Steve Nelson – Director, Investor Relations Howard Lester – Chairman and CEO Sharon McCollam – EVP, COO and CFO Laura Alber – President Pat Connolly – EVP and Chief Marketing Officer

Budd Bugatch – Raymond James Matt Nemer – Wells Fargo Alan Rifkin – Bank of America Matthew Fassler – Goldman Sachs Joe Feldman – Telsey Advisory Group Chris Horvers – JPMorgan Kate McShane – Citi Investment Research Colin McGranahan – Bernstein Scot Ciccarelli – RBC Capital Markets Michael Lasser – Barclays Capital Laura Champine – Cowen & Company Neely Tamminga – Piper Jaffray Christian Buss – Thomas Weisel Mike Baker – Deutsche Bank

Welcome to the Williams-Sonoma Incorporated fourth quarter and fiscal year 2009 earnings and fiscal year 2010 guidance conference call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session after the presentation. This conference is being recorded. I would now like to turn the call over to Steve Nelson, Director of Investor Relations, to discuss non-GAAP measures and forward-looking statements.

Good morning. This morning's conference call should be considered in conjunction with the press releases that we issued earlier today. Our press releases and this call contain non-GAAP financial measures that exclude the impact of unusual business events. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons, a reconciliation of these non-GAAP financial measures and the most directly comparable GAAP financial measures, and an explanation of why these non-GAAP financial measures are useful and are discussed in Exhibit 1 of the earnings press release. 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, growth plans, and prospects of the company in 2010 and beyond, and are subject to certain risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases and SEC filings 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.

Good morning and thank you for joining us. With me today is Laura Alber, our President and future CEO; Sharon McCollam, our Chief Operating and Chief Financial Officer; and Pat Connolly, our Chief Marketing Officer. I’d like to begin today with an overview of our fourth quarter and fiscal year 2009 results and our 2010 outlook. Then I'll turn the call over to Sharon and Laura for further details. While the industry growth in the home furnishings category continued to decline in the fourth quarter, we saw positive momentum in virtually every aspect of our business, including sales, margin and supply chain efficiency. Our cost containment and inventory management initiatives delivered benefits that were well beyond our expectations, and cash flow reached record levels. On revenue growth of 8%, we delivered non-GAAP diluted earnings per share of $0.86 versus $0.31 last year and continued to strengthen the balance sheet by reducing our inventories to their lowest level in five years. We ended the quarter with over $0.5 billion in cash. During the quarter, comparable store sales increased 7.6% and direct-to-customer sales increased 8.4%. On both the one and two-year basis, year-over-year growth trends once again sequentially improved, which validates for us the effectiveness of our merchandising and marketing strategies that were deployed during the year. Put this in perspective, two-year comparable store sales were negative 30% in Q1 versus negative 15% in Q4. In our core brands, sales trends improved in every concept, and we saw significant growth in new customer acquisition. In total, net revenues increased 7%. Williams-Sonoma increased 6%, Pottery Barn Kids increased 9%, and Pottery Barn increased 10%. I’m going to let Laura talk more about Pottery Barn and Pottery Barn Kids brands later in this morning’s call. In the Williams-Sonoma brand, we continued to see the same economic resilience we have seen all year. During the quarter, comparable store sales increased 6% and selling margins rebounded towards the historical levels. Strong merchandising, high inventories, and a focus on exclusivity drove these better than expected results. As we enter 2010, we will execute against the following initiatives that have been providing momentum in the business over the past 12 months, including partnering with key vendors to introduce new, innovative and exclusive products, enhancing the brand’s value proposition through strategic price points and targeted promotions, and expanding this brand’s ecommerce marketing initiatives to gain market share in its fastest growing and most profitable channel. In our emerging brands, which include West Elm, PBteen, Williams-Sonoma Home, net revenues increased 9%. In Williams-Sonoma Home, after another difficult quarter in Q4 and an extensive review of our strategic alternatives, we concluded that in the reset economy, the future potential of this brand is limited. As such, we are working on a plan to restructure the unprofitable segments of the business, including the operations of our 11 retail stores. As part of this restructuring, it is our intent to market those merchandising categories that support our bridal [ph] registry, expanded flagship, and designer assortments through the Williams-Sonoma Kitchen brand. These categories will be available both online and in select Williams-Sonoma stores. I’ll let Laura talk later about the performance of West Elm and PBteen. I’d like now to discuss our full year performance. Throughout 2009, we saw improving sales trends and steadily increasing selling margins. As such, despite a soft top line in the first half, net revenues for the full year declined only 8%, while diluted earnings per share on a non-GAAP basis increased from $0.35 last year to $0.95 this year. To generate these results, we delivered the highest operating contribution rate in the history of our direct-to-consumer segment. Reducing our non-GAAP SG&A rate to an all-time low strategically reduced our inventories while gaining market share and generated more cash in one year than ever before. As I reflect on these achievements, it’s impossible not be extremely proud of what has been accomplished. In supply chain, we saw significantly greater than expected benefits from the distribution, transportation, and quality returns initiatives that we implemented throughout the year. These initiatives included implementing distribution accuracy programs to significantly reduce inventory shrinkage and improve customer service, regionalizing a large key of inventory to consolidate furniture shipments, lower shipping cost, and enhance the customer experience. We have been in-sourcing our Ohio delivery hub to bring company-managed volume to over 40% and reduce damages and replacements, and aggressively managing inventory flow to reduce distribution square footage by 16%. Another significant supply chain initiative was in the area of sourcing where we completed the transition of our Asian furniture network. This initiative has allowed us to establish in-country expertise; improve vendor performance; and reduce furniture returns, replacements and damages. Many of the products that were currently driving the significant turnaround in the Pottery Barn and Pottery Barn Kids brands were sourced under this new initiative. In information technology, we completed the rollout of our new ecommerce platform at the end of the third quarter. This platform enables our merchant to make rapid changes on the sites without IT intervention, optimizes natural search returns and provides customers with faster download times and easier navigation. We also implemented new functionality relating to customer insights, which is allowing us to generate more relevant emails and improve catalog productivity. While much opportunity lies ahead of us in both of these areas, these initiatives are driving increased traffic and incremental sales to our brands. In real estate, our occupancy cost reduction initiatives were a key focus throughout the year. And we made significant progress. In 2009, we closed 1.2 million square feet of distribution space, 80,000 square feet of corporate office space, and 23 retail stores. Another accomplishment of the year is establishing a multi-year franchise agreement with the M.H. Alshaya Company to branch of our portfolio of brands in the Middle East. We opened our first Pottery Barn and Pottery Barn Kids stores in Dubai last week to a strong consumer response and will open two additional stores in Kuwait in June. We believe, with this business model, there is significant opportunity to expand the reach of our brands outside of North America. As we look forward to 2010, we will continue to capitalize on the still to be delivered benefits of our 2009 initiatives and focus on the five key initiatives that are driving our momentum today, including implementing innovative growth strategies to capture market share, delivering superior customer service, executing our catalog and Internet marketing initiatives, driving supply chain efficiencies, and maximizing profitability and cash flow. To capture market share, we will continue to introduce in market new products with an emphasis on innovation, exclusivity and value. We will also increase our investment in ecommerce. We believe that one of our most significant competitive advantages in this reset economy is our ability to serve customers in the channel of their choice. And the world is increasingly becoming that channel for both product research and purchase. As such, we believe that as time passes and the economy improves, there is a substantial opportunity for our brands to capture share from those retailers who do not have significant multi-channel capabilities and have closed stores, become less relevant, or failed completely in these difficult times. In the area of customer service, our focus will be on expanding the client telling [ph] services program that we launched last year in Pottery Barn stores. In 2010, we will complete the rollout of this program in West Elm. In 2009, this program facilitated approximately 20% of our retail furniture sales in Pottery Barn and Pottery Barn Kids stores. We believe customer service is a differentiator, especially in this environment. And this program is already changing our customers’ expectations. To execute our catalog and Internet marketing initiatives, we will continue to refine our catalog circulation by increasing the use of versioning in special mailers while continuing to shift catalog dollars into e-marketing. E-commerce is our fastest growing and most profitable channel, and we will continue to identify new opportunities to build brand awareness and customer engagement to search email modeling, affiliate programs, and enhanced functionality. To drive further supply chain efficiencies, we will continue to capitalize on the benefits from the initiatives we rolled out in 2009 as well as continuing to expand the in-sourcing of our third-party furniture delivery hubs, re-engineering inbound packaging to reduce the cubic volume of shipments through the supply chain to reduce packaging, transportation, and distribution warehousing drop [ph], and implementing the first phase of our East Coast distribution center consolidation that after moving costs recovered, will result in lower rent, utility and labor costs. Maximize profitability and cash flow will continue to drive increased sales and improved selling margins, rationalize our real estate portfolio, and reduce the operating losses in Williams-Sonoma Home. We will also continue to tightly manage the inventory and capital spending. In 2010, we expect retail lease square footage to decrease approximately 1% to 2%. As such, we are expecting 2010 net revenues to increase in the range of 3% to 6% and diluted earnings per share on a non-GAAP basis to increase 22% to 33% to a range of $1.16 to $1.26. Also, as announced this morning, we will be increasing our quarterly cash dividend by 8% to $0.13 per share for a total annual payout of $56 million. I’ll now turn the call over to Sharon for additional details on our 2009 performance and 2010 guidance.

Thank you, Howard. Good morning. Our fourth quarter results did substantially exceed our expectations, and we could not be more pleased or encouraged about what that says about our opportunity for 2010. During the quarter, the initiatives we set forth all year delivered greater benefits than we would have expected, and the consumer response to our new merchandising and marketing strategies is one of the strongest we have seen in many years. The P&L highlights for the fourth quarter were as follows. Net revenues increased 8% to $1.90 billion, with similar growth in both the retail and direct-to-customer channels. Internet revenues increased 15%. Non-GAAP gross margin increased 760 basis points to 41.5%, primarily driven by fewer markdowns, 130 basis points of occupancy leverage and benefits from our supply chain initiatives. Non-GAAP SG&A decreased 90 basis points to 27.9%, primarily driven by catalog circulation optimization strategy, partially offset by higher incentive compensation. Catalog circulated during the quarter decreased 12% and pages decreased 17%. And fourth quarter non-GAAP diluted earnings per share increased 177% to $0.86. This was $0.12 above the high end of guidance, driven by a 1% stronger than expected increase in net revenues and a 100 basis point greater than expected improvement in gross margin. Versus guidance, the improvement in gross margin was driven by fewer markdowns and earlier than expected financial benefits from our supply chain initiatives. For further details on the fourth quarter, please see this morning’s press release. Switching now to our full year financial highlights, fiscal year 2009 net revenues decreased 8% to $3.1 billion. Retail revenues decreased 4%, including a comparable store sales decline of 5.1%. Direct-to-customer revenues declined 12%, including Internet revenues, which were down only 9%. Non-GAAP gross margin increased 180 basis points to 35.7%, with similar drivers as the fourth quarter with the exception of occupancy costs. On a full year basis, non-GAAP occupancy costs of $515 million deleveraged by 80 basis points. Non-GAAP SG&A decreased 180 basis points to an all-time low of 30.5%, with similar drivers as the fourth quarter. Catalogs circulated during the year decreased 16%, and catalog pages decreased 21%. And finally, non-GAAP diluted earnings per share for the year increased $0.60 to $0.95. This increase was principally driven by the SG&A re-engineering we did through our infrastructure cost reduction and catalog circulation optimization strategies. These both represent sustainable structural changes in our expense base that we expect to benefit from for years to come. From a balance sheet perspective, our 2009 year-over-year highlights are as follows. Cash and cash equivalents increased $365 million to $514 million. Merchandise inventories decreased $108 million or 19% to $466 million. Prepaid expenses decreased 51% to $22 million due to a reduction in prepaid income taxes. Income taxes payable, on the other hand, increased $48 million, both (inaudible) by an increase in taxable income in 2009. Accounts payable increased 16% to $188 million due to the timing of inventory replenishments. And accrued salaries, benefits and other liabilities increased 42% to $108 million due to higher incentive compensation accruals. I would now like to discuss our non-GAAP pretax operating margin as a percentage of net revenues since many of you have asked to better understand the differences between our peak margin rate of 10.2% in 2005 and the 5.2% we delivered today in 2009. At the highest level, the 500 basis point reduction is driven by a 500 point decline in gross margin and a 10 basis point decline in interest income, partially offset by a 10 basis point improvement in SG&A. Within the 500 basis point margin decline, approximately 415 basis points is in occupancy expense, of which 210 basis points is driven by increased costs and 205 basis points from sales deleverage. Cost increases were primarily driven by rent escalations and new stores, which is why rationalizing our real estate portfolio is so important to recovering our peak operating margins. The balance of the gross margin decline is 85 basis points, which is driven by a 225 basis point decline in our selling margin, offset by 140 basis point improvement in supply chain efficiencies. What is encouraging about the selling margin decline is that there is no fundamental reason that it cannot be recovered over time. And the supply chain efficiencies are structural improvements in the business that would now be additive to the operating margin we delivered in 2005. The SG&A improvement of 10 basis points is the net of 125 basis point reduction in advertising costs, partially offset by an 80 basis point accounting impact from the 2006 implementation of FAS 123R and a 35 basis point impact from sales deleverage. Again, the advertising rate reduction is a structural change in our business model that would also be additive to the operating margin in 2005. So it is for these reasons that we believe that our 2005 peak operating margin of 10.2%, which on a FAS 123R adjusted basis is actually 9.4%, would be closer to 11% to 12% today given the structural improvements we have made in supply chain and advertising since that time. As such, when we look out over the next three years, we believe that even on low-single digit revenue growth, we can still get back to high-single digit operating margins. And we are already making progress toward this recovery in this 2010 guidance. In 2010, a net revenue growth of 3% to 6%, we are projecting an improvement in diluted earnings per share in the range of 22% to 33% and an improvement in our non-GAAP pretax operating margin of 150 to 190 basis points to a range of 6.7% to 7.1%. To drive these results, we are expecting DTC sales to increase in the range of 4% to 8% and comparable store sales to increase in the range of 3% to 6%. Catalog circulation, excluding circulation reductions in Williams-Sonoma Home, is expected to be flat. We are also expecting non-GAAP gross margin to increase 150 to 170 basis points, driven by fewer markdowns, 50 to 100 basis points of leverage and occupancy costs, and ongoing benefits from supply chain efficiencies. In dollars, occupancy costs are conservatively estimated to decline approximately 1%. Non-GAAP SG&A is expected to be flat to a decrease of 20 basis points in 2010, primarily driven by sales leverage. Fiscal year 2010 non-GAAP diluted earnings per share is expected to increase $0.21 to $0.31 to a range of $1.16 to $1.26, primarily driven by a high earnings flow-through on incremental sales, the gross margin improvement just described, and a reduction in operating losses in Williams-Sonoma Home. In fiscal year 2009, operating losses in Williams-Sonoma Home were approximately $0.08 per diluted share on a non-GAAP basis. In fiscal year 2010, we expect to reduce that loss to a range of $0.03 to $0.04. At the end of 2009, remaining net assets in the Williams-Sonoma Home brand, including inventory were approximately $16 million. Free cash flow in 2010, defined as net cash flow provided by operating activities less net cash used in investing activities, is expected to be in the range of $180 million to $200 million. Within this number, if capital spending of $70 million to $75 million, consisting of approximately 50% for information technology and ecommerce, 30% for new and remodeled stores, and 20% for other infrastructure projects. Also within this number is an inventory increase in the range of 1% to 10% to $470 million to $515 million. As we sit here today, we are encouraged by the momentum we are seeing in our brands and are excited about the opportunities that lie ahead for the balance of the year. While we remain cautious in our outlook on the macro environment, the strengths of our brands and our proven track record of our operating -- of our business in these difficult economic times provide us with a strong confidence in our ability to deliver the guidance that we have provided today. I would now like to turn the call over to Laura to discuss the Pottery Barn and West Elm brands.

Thank you, Sharon. Good morning. I’ll start with the Pottery Barn brand. Net revenues in the fourth quarter increased a better than expected 10%, with similar growth in both the retail and direct-to-customer channels. Comparable store sales increased 11.5%. An authoritative cohesive assortment and compelling price points combined with a highly effective inventory management strategy drove these significantly improved results. From a merchandising perspective, all key categories, strictly furniture and textiles, celebrate positive growth. These results are encouraging because they demonstrate the breadth of newness and value in the merchandise assortment and the effectiveness of our marketing and promotional strategies across categories. From an operational perspective, gross margin dramatically rebounded as we strategically balanced inventory levels with full price selling and margin objective. Also driving the margin improvement was the cumulative benefit of the supply chain initiative that Howard discussed earlier in addition to the savings being generated and our company managed upholstered furniture operations. We also greatly appreciate the support we have received from our vendor partners in reducing costs, improving quality, and driving innovative product development. In direct marketing, the catalog circulation optimization strategy continued to contribute to our improved results on both the top and bottom lines, as we shifted our investment in marginal catalog circulation to e-marketing. Our new e-commerce platform also delivered significant benefits during the quarter, as we gained flexibility in site merchandising, optimized natural and paid search, and further engaged the brand in the world of social media. In 2010, we recognize that the home furnishing sector remains vulnerable to volatility, but also see great opportunities to take market share by capitalizing on the initiatives that have taken our performance to this level. As such, we will flex our inventories with sales trends, drive direct-to-customer innovation with breakthrough merchandising and customer contact strategies, further escalate our service levels with our best customers through enhancements in our in-store client telling initiatives and provide great product at a great value, as we identify the right space in a changing competitive landscape. Now I would like to talk about Pottery Barn Kids. The improvement in performance in both channels of Pottery Barn Kids in the fourth quarter was transformational. During the quarter, net revenues increased 9% and comparable store sales increased 12.3%. To put this in perspective on a two-year basis, comparable store sales in Q1 and Q2 were down 36%. In Q4, they improved to down 13%. This change in trend in both channels was driven by a very strong consumer response to our cross category entry price point product introductions and highly effective marketing around value and inspiring affordable decorating. What is most encouraging about these results is that only about half of the newest format has been launched, leaving substantial upside for 2010. From a merchandising standpoint, all key categories delivered positive growth during the quarter, led by textiles and decorative accessories. We are also extremely pleased with the turnaround of our baby registry in nursery categories. In all categories, our success was driven by our ability to deliver high quality products at a great value to this highly discerning customer. This would not have been possible without the partnership of our agents, vendors and strong sourcing organization, and we are continuing to make great progress, as we gain [ph] this initiative into 2010. From an operational perspective during the quarter, similar to Pottery Barn, we saw substantial improvement in gross margin. This improvement was driven by the superior execution of an aggressive inventory management and promotion strategy in addition to the margin improvement associated with our supply chain initiative. We also saw a significant improvement in our store operating expense structure through the benefits of labor scheduling and strategic store closings. As we look forward to 2010, we will continue to build on our 2009 successes, most of which we did not see benefit from until late in the year. The foundation of our growth strategy is offering great product at a great value, and we are continuing to expand our assortments. Another priority in 2010 is to use our direct-to-marketing capabilities to attract new customers to the brand and enhanced customer engagement. This initiative is well underway as we leverage the IT investments we made in late 2009 to greatly enhance the relevancy of our customer interactions and make social community an intrinsic part of the online experience. And finally, within every channel, we will continue to invest in the customer experience to client telling, in-store event, communication relevancy, and enhanced website tools. I would now like to talk about the PBteen brand. While all of our brands delivered strong performances in the fourth quarter, PBteen remained the best performing brand in the company, with net revenue growth of a better than expected 18%. This increase was driven by a key fourth quarter initiative to introduce value into the brand through strategic promotions and new product introductions. This initiative resulted in increased sales, improved margins, and significant growth in new customers to the brand. From a merchandising perspective, we saw double-digit growth across all major product categories and new entry price point products emerged as both top sellers and new customer acquisition vehicles. As we enter 2010, we will continue to drive profitable growth by expanding the breadth of our value strategy, introducing new assortments into underserved merchandising categories, and enhancing customer engagement by making social community a natural and additive part of the brand experience. Finally, I would like to talk about West Elm. During the fourth quarter, we saw substantial improvement in the performance of West Elm on both the top and bottom lines, and we are encouraged by the consumer response we are seeing to even small changes in the brand, like additional merchandising and promotional events. We also saw considerable improvement in our retail furniture business as we began the rollout of our client telling program to all stores. As we look forward to 2010, there are several strategic and tactical initiatives that we are very excited about and believe can meaningfully accelerate the growth trajectory and profitability of the brand. These initiatives include expanding our assortment in categories outside of furniture to rebalance the product mix and offer broader choices; broadening the aesthetic across the assortment to appeal to a wider range of customers; enhancing customer engagement through warm and inviting multi-channel lifestyle marketing; and substantially increasing the penetration of opening price points. We will also continue to take advantage of the opportunities that are rising in our retail portfolio to rationalize our footprint. While our long-term strategy for this brand is to expand our retail store base, we have stores where co-tenancy, initial site selection, and customer logistics are a challenge. As such, in 2009, we closed four stores and expect to close an additional three in 2010. We believe all of these initiatives will improve our competitive positioning and allow us to profitably grow this brand going forward. I would now like to open the call for questions. Thank you.

Thank you. (Operator instructions) Our first question will come from Budd Bugatch with Raymond James. Budd Bugatch – Raymond James: Good morning, and congratulations on the quarter and the good luck on this year.

Thank you. Budd Bugatch – Raymond James: I guess, Sharon, my question goes to the gross margin and to that very informative conversation you had with us regarding the operating margin and where you can get to. If I look at the guidance for the year of 37.2% to 37.4%, that does not get you back to where you were a couple of years ago, which were significantly higher. Can you talk a little bit about that and maybe give us a roadmap of how long do you think it will take you to get back there and whether that’s still possible?

Budd, I’d be happy to. I would say that as we look at the guidance, we believe that this is going to come back gradually and incrementally. And I’m going to let Laura speak to the actual execution of improving the selling margins within the brands and the promotional strategies I have in place in order to do that. But just as you think about it, within this guidance this year, we are continuing to put out there in the guidance our trajectory of gradual incremental improvement. As we said, you are getting in that number about 50 to 100 basis points of occupancy leverage. The balance, of course, is coming between the selling margin and supply chain initiative. So as we look forward, I think there is tremendous opportunity there. It could come faster. It’s very front half loaded. We were more cautious. I think if you look at the guidance in total, you will see that we have put out some stronger guidance in the first half. And then in the back half, we are going to continue to be cautious, as we watch the economy and see where it goes. So obviously the opportunities in this fiscal year would be in the back half. But we feel that the guidance we have out there today, we are extremely confident in it. We have the plans in place and we see it happening. So that’s the great news. But Laura, do you want to speak to just the promotional strategies and how you see the margin progressing within the brands, please?

Sure. One of the key components of the margin improvement is our inventory management strategy. And I’d say we’ve really graduated into world-class inventory management. We are conservative in terms of future receipts and have worked through a process to chase inventory as we see trends happen. And the teams, everyday, are looking at adding receipts where we need them and subtracting them where we don’t. We are also really working to shift our mix away from furniture from where we have been historically back to -- or I should say, where we’ve been the last couple of years back to the historic dec-ac [ph] and textile percent of total, which is an important shift not just for margin but because new customers are often much more comfortable buying lower ticket and they come in more frequently to buy lower ticket than they do to buy the considered furniture pieces. And with that also comes higher margin because those categories tend to be higher margin from both the initial to the final selling and returns, all the way through the P&L. As far as costs go, we are continuing to look for ways to reduce costs in each and every one of our products. This doesn’t mean taking out quality. We actually are very invested in improving our quality and have made tremendous strides with our new agent overseas outlook and also the teams on the ground there to improve, in particular, the furniture quality. However, there were areas that we were over-building. So on beds, for example, we will look at places where it doesn’t matter whether we are building two stick [ph] of a wood or something that the customer didn’t see. And we are taking that out and investing it in where they do see and also driving the cost down. We also see tremendous opportunity to reduce our packaging costs. And we are undertaking a big initiative across the company to look at packaging where we have overbuilt it and where we can move it more efficiently through our supply chain. And then last but not least, another key component of margin is our direct-to-retail shift. And our direct business, because we have inventory in one place, allows us to keep our margins higher, because we don’t have to push at all the stores and therefore take markdowns store-by-store. And our focus on the Internet combined with opening fewer stores in the future is going to inherently drive the margin up.

And Budd, just to finish Laura’s part on the furniture mix issue, at the end of Q4, the trailing 12 months furniture percent of our total sales is 30%. That had gone up from 29%.

And we will move to our next question from Matt Nemer with Wells Fargo. Matt Nemer – Wells Fargo: Good morning. I was just wondering if you could comment on what’s implied in your guidance for Internet versus catalog growth this year out of the total direct change. And then could you -- just to follow up on that, could you also comment on the incremental profitability of a direct customer versus a retail customer, and how are you allocating costs? Thank you.

Matt, I’m going to let Pat discuss that. Pat, could you please take that?

Sure, I will. Thank you, Sharon. Matt, we see a lot of opportunity this coming year in our e-commerce business. We added about 1.8 million customers in total during the fourth quarter, about a 22% increase. At the same time, we had a 33% increase in new customers during the period derived from e-commerce. And as you know, new and active customers are the primary driver of future sales growth. As mentioned earlier, we’re very satisfied with the results we are seeing in both our SCO and SCM initiatives. But in this past year, we’ve really grown a number of digital marketing efforts, including retargeting, social retargeting, search remarketing, and display advertising. And what exciting about those is that they are all fairly new. They are not mature. So we see the opportunity to continue to drive traffic at pretty good rates compared to the prior year. The incremental profitability of a direct customer is very substantial. And it is why we are so excited about the e-commerce business overall.

And Matt, in the e-commerce growth -- in the DTC growth next year, e-commerce is 100% of the growth. We expect that to be the channel where we pick up incremental sales.

And our next question will come from Alan Rifkin with Bank of America. Alan Rifkin – Bank of America: Thank you. Sharon, it appears that the January comp was pretty close to 10% despite anniversarying the $20 million in revenues last year from the inventory clearance event. What did you see specifically in January and particularly in the last couple of weeks of the month resulted in the significant outperformance of comps?

The -- I’ll let Laura speak to the Pottery Barn brands. And I think we can just put a general statement out there. The consumer response to the spring assortment that we launched across all brands were substantially stronger than we expected. And I’ll let Laura speak to the specifics.

I think, Sharon, you answered it. We’re seeing great response across every category actually, and we were concerned about anniversarying those markdowns. We put in place some pretty strong marketing and took some promotions that drove the consumer response, and we are very pleased with the beginning of this year and see each one of these strategies incrementally come in and actually outperform what we expected.

Our next question comes from Matthew Fassler with Goldman Sachs. Matthew Fassler – Goldman Sachs: Thanks a lot, and good morning. I have a question about merchandise margin in the fourth quarter. You talked about where the annual margin stood versus historical levels. How did your fourth quarter merchandise margin compare to -- compared with prior fourth quarter peaks?

You still have a lot of opportunity, Matt, in the fourth quarter. When you go back to historical levels, you are still looking at to the peak, somewhere in the neighborhood of 200 basis points or more. Matthew Fassler – Goldman Sachs: And I know that this is covered --

This is for the peak. Your question is to historical peaks, how far do you have to go. ’05 would be that year, and I think we mentioned in my reconciliation of the ’05/’09 operating margins, there is 225 basis points of selling margin.

Our next question comes from Joe Feldman with Telsey Advisory Group. Joe Feldman – Telsey Advisory Group: Yes. Hi, guys, good morning. I had a question about cash, and you guys are doing an amazing job generating a lot of cash, getting efficiencies. And at $514 million on the balance sheet now, and I know there are $180 million to $200 million next year, I guess, just any new thoughts on capital allocation, especially given that store growth -- well, there is actually going to be some contraction this year in terms of storage.

Joe, we will plan to -- we obviously increased the dividend 8% this morning. That was our first step toward returning some of that cash to the investors. And I think we had said consistently that we think in this environment that it is critical versus our historical performance or our historical behavior that we retain more cash on the balance sheet going forward. Now that is to say that we will be assessing this as we progress throughout the year. I think Laura described it well in her prepared remarks when we said, “We believe that there was a vulnerability to volatility in this environment. As we get through Q1 and Q2 where you had the lowest consumer confidence numbers that you had all year last year, and then they started improving. And then you got into the back half. As we started seeing these trends be sustainable, then we will start talking about -- more about uses of cash in a more robust way. Right now, we are thrilled to have ended the year where we are. We have no financial dependence on the financial institutions, which is a great place to be. We got our revolver in place. Anything goes wrong with the financial markets, we are set. And we’ll keep talking about it.

Our next question comes from Chris Horvers with JPMorgan. Chris Horvers – JPMorgan: Thanks and good morning. I want to follow up on the selling margin question. Sharon, is that 225 basis points largely driven by your expansion of the credit card business. Can you talk about how much of that pressured margins in 2009 and how you’re thinking about 2010?

I would say the credit business definitely had an impact. But as a percentage of our total sales, that is not a huge number. And it would really be across all actions that we go into selling margin, we had to be more promotional, we had to take additional sitting promotions, we had the credit card in place, we have the 12-month same as cash. And so each and every one of them contributes to that. There is not any one, in particular, that I would say is more than 50% of the total. But it’s going to come from actions across the merchandising promotional strategies et cetera within the brands. Inventory management is huge. That is into the promotional strategies and markdowns that they have to take in order to clear. There has also been the impact of the introduction of the emerging brands. Williams-Sonoma Home has put particular pressure on that margin, which we -- as we said, we are working on that. So there are a lot of small things that contribute to that, which we love, because you can work on those and you can make small incremental progress across the board.

Our next question comes from Kate McShane with Citi Investment Research. Kate McShane – Citi Investment Research: Hi, good morning. Thank you. I was wondering if you could talk a little bit about your outlet business and what you are seeing there. Is it a lack of inventory that may be hurting that business and why comps haven’t recovered yet?

Laura, do you want to talk about the outlet business. I think, Kate, you’re probably referring to the negative 8 comp in Q4?

Yes, sure. We’ve been working very hard to improve our profitability in our outlet business. It’s really a strategy to recover costs for us and profit versus really a strategy of growth. And when we had inventories last year and the year prior, we pushed a lot of goods to the outlet. Frankly didn’t tell them that a process. And so the merchandising teams in the brands have actually been building merchandising strategies. So the experience for the consumer in the outlet is a strong one. And we have not had to push the low profit products into the stores, which is why your single lower -- the lower sales, but also the improving profitability.

Our next question comes from Colin McGranahan with Bernstein. Colin McGranahan – Bernstein: Good morning. I wanted to ask about supply chain, which Sharon, I think you said was 140 basis point positive delta, and obviously you’ve made a lot of great progress on in-sourcing and DC optimization et cetera. Can you talk about over fiscal ’10 and then maybe going forward how you think about better fuel costs versus last year, container shipping costs that are out, but obviously inventory now is going to be growing. So you’re just going to be running a few more trucks. How do you think about that 140 basis point delta and what’s your outlook for supply chain cost in 2010?

Well, in 2009, many of our supply chain initiatives were actually not fully rolled out until the back half of the year. So in 2010, we are going to still be receiving a lot of benefit from the initiatives that we had last year, which Howard went through in his prepared remarks, the distribution accuracy programs, the regionalizing of our large scale inventory, the in-sourcing of our furniture delivery hubs. We are also increasing the number of furniture delivery hubs that we will be in-sourcing next year. There is a substantial returns, replacements and damages reduction in that as well as oftentimes some delivery cost reductions that go along with it. The packaging initiative with Laura refer to we as a new initiative that we believe is going to gradually and incrementally improve cost of merchandise, which of course will be a nice offset to the fact that we do collectively believe that there will be commodity cost pressure this year. And in addition to that, we are also going to be implementing the first of the next phase of our consolidation strategy with our East Coast distribution center. We’re going to be moving in from two buildings into one building. And once we get over the initial moving cost, the efficiencies associated with operating in one large building versus multiple buildings is substantial. Not only did we get an excellent deal by moving, because of the commercial real estate market, we also have a significant number of labor opportunities as a result of this. And then Laura already spoke to it. I’m going to turn this over to Laura to talk about some of the things that they are doing and sourcing right now, particularly in Asia, to help offset the expectation that we have, the commodity costs are going to go up next year. Laura, would you speak to that, please?

Sure. Remember that last year we brought on a new agent outlook to help us with our quality in our furniture categories. And this is then a great strategy for us and that they have really helped us find the best vendor for each and every product and improved the costs in manufacturing. We continue to have opportunity in that area, as it was only really a full year that we have been underway with that strategy. So we've just gotten started and are already seeing great benefits there. In addition, our agent Connor [ph], who has been focusing on our dec-ac and textiles categories, has been doing a superior job in helping us in those categories to both find new products, but also as it relates to costs to find opportunities to reduce costs. And so I'm very excited about the future with our overseas cost control, even though we do know commodities are going up. Our vendors are so loyal to us and such great partners. They know that we can't raise retail prices, and so they are very serious about how do we together hold cost down so we can keep our retails down and keep the volume up in our business together. We also are sharing with you a lot of great opportunities we have in supply chain. It is really -- it is the mindset of continuous improvement. Dean Miller and his team, every single thing that they do, they look for what’s the opportunity and there are things that I'm sure they are working on this. They haven't even shared with us yet because they are so proactive in finding ways to take costs out of the system so that we can give our consumers the best price possible.

Our next question comes from Scot Ciccarelli with RBC Capital Markets. Scot Ciccarelli – RBC Capital Markets: Hi, guys, how are you?

Good. Scot Ciccarelli – RBC Capital Markets: Advertising spend and inventory levels are down sharply year-over-year and certainly from peak levels, and I know you guys are continuing to kind of shift your talent distribution. But is there a point where you think you need to ramp up advertising spend and/or inventory build to further drive sales growth?

Well, we’ve said consistently that the catalog circulation optimization strategy was just that. It was the manifestation of a tremendous amount of systems work that have been done and the ability for us to be able to optimize our catalog circulation based on data that we had added to our files. Where we are today is an advertising cost rate that we feel very good about, and I would like Pat to speak to that so he can explain a little more about what we are doing in catalog advertising and how we are shifting that over to paid search. Pat, would you like to speak to that?

Sure, Sharon. I think one of the things that we are doing is every month we have a catalog investment meeting, and for each brand, we go through and look at the current performance almost day-to-day and make the decisions about how we spend the last part of our advertising cost. What we have seen is that for existing customers the catalog is a very, very effective advertising vehicle. Last year we began to introduce some new specialized formats, particularly in Pottery Barn Kids that are very exciting because they are in incremental. They are not taking the place of catalogs we are already mailing. So even though we've optimized, the catalog teams are continuing to find ways to market through the catalog at very low cost. At the same time, we are seeing that the Internet, our digital marketing efforts are very effective in acquiring new customers. And combined with the social aspects of pushing our brands further into the web, it further increases the effectiveness of our digital marketing efforts. So across the board, we see the opportunity to save -- to basically keep our ad cost rate at the levels we have, but maximize the sales against those rates.

Our next question comes from Michael Lasser with Barclays Capital. Michael Lasser – Barclays Capital: Good morning. Thanks a lot for taking my question. You recently indicated that about half of the sales from the closed doors are flowing through to either other locations or the direct business. How does that trend out? Is it an immediate impact or does it happen over time? And then secondly, can you talk about the performance of various categories across all brands in opening price points versus higher end price point items?

Absolutely. Michael, on the trajectory of retaining sales on store closings, the analysis that was done that you are referring to was based on stores that have been closed for more than one year. So obviously the store closings that we just did, the 23 stores that we closed in 2009, of course we are going to be watching those. Well, we are not going to wait for those results. We feel very confident in the fact that as a multi-channel retailer, we are going to retain more sales in store closings in multi-store markets. Remember that those results are in highly dense multi-store markets. So where we are closing stores in those markets, we are able to not only shift those sales into other stores in the market, but also to be able to use our direct marketing capabilities to bring those customers into the brand through direct. So that is the opportunity that we have, that we believe other retailers are missing today. As far as the performance of our merchandising categories, I would like Laura to speak to that because it was the home furnishing trends where you have the greatest impact from the introduction of entry price points.

Sure. The focus last year was to introduce more entry price points, as we had plenty of high-level price points. We didn't need to introduce as many products there if at all in the brands. And so as a result, it is the combination of both the newness and the appealing nature of the opening price points that really drove this category, and it is the opening price points where we have the growth and it is where we are going to continue to focus this year.

Our next question comes from Laura Champine with Cowen & Company. Laura Champine – Cowen & Company: :

Laura, I will take that one first. I think some of it is certainly a change in the trend, but we have had a lot of success from these digital marketing initiatives that we’ve put forth. And as I said, we still think there is a lot more opportunity. We are increasing the percentage of our total advertising spend as a percentage of the total into e-commerce, and that is what is driving it. Very effective for acquiring new customers.

And then to your question on West Elm store closing, and then I want Laura to talk about the West Elm growth strategy from a retail point of view, the locations in West Elm that we closed in 2009 were not in multi-store markets. However, many of those leases were opportunities where we had a co-tenancy failure situation or a situation where the mall or the area we went into, we did not believe was going to support the West Elm brand because of the change in the economy. And to the extent that we could reposition the real estate in those markets in the future, we felt that to seize that opportunity was the right thing to do. The stores we are closing in 2010, we are not prepared to speak to. We have a lot of announcements that would have to be made associated with that, as you can understand. So we are not going to be speaking to those. Laura, do you want to talk about the growth strategy at retail for West Elm?

Sure. We are very excited about West Elm, as I said earlier, and are underway working on the models, the retail model and the direct model, to improve it not just from profit levels but sales volume because we know that we need much -- we need a lot more sales in each and every one of our stores. And so we are looking at broadening these (inaudible) as I said earlier, really remixing it, remerchandising it, and repricing it. We are not looking at opening any new stores until we see great success in the existing stores. And when we do, we will be back to you with a rollout strategy.

Our next question will come from Neely Tamminga with Piper Jaffray. Neely Tamminga – Piper Jaffray: Great. And fantabulous, guys -- fabulous here.

Thank you, Neely. Neely Tamminga – Piper Jaffray: So, hey, Laura, for you on the merchandising front, can you give us a little sneak peek around the corner with respect to where the opportunities may be particularly at Pottery Barn, and maybe just talk more hypothetically about, you know, is outdoor a three-week season or is it going to be a three-month season? Thanks.

Thank you. We have so many great opportunities this year. We are seeing the customer respond again to seasonal holidays, which is great. We love the seasonal holidays. We have tremendous marketing behind them through the balance of this year and see that as an opportunity. Outdoor, in many ways is a seasonal holiday. And I don't think people bought a lot of it last year. I think there is pent-up demand to buy outdoor furniture, and certainly there are fewer competitors, as we saw. Unfortunately, Smith and Hawken go out of business, it’s great for us. And we’ve really built our assortment knowing that we would have that opportunity. So you are going to see a beautifully assorted catalog; incredible, direct e-commerce marketing; and the in-store set I think is probably the best that we have seen yet. New price points are for new materials, new colors. So we should have a great outdoor season, so off to a good start here, and it is pretty early in the year. So I'm optimistic about outdoor. And then beyond that, we have really -- in every one of our brand, we are very focused on product launches through the back half of the year and beyond and how do we do them in a bigger way. We have new tools to use with e-commerce. We have partnerships that we have developed that we have never had before, and we are so excited for the launch of new products into the back half and beyond.

Our next question comes from Christian Buss with Thomas Weisel. Christian Buss – Thomas Weisel: Yes, hi, congrats on the nice quarter.

Thank you. Christian Buss – Thomas Weisel: I was wondering if you could talk a little bit about incremental incentive compensation expense in 2010 and how to think about that?

We do not expect to see an increase in compensation expense in 2010. We have inhered in the guidance there is no increase in compensation expense. Where we do have increases, however, in SG&A dollars is from a merit incentive that we did. We did a merit increase this year. As you know, for several years we had held our salary levels, and this year we felt we needed to do a merit increase for our associates. They have added so much value to the company, and competitively, it was very important. And it was important that we reward them for their contributions. So we did do a merit increase this year. It was a small, low-single digit increase, but that is unrelated to incentive compensation.

We will go now go to Mike Baker with Deutsche Bank. Mike Baker – Deutsche Bank: Thanks. So I just want to ask a quick question on the direct-to-customer business, I think it was -- if I look at the November, December versus the full year it, I think if my math is right, does speak to little bit of a slowdown in January, whereas the retail accelerated. So I was wondering if you could address that.

Pat, would you like to speak to the trends that you saw in e-commerce this year?

Sure. We saw in e-commerce, in particular, we had increasing trends throughout the year actually. In January, we had a mid-double digit increase -- mid-teen double-digit increase in e-commerce demand during the month of January.

And due to the time, that will be the last question for today. I would like to turn the call back over to Mr. Lester for any final and closing remarks.

Well, just thank you for joining us today. We appreciate your time and support, and we will talk to you next quarter. Have a great day.

And once again, this does conclude today's call. We thank you for your participation.