Analyst Note| Jaime M. Katz, CFA |
We are lifting our fair value estimate for narrow-moat Williams-Sonoma to $195 from $152 per share to account for the firm’s opportunity to capture structurally higher operating margins over the long term. Admittedly, we previously underestimated the growth opportunities stemming from the business-to-business, marketplace, and franchise revenue streams, lines that tend to have better profit margins than the traditional brick-and-mortar furniture and home furnishing business. Additionally, given management’s outlook for West Elm to represent $3 billion, Pottery Barn $5 billion, and international $700 million in sales by 2024, our $8.9 billion 2024 sales forecast was light, particularly since management sees a $2 billion opportunity in B2B over time (with sales tracking to around $700 million in 2021). While we see some risk surrounding the return to spending in other discretionary categories as COVID-19 subsides, we think Williams-Sonoma has mitigated some of this risk by entering white-space categories like B2B for growth that can offset intermittent softness in certain lines.