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Stock Strategist

We See Value in Williams-Sonoma

But price competition keeps the company from digging a moat.

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 Williams-Sonoma (WSM) has carved out a solid niche in the fragmented $100 billion domestic home furnishings market, launching most of its brands organically in underserved segments. We expect the firm to remain a leader in the category, with few sizable competitors in the teen and kids space. While the retail business (around 600 stores) doesn't have enough scale to garner a cost advantage alone, consumer knowledge and insight captured by the e-commerce segment are meaningful and key to consumer perception of the brand. We view the shares as undervalued currently, trading in 4-star territory after falling nearly 25% since August. However, the categories the company operates in remain price-competitive, leading to our no-moat rating.

Williams-Sonoma relies on its e-commerce business (51% of total revenue) to build the brand cost-effectively and help leverage costs via low overhead expenses, driving operating margin improvement; e-commerce EBIT margins are 24% versus 11% in retail. The firm should enjoy opportunities to build the brand globally while improving the cost structure thanks to an improving supply chain and distribution network through initiatives like insourcing of foreign buying offices and furniture delivery operations.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.