decrease in Pottery Barn Kids, and a 1.7% decrease in the Williams-Sonoma brand. In our emerging brands, which include West Elm, Williams-Sonoma Home, and PBteen, net revenues increased a better-than-expected 16.3% despite the overall softness in the home centered retail environment. In direct marketing, we continue to move forward with our catalog circulation optimization strategy with favorable results. These results are a direct benefit of the proprietary direct marketing systems that we’ve implemented over the past two years and we are optimistic that we will be able to successfully expand this strategy over the next several quarters. In supply chain, we continue to roll out the next phase of our returns, replacements, and damages reduction initiatives. This has been a key area of focus and investment for us and we are beginning to see meaningful results. We are driving accountability back to our agents and vendors and expect to make substantial progress in this area during 2008. As we look forward to the second quarter and balance of the year, we are increasingly concerned by the downward trends in consumer confidence and home furnishings category growth. In light of these trends, we’ll be operating more cautiously. While we are committed to driving future growth across all channels, we are equally committed to optimizing asset efficiency, including inventory turns, and aggressively reducing costs to the extent that these actions do not affect service levels to our customers. As I said in March, our approach to this environment will not be business as usual. To support future growth and expand the reach of our brands in 2008, we expect to open 27 net new retail stores, including [Kid] and West Elm, and expand or remodel an additional 22 stores. We also expect to intensify the marketing behind our fastest growing channel, e-commerce, in addition to upgrading our websites in the Pottery Barn, Pottery Barn Kids, PBteen, and Williams-Sonoma Home brand. We will also continue to roll out the next phase of our Pottery Barn revitalization initiatives, which Laura will discuss later in this morning’s call. In our efforts to improve asset efficiency, we are continuing to aggressively manage inventory levels across all brands and channels. In addition in early May, we took advantage of a robust corporate aircraft market and replaced an owned aircraft with a leased aircraft. This sale resulted in a financial gain of $0.09 per diluted share and approximately $29 million in net after-tax cash flow in the second quarter. From a cost perspective, we are leaving no stone unturned as we execute against the following initiatives: one, optimizing catalog circulation, catalog versioning and paid search to improve the overall productivity of our advertising cost; reducing returns, replacements, and damages by implementing effective vendor management quality control and logistic initiatives; and reducing corporate overhead costs. While we continue to be confident in our ability to execute against all these initiatives, we believe the overall macroeconomic environment has become increasingly difficult and there is a greater top line risk than we anticipated at the beginning of the year. Therefore, to reflect this risk we are reducing our 2008 revenue guidance by approximately $55 million to $73 million and our non-GAAP diluted earnings per share guidance by approximately $0.06 to $0.07. We are also modifying our inventory receipt plans accordingly. These reductions are principally driven by lower expectations in the Pottery Barn brand. I will now turn the conference call over to Sharon to discuss the details of our first quarter 2008 results and the changes to our 2008 guidance. Sharon. Sharon L. McCollam: Thank you, Howard. Good morning. In the first quarter of 2008, GAAP diluted earnings per share decreased $0.06 to $0.10 per diluted share versus $0.16 in the first quarter of 2007. Excluding a $0.05 net benefit associated with an incentive payment for early lease termination, non-GAAP diluted earnings per share were $0.05. Throughout the quarter, an intense focus on operational execution and cost containment allowed us to deliver non-GAAP operating results that were $0.02 above the high-end of our guidance and $0.04 above the First Call consensus estimate. Net revenues in the first quarter decreased 4.2% to approximately $782 million. Comparable store sales decreased 9%. Retail lease square footage increased 6.9% while catalog circulation decreased 16.3%. Page circulation decreased 25.2%. This compares to a catalog circulation decrease of 3% and a page circulation increase of 5.7% in the first quarter of 2007. Gross margin, expressed as a percentage of net revenue, was 35.3% versus 37% in the first quarter of 2007. Excluding the impact of accelerated depreciation associated with the early lease termination, non-GAAP gross margin was 35.5%. This 150 basis point year-over-year decrease was primarily driven by the deleverage of fixed occupancy expenses due to declining sales and an increase in cost of merchandise sold, partially offset by reductions in replacements and damages. SG&A as a percentage of net revenues was 33.2% versus 33.5% in the first quarter of 2007. Excluding the benefit associated with the early lease termination, non-GAAP SG&A was 34.4%. This 90-basis point year-over-year increase was primarily driven by the deleverage of employment and advertising costs due to declining sales. The effective income tax rate was 38.8% versus 40.3% in the first quarter of 2007. This decrease was driven by certain favorable income tax resolutions in the first quarter of 2008. I would now like to discuss significant working capital balance sheet variances at the end of the first quarter of 2008 versus the end of the first quarter of 2007. Cash and cash equivalents decreased $91 million to $27 million after returning over $230 million to our shareholders through share repurchases and dividends over the past 12 months, and advancing $61 million on our revolving line of credit. Accounts receivable increased $17 million to $60 million. This increase was driven by the timing of landlord receivables related to the construction of our stores. Merchandise inventories increased $74 million, or 11.6% to $714 million, in line with our expectations. Of this $74 million increase, approximately $30 million represents the year-over-year increase in fixed investment for new and remodeled stores, approximately $21 million represents increased units in the new and emerging brands, and approximately $23 million represents cost and mix shift increases in the Williams-Sonoma brand. Pottery Barn and Pottery Barn Kids inventory, excluding new and remodeled stores, were virtually flat year over year. Accounts payable increased $21 million or 13.6% to $177 million. This increase was primarily driven by the timing of payments in merchandise payables at the end of the quarter. I would now like to briefly discuss our fiscal year 2008 guidance. As a reminder, fiscal year 2008 is a 52-week year versus fiscal year 2007, which was a 53-week year. The 53rd week in fiscal 2007 added approximately $70 million in revenue and $0.05 in diluted earnings per share to fiscal 2007 results. As we look forward to the balance of the year, we are increasingly concerned about the softness we are seeing in the home furnishing sector and the economy overall. While we are aggressively driving revenue enhancements, asset efficiency, and cost reduction initiatives to mitigate the earnings and cash flow impact of a softer top line, we believe that the retail environment is going to continue to get more difficult and we are reducing our revenue and non-GAAP diluted earnings per share guidance accordingly. Specifically, our fiscal year 2008 revenue guidance has been reduced by approximately 1.5% to $3.74 billion to $3.8 billion, and our non-GAAP diluted earnings per share guidance has been reduced by $0.06 to $0.07, to $1.31 to $1.44. When reconciling our current non-GAAP diluted earnings per share guidance to our previous guidance, it’s important to note that the early lease termination benefit of $0.05 in the first quarter was included in previous guidance but not until the second quarter. Therefore the timing of this benefit only affects first and second quarter guidance, not the full year. On a GAAP basis, however, we are actually increasing our diluted earnings per share guidance by $0.02 to $0.03, to $1.45 to $1.58, due to the $0.09 gain from the sale of our corporate aircraft, partially offset by lower revenues and softer margins. I will now turn the call over to Dave DeMattei to discuss the Williams-Sonoma, Williams-Sonoma Home, and West Elm brands.

Thank you, Sharon. Good morning. I would like to begin this morning by discussing the performance of the Williams-Sonoma brand. As expected, first quarter net revenues decreased 1.7% versus last year due to ongoing softness in retail traffic. Comparable store sales decreased 4.8%, partially offset by incremental revenues from new and expanded stores and positive e-commerce growth. From a merchandising perspective, our premium assortment, including electrics, cookware, and cutlery, drove positive growth during the quarter. This growth was more than offset, however, by ongoing softness in our traffic driven categories like food, housewares, and cook’s tools. As we look forward to the second quarter and the balance of the year, we are cautious in our economic outlook but believe the Williams-Sonoma brand will be more resilient than our other home furnishings brands. Execution, however, is critical and we are continuing to focus on the initiatives that will allow us to capitalize on the brand’s authority. These initiatives include leveraging the functionality of our new e-commerce platform that was launched in January, strengthening our marketing message on the exclusivity of our product offering, and maintaining a superior level of customer service in both channels while balancing the cost pressures of a softer top line. We believe the Williams-Sonoma brand is and will remain the premier destination for high quality cooking accessories, gift-giving ideas, and home entertaining essentials despite these difficult economic times. In the Williams-Sonoma Home brand, first quarter results on both the top and bottom line were ahead of expectations as we continued to make significant progress on the brand-building initiatives we set for ourselves at the beginning of the year. From a merchandising perspective, home furnishings and decorative accessories, a strategic area of focus for the brand, were the primary drivers of growth during the quarter. As we look forward to the second quarter and the balance of the year, we will continue to capitalize on the economic resilience we have seen in this customer segment and execute against the initiatives that we believe will take the brand’s performance to the next level, including building brand awareness by leveraging the strength of the Williams-Sonoma kitchen brand, optimizing catalog circulation and e-commerce marketing, and reengineering the supply chain to deliver superior quality to our customers at a great value. As it relates to new store openings, our new store in Scottsdale, Arizona that was expected to open in 2008 is being moved to 2009 due to landlord construction delays. In West Elm, despite the negative pressures of the macroeconomic environment, we are pleased with our first quarter results. Positive net revenue growth was primarily driven by incremental sales from new stores and strength in e-commerce. We opened two new stores during the first quarter -- Puerto Rico, which is off to a great start, and Ohio, and ended the quarter with 29 stores versus 22 last year. From a merchandising perspective, we saw ongoing momentum in our furniture and textile categories. Our design driven merchandise offering is resonating with the customer and providing a significant competitive advantage. As we look forward to the second quarter and the balance of the year, we continue to focus on the following brand-building initiatives -- expanding our fiscal year retail store base by 10 new stores, increasing e-commerce marketing, testing alternate shipping rate strategies to optimize merchandise revenue while maintaining brand profitability, and refining our merchandise assortment to drive increased traffic and a broader brand appeal. As it relates to new West Elm store openings, our previous guidance for 2008 was 12 stores. However, we now expect to open 10 stores within the year due to our Arizona and New York stores being moved into 2009 as a result of landlord related delays. We will also be focusing on expanding our gross margins through strategic sourcing and aggressive quality assurance programs. We continue to be very excited about the long-term growth potential in the West Elm brand. I will now turn the call over to Laura to discuss the Pottery Barn brand. Laura J. Alber: Thank you, Dave. Good morning. First I will start with the Pottery Barn brand. First quarter net revenues decreased 7.9% versus last year, as the benefits of our revitalization strategy were more than offset by continued weakness in the macroeconomic environment. Retail was particularly challenging with comparable store sales decreasing 10.5%. From a merchandising perspective, we saw year-over-year sales declines across all major categories. Despite these declines, however, we did see new product introductions outperform all other categories, but their strength was more than offset by the impact of external factors on the core assortment. From an operational perspective, we saw better-than-expected results from our returns, replacements, and damages and catalog circulation optimization initiatives. We believe both of these initiatives are going to drive progressive improvements in profitability over the next several quarters. As we look forward to the second quarter and the balance of the year, we are prepared to face one of the most difficult retail environments we’ve seen in the history of the brand, and as such we are continuing to focus on the merchandising, marketing, and supply chain initiatives that are in our control and can make the biggest difference in our performance. These initiatives include introducing a greater level of newness through innovative product development and enhanced visual merchandising; providing our customer with impactful change at a great price; continuing to roll out the catalog circulation optimization strategy; and finally redefining and upgrading our store standards to enhance the customer experience and optimize four-wall profitability. We will also capitalize on the May 2008 upgrade of our e-commerce website, which is delivering positive post-launch performance metrics. While we have great confidence in our ability to execute against all of these initiatives, we believe the macro issues that are affecting us today are going to persist for the foreseeable future. Therefore, we will continue to optimize profitability to the extent possible by strategically leveraging the opportunities we see in e-commerce, inventory management, and our variable cost structure to the extent we do not negatively impact customer service. In the Pottery Barn Kids brand, net revenue in the first quarter decreased by 11.1% versus the prior year, including a comparable store sales decrease of 10.9%. While these results were in line with our expectations, we continue to believe that Pottery Barn Kids has been more impacted by the macro environment than any of our other brands, due to its significant dependence on discretionary categories like textiles and decorative accessories. Categories like nursery and core furniture that fill needs for life stage events delivered substantially better results. Despite the macro environment though, we believe that there are strategic opportunities we can pursue to mitigate the impact on both the top and bottom line and strengthen our position as the leader in the kids home furnishings market. These include launching an upgrade e-commerce website in the third quarter; capitalizing on the strength of our bedroom offering by introducing increased newness and filling in merchandising gaps across categories; strengthening our vendor base in the nursery category to provide superior design, quality, and service; and finally, like Pottery Barn, optimizing the effectiveness of our advertising dollars by implementing strategic changes in catalog circulation and paid search. Although we do not believe the home furnishings category growth is going to rebound in the next several quarters, we remain committed to aggressively managing the aspects of the business that we can control, while at the same time protecting our brand image in the eyes of our customers. By doing both, we believe that the Pottery Barn Kids brand will emerge from these challenging times with even stronger competitive presence. I would now like to talk about Pottery Barn Teen. Net revenues in the PBteen brand continued to exceed expectations, with net revenues in the first quarter increasing by 29.4% versus last year. All key merchandising categories saw better than expected growth during the quarter, including furniture, textile, and decorative accessories. Highly targeted marketing, new innovative products, and a stronger in-stock position contributed to these results. As we look forward to the second quarter and the balance of the year, we are continuing to drive initiatives that will improve the teen customer experience and extend the reach of the brand, including the launch of our upgraded e-commerce website in the third quarter. We continue to believe that PBteen has significant growth potential as it solidifies its role in life stage marketing among the Pottery Barn portfolio of brands. I would now like to open the call for questions. Thank you.

(Operator Instructions) We will go first to Colin McGranahan with Bernstein. Colin McGranahan - Sanford Bernstein: Good morning. I was hoping you could talk a little bit more specifically about some of the cost reduction and expense management initiatives -- you know, what drove the little better results than you would have thought in 1Q and what are some of the opportunities in your focus through the year? And then as just a quick follow-up, if you could talk about any impact you are seeing at all from the rebate checks that started arriving in the last several weeks. W. Howard Lester: Well, with respect to the cost reduction programs, as we’ve talked last quarter and previously, we have virtually leaving no stone unturned. I mean, we’ve gone through and continue to all the essential activities in the company and we’ve looked at can we do those better. In some cases, we’ve had some reorganization; in some cases, we set more stringent goals for ourselves and we’ve had some favorable results in achieving those, like returns and replacements, as part of our whole supply chain initiatives. We’ve got a lot of those underway. We’ve made great progress throughout our domestic delivery to our customers. The final mile and in-sourcing are up, all the things we’ve talked about. I think in our corporate cost centers, the same thing has been true. We’ve done some reorganization. We’ve been very thoughtful about new hires, although we are continuing to run our business in the most effective way that we can. We did this year froze our merit increases for the year for our associates, while at the same time we reviewed every associate’s compensation with the market and if they were not in line with the market, then we did correct that. We have made improvement, as we’ve talked about, on our advertising expense where we had done other things with paid search and other activities there, led by Pat Connelly and all the teams in the brands. We’ve made real progress there. You saw some of that in the first quarter and you will continue to do it. As Dave mentioned, our emerging brands, the profitability is up, so we’ve improved that over last -- over a year ago considerably. So across the board, I mean, we’ve got a lot of things. I could go on for a long time here about everything from how we are photographing our catalogs to how we are buying paper to how we are doing -- virtually everything that we do in the company, we are looking at everything methodically and we are not through. We have more things that we’ll be doing in the future. You know, as I said last quarter, when you are going through difficult times, it’s really a great opportunity in running a business to be more incented to look at things that will make your company much stronger as you come out of this environment, and I think we are enthusiastic about taking advantage of that. Our entire team has done a great job and we are making real progress. You asked me about the rebate checks -- I don’t think that we’ve seen any impact from that. I doubt that a lot of our customers were affected, or to the extent that it drove them to buy home furnishings, but -- next question.

We’ll now go to Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Good morning, everyone. I wanted to follow-up a little bit on the inventory levels. Sharon, as you think about the inventory levels, how do you see the inventory progression continuing, which brands? And then Laura, as you think about Pottery Barn, how are you doing on opening price points and what are you seeing in terms of the new product offering and how you position it? Thank you. Sharon L. McCollam: Dana, as it relates to inventory, we were pleased during the first quarter to see the Pottery Barn and Pottery Barn Kids inventory virtually flat year over year. There is aggressive action happening in Pottery Barn which I will let Laura speak to, but we are looking at tightening our inventories in every brand and improving our turn to the extent that it does not negatively impact customer service. Dave has substantial initiatives in all three of his brands, as does Laura, to improve turns and to improve asset efficiency, as we discussed and Howard mentioned. So we feel very good. By the end of the year, our guidance currently says that we could actually have inventories going down slightly, low single digits, and on the high-end of our guidance, we would be up in the mid-single-digit positive range, but we are really targeting the low-end of that range at this time, in light of the macro. And Laura, would you speak to Pottery Barn inventory specifically? Laura J. Alber: Sure, I would love to. We have been aggressive as we see top line decline in cutting back our slow-turning core receipts and we are really starting to see the results of that, which should not impact or will not impact our newness and our ability to execute against our service metrics. And in fact, our service metrics are up versus last year so we are mindful of that but we do have a substantial opportunity to continue to reduce receipts through the balance of the year. I’ll point out we were actually able in Q1 to get out of an off-site storage location in Memphis this quarter, which was a big achievement and we continue to push to have those kinds of operational efficiencies through the back half of the year. So you are going to see inventory decline versus last year progressively through the balance of this year. As it relates to opening price points, we’ve been really focused on areas in our business where the customer can easily update their home, those being decorative accessories, pillows, linens, and lighting, and those happen to be our strongest categories and we’ve been strategically marketing them and buying into a broader and better designed line there. And those are the highlights of our business, those easy updates. You know, in terms of specifically opening price points on other products, we see success when we have a great combination of design quality and price, and in some cases, some of our best new furniture collections have been mid-priced, not at the lower level but clearly the value is better than what you can buy elsewhere.

We’ll now hear from Matt Nemer with Thomas Weisel Partners. Matt Nemer - Thomas Weisel Partners: Good morning. I’ve got two questions. The first is, can you talk to us about the cost differential between sending a catalog and the cost per click? Just some rough numbers so that we can frame the opportunity on marketing optimization? And then the second question is in looking at the second half assumptions, can you walk us through how you get to the sequential improvement in year-over-year earnings and are you willing to protect these numbers with additional reduced circulation if you need to? Thank you.

I’ll try and answer your first question. What we are always doing is looking at the productivity of the last catalog mailed versus the next dollar that we can spend on paid search, and over the past couple of years, we’ve been able to intensify the efforts in search and reduce some of the marginal catalog mailings, and that’s really the best way to answer that. Sharon L. McCollam: And Matt, to your question about additional circulation adjustments, I would call them, we will continue to evaluate that and I believe that across all brands, to the extent that we see increased changes in the macro environment or opportunities as we continue with our versioning, we will be prepared to capitalize on those opportunities in the back half.

Moving on, Budd Bugatch with Raymond James. Budd Bugatch - Raymond James: Good morning. Thank you for taking my questions. Two quick ones -- one, talk a little bit about what you see in the progression of comps. If I look at at least the low end of your retail comps, it says that there’s not much improvement, maybe 100 or 200 basis points by the end of the fourth quarter. And the second question relates to income tax rate for the second quarter of 31% to 32%. Is that affected significantly by the aircraft sale or is there other issues that are affecting that? And is that the number that we should use to tax effect the aircraft sale? Sharon L. McCollam: No, Budd. Let me just take the income tax question first. We are aggressively looking at several unresolved tax situations that we have and we believe we are going to see, like we did in Q1, certain favorable income tax resolutions that will occur in the second quarter. The aircraft has no impact on the tax rate. It has an impact on cash flow but not on the tax rate. As far as the comps go, basically what we are looking at for the year when you look at the comp guidance for the year is that you are going to see the Pottery Barn brands, Pottery Barn in the high-single-digit negative comp, kids will be low doubles is what we are assuming, the Williams-Sonoma brand will be negative in the low-singles. That’s how we are looking at it and that is really no different than what we are seeing today, and we expect that if things improve, we’ll come back to you with some updates to that but at this point, when you look at the full year guidance, the big negatives are in the Pottery Barn, Pottery Barn kids brand. Sonoma is in adding negative comp for the year and we’ll see how it plays out. W. Howard Lester: Sharon, if I could add to that, on the comps, you know, we believe that we are making substantial progress in both -- for instance, in Pottery Barn in our merchandise quality and in our service levels at the store. However, we haven’t changed the comp rate for the year so it doesn’t reflect -- it either doesn’t reflect that or it reflects a more negative attitude about the economy. But we are cautious, as we’ve said, because the election is going to be distractful. We’ve got a lot of home inventories to work our way through in the country and there’s just a lot of things going on that are keeping the customer from redecorating their home or updating their home furnishings. But it doesn’t mean that we are not making improvement in our execution because we are very confident that we are.

Moving on, we’ll hear from David Magee with Suntrust Robinson Humphrey. Analyst for David Magee - Suntrust Robinson Humphrey: Hello, this is Kris [Rapplejay] on the call for David. I had a question about sourcing costs and specifically, assuming that the costs from -- higher costs from China are here to stay, are there any structural changes that you are contemplating for dealing with that going forward? Thank you. Sharon L. McCollam: Laura, would you like to speak to the sourcing costs for Pottery Barn? And then Dave, you can speak to them for your brands. Laura J. Alber: We are definitely seeing the pressure of raw materials costs and increased labor in the overseas market, as well as the declining dollar. So those are our hurdles. What we are doing to combat it is to really continue to leverage the improvements that we are making as a result of quality initiatives, so that we do not have to increase in Pottery Barn our price to our customer. So by getting less returns, for example, our profit, even if the initial cost is higher, we can maintain because we are not having to damage out as much or spend the extra shipping costs to return as much as we had previously. So that, we continue to be focused on driving those operational initiatives, both through our domestic and international supply chain and we still believe there is sizable opportunity there that will help us combat the rising costs. In some areas, you know, we have taken price increases where we have enough elasticity to do so.

And in West Elm, it’s very similar to what Laura said. You know, we’re looking at having strategic vendor partners. With our growth of stores and our growth in volumes, we’re able to offset some of those cost pressures with our increased of quantities, which will help out in negotiations with the vendors. Where we can’t, we pass on strategically, if we think we can absorb it as a brand and also, we didn’t really talk about Williams-Sonoma also with the Euro pressures. On there, we are passing some of those costs on to our customers and as you saw how it affects our inventory. Sharon L. McCollam: I will say in our guidance, however, it’s just important to note that in the guidance that we provided today on the gross margin for the year, our big negative within that guidance is the deleverage of occupancy, but we do have an assumption of negative cost of goods related to higher costs, but in the guidance, as Laura mentioned, it is offset, substantially offset by the improvements in the supply chain, including returns and the replacements and damages.

Our next question will come from Jack Murphy with William Blair. Jack Murphy - William Blair: Good morning. I wonder if you could just talk a little bit about the e-commerce business versus the retail business. I’m just trying to get some insights as to what you’ve kind of actively done in terms of putting dollars behind e-commerce versus what you think macro factors like the price of gas, et cetera, are affecting retail. So are you sort of seeing a shift from your stores to the e-commerce for macro reasons? And then finally, does the trend that you are seeing in stronger e-commerce sales impact your long-term thinking on capital allocation at all, in terms of what channels you are going to end up the most in? Sharon L. McCollam: Pat, would you like to discuss e-commerce, please? Patrick J. Connolly: Yeah, let me start with that one, Jack. Our e-commerce revenues were up 8.7% in the first quarter and that’s very encouraging for us. Some of that is occurring because customers are choosing to place their orders on the web as opposed to calling our care centers. But also part of it is the natural growth of e-commerce and our ability to drive more business to that channel through improved natural and paid search and through the upgrading of our sites and the implementation of new e-mail programs that allow us to target our customers more efficiently. We have about $18 million customers who have given us their e-mail address and opted in on a positive basis to receive regular e-mails from us and that’s very helpful as well, and we are continuing to make investments. Both Laura and Dave referred to the launch of our new e-commerce platform and that will be continued through all of our brands, except West Elm, this year. W. Howard Lester: Let me take the second part of the question about does this affect whatever’s going on here affect our future capital expenditures for our retail stores, and the answer is we are always looking at it and we are continuing to monitor through all the data that we have here very closely what happens with our customers that migrate, you know, that come to us from the web and migrate some of their sales to retail, from our retail customers and what kind of transfer we are getting to the web and because of gas or because of convenience or because they are getting more accustomed to it, for a variety of reasons. And we have seen really very little shift to the extent that it would affect our ability to open -- continue to open retail stores pretty much on the same basis that we have, which is a demographic and [encycleographic] model that we look for a certain minimum standard to meet before we open a retail store for each of our brands. And we’ll continue to modify that model as we watch these various migrations of customers across our channels. But at this time, I don’t see any material change in our long-term strategy.

We’ll move on to David Strasser with Banc of America Securities. David Strasser - Banc of America Securities: As you look at getting better with SG&A, how much of it is direct customer-facing stuff, i.e. cutting hours in the store? Because I thought you had talked about that a little bit last quarter, that some of that was going on. And as you’ve done that, have you seen any impact to service? W. Howard Lester: Let me be very clear on this for you and everyone -- our edict here when we began this whole journey through this bad period is that we are -- there’s two things we are not going to do. We are not going to lower our service to our customers in any way, so that means that we are going to be in stock with our goods, we are going to have payroll levels in our stores at the place where we are offering as good or better service than we did before, et cetera. We are not going to cut back in anything that provides a less-than-superior experience for our customers. And the same thing is true for our brands. You know, we’ve said the same thing there and we didn’t today be as emphatic probably as we should have been. You know, we are going to continue to remodel our stores in a timely way when they require it, like we have historically. We are going to continue to do those things that require any of the elements of our brand to be the best they can be, because our whole strategy during this period is to earn as much as we can, treat our shareholders as good as we can, but to come out of this stronger as a company and with more market share, as those that are weaker than us fall by the wayside. So while if we’ve cut back payroll in our stores, it’s because we thought we could do the same job better by just reallocating the way those hours were being utilized. But we are not achieving SG&A expense reduction by sending a message out, let’s cut payrolls. In my 30 years here, we’ve never sent that message to the stores and we are not going to start now.

We’ll now hear from Matthew Fassler with Goldman Sachs. Matthew Fassler - Goldman Sachs: Thanks a lot and good morning to you. My question relates to margins, and you’ve dealt with a lot of the substance to this, but in the first quarter, even though the comp was worse than what you had initially guided to and occupancy deleverage seems to have been a big issue, you beat your gross margin guidance. And as I look out to the second quarter, you are guiding to a bigger gross margin decline than you saw in Q1 with comps essentially in the range of what you saw in Q1. So can you talk about what was better than what you expected in Q1 from a margin perspective? And secondly, just give us a little color on whether there’s something other than occupancy deleverage that would contribute to a bigger year to year gross margin decline in Q2. Sharon L. McCollam: Absolutely. In the first quarter versus our guidance, the reason that we were better on our gross margins is that we did not have to get as deeply promotional as we anticipated to keep the goods moving through the network. The second place was in the replacements and damages. We are doing -- the progress we have made there is substantial. Howard in his prepared remarks said meaningful improvements and we mean meaningful. As we look forward to the future quarters, we are cautious in that guidance. This is a one -- this is the first quarter we’ve seen this level of meaningful results. We want to make sure that it’s sustainable and so we guide what we know, not what we wish and hope, as you guys know. So we feel that we’ve given you some cautious guidance. We are also prepared, as Laura and Dave have both said they are going to ensure that we improve our turns and what we need to do in order to make that happen will happen, so we’ve put some cushions in there to cover some potential markdowns associated with that, and that would be the differences that you see. You are also seeing a slightly greater deleverage in occupancy in second quarter and we’ll see how that plays out when we get to the end of the quarter, so those are the real drivers between Q1 and then going into Q2 in the back half.

Chris Horvers with J.P. Morgan, please go ahead. Chris Horvers - J.P. Morgan: Thanks and good morning. A couple of follow-up questions; can you potentially quantify how much sourcing costs and currency pressures are impacting the two big brands, from a dollar cost percentage increase or a dollar amount year over year? And then secondly, on the SG&A, are we still thinking advertising could be down $50 million to $60 million this year, or are you finding more efficiencies there? Sharon L. McCollam: Well, our estimates on advertising have consistently been in the range of $35 million to $40 million and our guidance is still predicated in that same range, so we have not changed that at this point, although we’ll continue to look for opportunities in that area. As it relates to cost increases and the percentage that’s actually coming from vendor cost pressure mix shift versus other factors, that’s a very difficult number to quantify and we have not quantified that. And the pressures are not across all categories equally. So I think it depends on your mix at each time during the year. Of course, in the fourth quarter it is different but if there is any additional comments that Laura and Dave would like to add to that, I’ll turn this over to them to add to add some color to the pressure you are getting from vendors on cost increases. Dave, would you like to discuss that?

I think -- discussing it from an inventory standpoint, I think in our prepared remarks we talked about it, that of our increase in our inventory, about 60% is coming from price increases and about 40% is coming from mix shifts, so I probably -- you know, depending on how you are selling that product, if you are selling a comparable, it would be similar to that. Laura J. Alber: And as I said earlier on this subject, it’s hard to specifically pull it out because there are some areas where you actually get cost decreases as volumes go up and the vendor gets more efficient at making things and that partially offsets the cost increases we are seeing. We are also really focused on driving our packaging costs down overseas and that is an opportunity for us to mitigate the increasing raw materials cost. And also, as I said earlier, the opportunity really lies in just improving the quality and improving the return to stock in our distribution centers and all those areas so we can continue to combat this increasing raw material cost. So it’s hard to answer specifically a percentage as you’ve asked.

We’ll now hear from Janet Kloppenburg with JJK Research. Janet Kloppenburg - JJK Research: Good morning, everyone. I wanted to just ask a little bit of questions about the assumptions behind the fact that you’ve got your comp trend improving in the back half of the year. I know it’s worse than it had been in the guidance but it’s still improving as we go into the back half. So my question is does that relate to easier comparisons or does that relate to an outlook for the environment to improve? And on Pottery Barn, Sharon, I think you said that even though your inventories are up roughly 12% that Pottery Barn and Kids is flat. Maybe you could explain that a little more thoroughly for me. I’m not sure I understood it. And maybe you could help us understand where you think, in light of the comp guidance, where you think the Pottery Barn and Kids inventories might be at the end of the year. Thank you. Sharon L. McCollam: Okay. Let me speak first to the comp guidance. Throughout the balance of the year, as I said earlier, Janet, the comp for the Pottery Barn and Pottery Barn Kids brands between now and the end of the year, where they ended up at the end of the first quarter and where I have them for the year is the same. Where you are seeing some slight improvement is in the Williams-Sonoma brand. Q3 and Q4 are Williams-Sonoma's time. If you go back 10, 15 years and you look at Williams-Sonoma, we still have a negative low-single-digit comp assumption in the guidance for the year for Q3 and Q4, but clearly not at the level that we experienced in Q1. So on a two-year basis, there is a slight improvement but we don’t look at it at a total company level. You can’t look at our business at a total company level. You have to look at where we are brand by brand. On the second question related to inventories, we did say that we were up $74 million year over year in inventory and where that came from was: $30 million of that is in new and expanded stores. That is display inventory in those stores year over year; $21 million of it is in the new and emerging brands, which is PBteen, West Elm, Williams-Sonoma Home; and then $23 million of it is in the Williams-Sonoma brand, which Dave just talked about, and that is 60% of it related to price increases and then 40% due to a mix shift in the brand, meaning that they are selling and carrying in their inventory higher price product. So that’s where it’s coming from. At the end of Q1, the Pottery Barn and Pottery Barn Kids brands, after you take out new stores, did not have a dollar cost increase in their inventories. It was virtually flat. Now Laura, I will let you speak to where you see Pottery Barn and Kids going between now and the end of the year. Laura J. Alber: Thanks, Sharon. We are very focused on inventory management in the Pottery Barn brands and we are going to continue to take markdowns on slow movers. We are reducing unproductive SKUs and we’ve already done that for the back-half of the year, and we have cut receipt flow on slow movers. So you are going to continue to see decreases in the Pottery Barn and Pottery Barn Kids inventory through the balance of the back half of the year.

We’ll now hear from Laura Champine with Morgan Keegan. Laura Champine - Morgan Keegan & Company: Good morning. Howard, this is a bigger picture question; I know that for years, we talked about how even if the industry declined, Williams-Sonoma was well-positioned because it’s a huge fragmented market and you could take share. But it looks like with Pottery Barn and Pottery Barn kids comping down double-digits that you are actually losing share. Is that a fair assessment and what do you think is driving that share loss? W. Howard Lester: Well, I don’t know that I can agree at all with your assumption. I’d say losing share -- I mean, in the general sense but if you look at our direct competitors, the ones that we get data on that are public, to the best of my knowledge our comps are in Pottery Barn and Kids are -- Pottery Barn is probably the only that is really comparable to something. The numbers that I have kind of gathered, we are doing better than they are. But in an overall sense because the industry is not down as much as our comps have been down, I think our reaction to that is the malls that -- the mall traffic is clearly down for us in the home furnishings area. You know, even Williams-Sonoma, for instance, which has proved over the years as you know, pretty much protected from these kind of downturns that we are going through now, I remember in 1990, Sonoma was flat to slightly down. Down to slightly down in 1990. That’s what we are seeing now with Sonoma. I’d say it’s reacting pretty much in the same way it did at the time, proving it’s such a great business because it’s affected but not -- but it’s still flatter or just barely down and we think that we’ve got an excellent chance that it will improve as we go on. We know there’s some execution things we can do better. But I actually -- you know, when we looked around us, we see -- we’ve seen, like in the kids area, we saw Bombay Kids go away, we saw Baby Style file for chapter 11. You know, we’ve seen Judy George’s company in the East Coast, Domain, file for bankruptcy a month or two ago. We’ve seen other larger companies that we now are having serious financial difficulties, and I’ve heard comps for some of these companies in the 20s, negative. So I don’t think that’s a good assumption that we are losing share here. I think we are still with Pottery Barn in the process of improving all those things that we talked about or have been talking about for the last couple of years in our revitalization strategy, and I think that we are making real progress. We are probably not connected with the customer as much as we’d like so far because of the economic environment. But others you know too, just to point out, where their comps might be better, they are highly promotional. I mean, we look in their stores and everything is on sale. We talked today about our merchandise margins have not had that experience. You know, you asked the questions why are they worse, really, and we’ve said all along that our strategy was to protect our brands. So we are not promotional like everyone else. Our sell-throughs this year are very similar to historical levels. So the other last thing on that too I think on a competitive basis is that we have reduced our catalog circulation substantially and of course, we knew that that would reflect, you know, would affect revenues to some extent, not just in the direct side but also in the store side because a very strong part of our model is those customers that are driven to the store through the receipt of the catalog, so obviously if we are mailing much less, the number of catalogs less that we’ve described to you, that’s going to have some impact on sales. So I would say overall, I believe that we are in an excellent position and not concerned about the fact that somehow we are losing share because others are outperforming us. I think quite the contrary.

We have no further time for questions. At this time, I will turn it back over to our speakers for any additional or closing remarks. W. Howard Lester: Well, we want to thank you for joining us today for our first quarter earnings call. We appreciate your time and support and patience and we look forward to talking to you next quarter. Everybody have a great day.

That does conclude our conference for today. Thank you for your participation.