Is it worth buying WSM shares now?

Williams-Sonoma, Inc. WSM shares are up 41.4% year-over-year, far outpacing the Zacks Retail – Home Furnishings industry’s gain of 2.2% and the Zacks Retail-Wholesale sector’s gain of 13.1% and the S&P 500’s gain of 17.5%.

This multi-channel retailer of specialist high-quality homewares has also achieved great success compared to its peers, Normal (RH, down 16.9% YTD), Haverty Furniture Companies, Inc. (HVT, down 32.4%) and Ethan Allen Interiors Inc. (ETD, down 15.3%).

Williams-Sonoma is reaping the rewards of its strategic focus on diversifying its product portfolio and establishing a sustainable operating model with the competitive advantage of a digital channel strategy, but not exclusively digital. With a solid e-commerce platform and a thriving Business-to-Business (B2B) business, the company is poised for significant growth. Its brands boast a broader range of unique products, including numerous exclusives and collaborations. Taking advantage of this favorable environment, the company is expanding its global presence and achieving new heights of growth, despite ongoing challenges in consumer spending.

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What drives Williams-Sonoma?

E-commerce platform:The evolution of technology has fundamentally changed the dynamics of the retail industry, and the e-commerce boom has had a profound impact on business models. Williams-Sonoma has become one of the leading e-commerce retailers in the United States, consistently maintaining its status as one of the most profitable companies in the sector.

From a long-term perspective, Williams-Sonoma anticipates a continued industry shift from traditional retail to online platforms. E-commerce penetration continues to grow, supported by the company’s internal technology platform, rapid experimentation program, content-rich online experiences, and effective marketing strategies. Williams-Sonoma’s current e-commerce penetration is approximately 66%, and this is expected to gradually increase to 70% over time.

For 2024, the company’s capital allocation plans are focused on funding its operations and investing in long-term growth. Williams-Sonoma plans to allocate $225 million in capital expenditures to support its long-term growth, with 75% of that investment to strengthen its leadership in e-commerce and supply chain efficiency, underscoring the digital nature of the company’s business strategy.

Competitive advantage:Williams-Sonoma stands out in the highly competitive e-commerce and specialty retail market. The company’s strength lies in its brand authority, superior merchandise, robust e-commerce platforms and strategic marketing capabilities.

The company’s in-house design teams and talented suppliers bring high-quality, sustainable products to market, supported by a high-touch, omni-channel platform. The company leverages world-class customer analytics and first-party data to optimize digital marketing, increase sales, and acquire new customers. WSM’s investment in proprietary e-commerce technology and AI leadership solidifies its position as an industry leader.

Focus on B2B:Williams-Sonoma’s successful B2B strategy is positioning it to capture significant market share in the fragmented home furnishings industry. Operating in two formats, trade and contract, the B2B segment achieved extraordinary growth in the first quarter of fiscal 2024, increasing 10% year over year and driving record demand. Trade business grew 6%, while contract business, which makes up about a third of B2B, grew 18% year over year. This success is attributed to a diverse clientele that ranges from supplying sofas for UC San Diego dorms to corporate gifts for Pebble Beach Company. Additionally, the company has seen continued growth with large design clients such as Marriott, Dave & Buster’s and Jamestown Properties.

Focused on accelerating its contract business, Williams-Sonoma is experiencing positive momentum in this segment less influenced by residential and consumer trends. Significant wins in the hospitality, sports and entertainment verticals underscore its strategic importance and future growth potential. Leveraging its strong brands, design expertise, global sourcing capabilities and efficient delivery system, Williams-Sonoma is optimistic about its long-term prospects and recent improvements in the B2B market.

Strategic Efforts and Innovation: Williams-Sonoma is well-positioned for growth, fueled by the strength of its brands, strategic efforts and innovative merchandising initiatives. Despite some challenges, key brands under the WSM umbrella are showing resilience and potential for expansion. Meanwhile, while international sales have struggled with macro headwinds, there have been bright spots in India, Mexico and Canada.

Looking ahead, Williams-Sonoma is focused on improving West Elm’s merchandising and driving growth. The brand is emphasizing new product launches and collaborations, and maintaining a modern aesthetic in stock. Williams-Sonoma is also excited about exclusives like the new navy Jura coffee machine and influential collaborations, including a recent one with Netflix’s Bridgertons. Pottery Barn Kids/Teen will continue to focus on collaborations, baby products and dorm assortments, while Pottery Barn prepares for fall and holiday updates with new collaborations.

Williams-Sonoma’s strategic focus on brand strength, innovative merchandising and effective partnerships positions the company for sustainable growth in a competitive retail environment.

WSM Trading Below 50-day moving average

WSM stock is trading well below its 50-day moving average, largely due to retail sales weakness. Furniture sales are down 1.1% in May from April 2024 and 6.8% year-over-year. As of July 8, the stock closed at $285.18, below its 52-week high of $348.51 but well above its 52-week low of $120.74.

WSM Price Movement Compared to 50-Day Moving Average

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A sluggish housing market and slowing consumer spending continue to pose significant challenges. Rising inflation and higher interest rates are straining consumer resilience, causing households to prioritize essential purchases while cutting discretionary spending.

Meanwhile, Williams-Sonoma’s margins benefited from lower ocean freight costs, supply chain efficiencies and reduced promotional activity, but those benefits are now fading. The company’s 2024 guidance suggests flat operating margins from the second quarter through the fourth quarter of the current fiscal year. Some gross margin benefits could persist, possibly reinvested in advertising. However, higher incentive compensation expenses are expected.

Williams-Sonoma is a stronger operator post-pandemic, with a sustainable operating model poised for profitable growth. Differentiated products, exclusive offerings and brand partnerships drive revenue based on product value, not promotions.

Estimate revision trend

The Zacks Consensus Estimate for fiscal 2024 earnings per share has moved 5.3% and 4% higher for the next year over the past 60 days. The positive estimate revisions reflect optimism about the stock’s growth potential. The estimate suggests year-over-year growth of 8.3% and 4.1% for fiscal 2024 and 2025, respectively.

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Solid financial position

Williams-Sonoma ended the fiscal first quarter with $1.3 billion in cash and no debt. Williams-Sonoma has maintained a debt-free, strong financial position from the second quarter of fiscal 2023 through the end of the year. This allowed the company to invest $40 million in capital expenditures and return $107 million to shareholders through share repurchases and dividends in the first quarter of fiscal 2024.

In March, Williams-Sonoma announced a 26% increase in its quarterly dividend to $1.13 per share, marking the 15th consecutive year of increased dividend payments. Additionally, the company has $956 million under a $1 billion share repurchase authorization that will be used to opportunistically repurchase shares and provide returns to shareholders. See WSM’s dividend history here.

WSM turnover with bonus

The company is currently valued at a premium to its industry, based on the P/E ratio for the next 12 months.

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Higher ROE

The last 12 months ROE (Return on Equity) of WSM indicates growth potential. The ROE for the last 12 months is 54.5%, significantly higher than the 41.6% in the industry, which indicates the efficient use of shareholders’ funds by the company.

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Investment thoughts

Declining consumer confidence, housing market volatility and economic uncertainty are indeed potential risks for WSM. In addition to these risks, flat operating margin expectations and premium pricing are concerns.

Despite the high valuation, the stock remains attractive to investors. Williams-Sonoma’s e-commerce leadership, resilient operating model, supply chain efficiency, B2B focus and expansion plans, solid balance sheet and commitment to returning cash to shareholders will likely mitigate downside risks.

Given the above favorable tailwinds and high returns, investors could consider adding the Zacks Rank #1 (Strong Buy) stock to their portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

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