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Stock Analyst Update

Williams-Sonoma Grabs Market Share

The undervalued retailer remains competitively positioned with its core customer base.


Narrow-moat  Williams-Sonoma (WSM) continues to take share of the furniture and home furnishing category, capturing sales that rose more than 8% in the first quarter, versus an industry that increased at a mid-single-digit pace (5%) over the last three months. Both retail and e-commerce surpassed our expectations, with store sales rising 4% and direct to consumer up 11%, along with Pottery Barn, Williams-Sonoma, and PBKids/Teen brands all posting sequential brand comp improvement, indicating that efforts to improve the product and supply chain are helping the company’s offerings resonate better with consumers. However, despite the continued uptick in sales growth (this is the fifth quarter in a row of higher sales growth sequentially), the full-year outlook remained largely unchanged, with the company lifting its total sales expectations by $20 million (to $5.495 billion-$5.655 billion) and earnings per share by $0.03 on both the low and high ends, to $4.15-$4.25. Given that our previous outlook called for sales of $5.5 billion and EPS of $4.22, in line with updated expectations, we don’t anticipate any material change to our $68 fair value and still view shares as undervalued.

Despite the strong recent performance and ongoing strength of housing fundamentals, we still believe that competition across the home furnishing space should remain fierce, with peers spending heavily on marketing and customer acquisition, racing to capture incremental discretionary spending. However, Williams-Sonoma remains competitively positioned with its core customer base thanks to its brand messaging and is working toward improving its cost structure (better inventory management and supply chain), which should help operating margins rise from current levels (up to around 10% longer term from 8.8% in 2017).

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

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