With a stable of excellent brands from Pottery Barn, West Elm and its flagship, Williams-Sonoma Inc. (WSM, Financial) looks good from a numbers standpoint. The company has a small competitive edge in the home furnishing market based on name recognition and solid financials.
The company generates over $300 million in net income, has just $125 million in total debt and spends less than 70% of its earnings on capital expenditures. This is a slow growth story, with sales up just 35% in the last decade. Management, however, has bought back stock to boost per share growth north of 100% since 2007. The Pottery Barn brand brings in 41.5% of the company's sales, which have been in decline. West Elm continues to report double-digit top-line growth led by furniture and lighting, and across nearly 100 locations sales are north of $1 billion a year.
While consumers still buy furniture in stores, online shopping continues to increase for Williams-Sonoma brands. In fact, online sales were up better than 5% year over year and make up 52% of total sales for the company. It is possible that with better return policies, people use the showroom to get a feel for the furniture and complete their orders online.
This is good news. Williams-Sonoma generates $5 billion in sales with 37% gross margins, but do not expect significant growth in sales going forward. The company will likely continue to leverage its online shoppers to expand its margins. E-commerce profit rates are 22% versus just 10% in retail. In a decade, its sales could be north of $8 billion with 60% to 65% coming from online transactions. If successful, the profit could grow to more than a billion in that time - 20% of the current market cap. If that happens with its current price multiple, the stock would enjoy a 250% rise. Not only that, the company could be paying out north of $5 a share in dividends. In the meantime, investors will enjoy a payout of at least 3.3% annually.
Solid finances will enable the company to increase dividends and repurchase shares with some $477 million available. All in all, Williams-Sonoma has solid growth potential and, at its current price level, a fairly high margin of safety.
Disclosure: I do not have a position in WSM.
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