Williams-Sonoma (WSM)

Kitchenware and home goods retailer Williams-Sonoma (NYSE:WSM) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 4.2% year on year to $1.73 billion. Its GAAP profit of $1.85 per share was 5.4% above analysts’ consensus estimates.

Company Overview

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.

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).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $7.78 billion in revenue over the past 12 months, Williams-Sonoma is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Williams-Sonoma’s sales grew at a tepid 5.3% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it closed stores.

This quarter, Williams-Sonoma reported modest year-on-year revenue growth of 4.2% but beat Wall Street’s estimates by 4%.

Looking ahead, sell-side analysts expect revenue to decline by 1% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and indicates its products will face some demand challenges.

Number of Stores

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

Williams-Sonoma operated 508 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 2.1% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Williams-Sonoma’s demand has been shrinking over the last two years as its same-store sales have averaged 4.7% annual declines. This performance isn’t ideal, and Williams-Sonoma is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Williams-Sonoma’s same-store sales rose 3.4% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

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 averaged an excellent 45.2% gross margin over the last two years. That means for every $100 in revenue, only $54.81 went towards paying for inventory, transportation, and distribution.

In Q1, Williams-Sonoma produced a 44.3% gross profit margin, down 4.1 percentage points year on year and missing analysts’ estimates by 1.9%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Williams-Sonoma has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer retail business, boasting an average operating margin of 17.9%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Williams-Sonoma’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Williams-Sonoma generated an operating profit margin of 16.8%, down 2.3 percentage points year on year. Since Williams-Sonoma’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, and administrative overhead expenses.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Williams-Sonoma has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer retail sector, averaging 15.4% over the last two years.

Taking a step back, we can see that Williams-Sonoma’s margin dropped by 5.3 percentage points over the last year. This decrease warrants extra caution because Williams-Sonoma failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new stores.

Williams-Sonoma’s free cash flow clocked in at $60.7 million in Q1, equivalent to a 3.5% margin. The company’s cash profitability regressed as it was 7.5 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

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

Although Williams-Sonoma hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 43.8%, splendid for a consumer retail business.

Williams-Sonoma reported $1.05 billion of cash and $1.37 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 $1.65 billion of EBITDA over the last 12 months, we view Williams-Sonoma’s 0.2× net-debt-to-EBITDA ratio as safe. We also see its $49.03 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We liked how Williams-Sonoma beat analysts’ revenue and EPS expectations this quarter. On the other hand, its gross margin missed. Looking ahead, the company reiterated full-year guidance but warned of tariff headwinds and macro uncertainty. Investors were also likely hoping for more--perhaps a raise in guidance to flow through the Q1 beat--and shares traded down 5.8% to $158.01 immediately following the results.

Updated: July 8, 2025 at 10:24 PM EDT

Before investing in or passing on Williams-Sonoma, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Williams-Sonoma’s business quality ultimately falls short of our standards. For starters, its revenue growth was a little slower over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its shrinking same-store sales tell us it will need to change its strategy to succeed. On top of that, its declining physical locations suggests its demand is falling.

Williams-Sonoma’s P/E ratio based on the next 12 months is 19.8x. This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $177.23 on the company (compared to the current share price of $169.25).