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Williams-Sonoma (NYSE:WSM) Posts Q1 Sales In Line With Estimates, Stock Soars


Full Report / May 22, 2024

Kitchenware and home goods retailer Williams-Sonoma (NYSE:WSM) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 5.4% year on year to $1.66 billion. It made a non-GAAP profit of $4.07 per share, improving from its profit of $2.64 per share in the same quarter last year.

Williams-Sonoma (WSM) Q1 CY2024 Highlights:

  • Revenue: $1.66 billion vs analyst estimates of $1.65 billion (small beat)
  • EPS (non-GAAP): $4.07 vs analyst estimates of $2.73 (49.3% beat)
  • Gross Margin (GAAP): 48.3%, up from 38.5% in the same quarter last year
  • Free Cash Flow of $187.3 million, down 36% from the same quarter last year
  • Same-Store Sales were down 4.9% year on year
  • Store Locations: 517 at quarter end, decreasing by 14 over the last 12 months
  • Market Capitalization: $20.2 billion

Started in 1956 as a store specializing in French cookware, Williams-Sonoma (NYSE:WSM) is a specialty retailer of higher-end kitchenware, home goods, and furniture.

Today, the company has expanded beyond its French cookware roots to offer everything from bedding and bath linens to gourmet food and specialty appliances. The unifying theme in a Williams-Sonoma store is products that are both beautiful and practical.

The core Williams-Sonoma customer is typically a higher-income, educated suburban consumer who values quality and design and isn’t afraid to pay a bit more for it. Some brands that a shopper can find in a Williams-Sonoma store include Le Creuset, KitchenAid, Nespresso, and the company’s own line of kitchenware.

Williams-Sonoma has been one of the more successful retailers to adapt to e-commerce. Before online shopping caught fire, the company was able to build a large database of customer information because of its catalog mailing list. This turned into an email marketing list and a relatively early e-commerce presence.

Home Furniture Retailer

Furniture retailers understand that ‘home is where the heart is’ but that no home is complete without that comfy sofa to kick back on or a dreamy bed to rest in. These stores focus on providing not only what is practically needed in a house but also aesthetics, style, and charm in the form of tables, lamps, and mirrors. Decades ago, it was thought that furniture would resist e-commerce because of the logistical challenges of shipping large furniture, but now you can buy a mattress online and get it in a box a few days later; so just like other retailers, furniture stores need to adapt to new realities and consumer behaviors.

Competitors that offer kitchenware and home goods include TJX (NYSE:TJX), Target (NYSE:TGT), and Walmart (NYSE:WMT).

Sales Growth

Williams-Sonoma is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's annualized revenue growth rate of 6.1% over the last five years was weak as its store count dropped.

Williams-Sonoma Total Revenue

This quarter, Williams-Sonoma reported a rather uninspiring 5.4% year-on-year revenue decline to $1.66 billion in revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 2.3% over the next 12 months, an acceleration from this quarter.

Same-Store Sales

Williams-Sonoma's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 3.2% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.

Williams-Sonoma Year On Year Same Store Sales Growth

In the latest quarter, Williams-Sonoma's same-store sales fell 4.9% year on year. This decrease was a further deceleration from the 6% year-on-year decline it posted 12 months ago. We hope the business can get back on track.

Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Williams-Sonoma is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Since last year, Williams-Sonoma's store count shrank by 14 locations, or 2.6%, to 517 total retail locations in the most recently reported quarter.

Williams-Sonoma Operating Retail Locations

Taking a step back, the company has generally closed its stores over the last two years, averaging a 3.3% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Gross Margin & Pricing Power

We prefer higher gross margins because they make it easier to generate more operating profits.

Williams-Sonoma has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it's averaged an impressive 42.9% gross margin over the last eight quarters. This means the company makes $0.43 for every $1 in revenue before accounting for its operating expenses.

Williams-Sonoma Gross Margin (GAAP)

Williams-Sonoma produced a 48.3% gross profit margin in Q1, marking a 9.9 percentage point increase from 38.5% in the same quarter last year. This margin expansion is a good sign in the near term. It shows the company increased its pricing power, and if this trend continues, it could signal a less competitive environment where it has more negotiating leverage and stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Williams-Sonoma generated an operating profit margin of 19.5%, up 8.1 percentage points year on year. This increase was encouraging and driven by stronger pricing power, as indicated by the company's larger rise in gross margin.

Williams-Sonoma Operating Margin (GAAP)

Zooming out, Williams-Sonoma has been a well-managed company over the last two years. It's demonstrated elite profitability for a consumer retail business, boasting an average operating margin of 16.9%. On top of that, its margin has improved by 1.8 percentage points year on year (on average), an extremely encouraging sign for shareholders.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q1, Williams-Sonoma reported EPS at $4.07, up from $2.64 in the same quarter a year ago. This print beat Wall Street's estimates by 49.3%.

Williams-Sonoma EPS (Adjusted)

Over the next 12 months, however, Wall Street is projecting an average 3.5% year-on-year decline in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Williams-Sonoma's free cash flow came in at $187.3 million in Q1, down 36% year on year. This result represents a 11.3% margin.

Williams-Sonoma Free Cash Flow Margin

Over the last eight quarters, Williams-Sonoma has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a robust cash balance. The company's free cash flow margin has been among the best in consumer retail, averaging 14%. Furthermore, its margin has averaged year-on-year increases of 7.8 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Williams-Sonoma's five-year average ROIC was 37.9%, placing it among the best retail companies. Just as you’d like your investment dollars to generate returns, Williams-Sonoma's invested capital has produced excellent profits.

Williams-Sonoma Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Williams-Sonoma's ROIC averaged 12.9 percentage point increases. This is a good sign, and if the company's returns keep rising, there's a chance it could evolve into an investable business.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Williams-Sonoma reported $1.25 billion of cash and $1.34 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $1.60 billion of EBITDA over the last 12 months, we view Williams-Sonoma's 0.1x net-debt-to-EBITDA ratio as safe. We also see its $39.72 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Williams-Sonoma's Q1 Results

We were impressed by how significantly Williams-Sonoma blew past analysts' EPS and gross margin expectations this quarter. We were also excited it raised its full-year operating margin guidance to 17.8% at the midpoint. Zooming out, we think this was an impressive quarter that should delight shareholders. The stock is up 5% after reporting and currently trades at $330.15 per share.

Is Now The Time?

Williams-Sonoma may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We have other favorites, but we understand the arguments that Williams-Sonoma isn't a bad business. Although its revenue growth has been a little slower over the last five years with analysts expecting growth to slow from here, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. Investors should still be cautious, however, as its declining physical locations suggests its demand is falling.

Williams-Sonoma's price-to-earnings ratio based on the next 12 months is 20.0x. There are things to like about Williams-Sonoma and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $290.37 per share right before these results (compared to the current share price of $330.15).

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