E-Commerce Continues to Drive Growth for Williams-Sonoma

Online sales increased 46% year over year and represented more than three-quarters of total revenue during the second quarter

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Aug 30, 2020
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Retail companies that have been able to quickly and effectively transition to e-commerce during the Covid-19 pandemic have done very well in the latest quarter.

One such company is Williams-Sonoma Inc. (

WSM, Financial). The company's latest quarter showed very strong digital sales, though the stock fell 8% the day following the earnings release. Still, the stock has gained 22% so far in 2020.

Let's dig into Williams-Sonoma's most recent quarter to find out why long-term investors should use the near-term weakness to buy the stock.

Quarterly highlights

Williams-Sonoma reported second-quarter earnings results on Aug. 26. Revenue increased 8.8% to $1.5 billion, beating Wall Street's estimates by $23 million. Profits are really where the company shined. Earnings per share increased 93 cents, or 107%, to $1.8, which was 81 cents higher than expected. Earnings per share percentage growth was a record for the company.

Net comparable brand revenues were higher by 10.5%. As with the previous quarter, e-commerce was a prime driver of growth as sales improved 46% for this channel. E-commerce represented an all-time high 76% of total revenues. This was a 500 basis point acceleration from the first quarter of this year. Demand comparable sales, which are orders placed but not yet filled by the end of the quarter, grew nearly 19%.

All of the company's brands showed comparable sales growth during the quarter.

Pottery Barn improved 8.1% to $563 million. Sales were driven by newer products at attractive price points. Investments made in the apartment and marketplace categories paid off as these products were a substantial contributor to results.

Sales for West Elm grew 7% to $381 million. This follows a year-over-year increase of 17.5% in the second quarter of 2019. Indoor, in-home office, dining, storage and outdoor furniture were cited as reasons for the brand's performance.

The Williams-Sonoma brand was the best performer in terms of growth as sales increased a record 29.4% to $243 million. This segment benefited from triple-digit e-commerce growth. Cooking-related products were in greater demand as consumers dined at home more often during the quarter. Showing its innovation, the Williams-Sonoma brand partnered with local restaurants to bring perishable products and food to customers. This helped drive traffic to the website and led to higher sales.

The Pottery Barn Kids & Teen segment was 4.8% higher to $236 million. Teen business remains in high demand as customers are spending on home furnishings at a higher rate than usual. Baby products also performed well. Growing its baby business could be a key to the future as customers develop brand loyalty.

Gross margins improved 160 basis points to 37% due to better merchandise margins. Lower occupancy-related costs due to lower rents also added to gains in gross margins. Shipping costs were up due to growth in e-commerce as well, and Williams-Sonoma saw some negative impact from China tariffs.

Selling, general and administrative expenses represented 23.9% of total sales, down from 28.5% in the previous year. Increases in sales and lower store payrolls resulted in operating margins of 13.1%. This was a gain of 620 basis points and the highest quarterly operating margins outside of a holiday fourth quarter.

What is impressive is that Williams-Sonoma was able to reduce its promotional activity, but actually grow its number of customers by 15%. The company said that it had a higher number of new and returning customers during the quarter. In a sector where promotions and reduced product prices are a common way to attract customers, Williams-Sonoma was able to buck this typical retail strategy trend. This led to better margins and lower expenses.

Williams-Sonoma does expect shipping costs to be higher in the second half of the year, particularly for the third quarter when shipping surcharges will peak before the holiday season.

The company's balance sheet remains in solid shape. Cash and cash equivalents totaled $950 million at the conclusion of the quarter, up from $861 million in the first quarter and a significant improvement of $120 million in the second quarter of 2019. The company also has $500 million of liquidity remaining on its credit facility, though leadership noted that they may reduce this as the year goes on. Merchandize of slightly more than $1 billion was down more than 12%. Long-term debt stands at $2.1 billion, but the company has just $487 million of current debt.

Though the company did not offer guidance for the remainder of the year, Williams-Sonoma did mention that sales have remained similar across brands through the first few weeks of the third quarter. According to Seeking Alpha, analysts expect that Williams-Sonoma will produce earnings of $6.35 per share this year.

Valuation analysis and final thoughts

Shares closed Friday at $89.56, giving the stock a forward price-earnings ratio of 14.1. The average price-earnings ratio since 2010 is 16.9. Allowing for some margin of error, I believe a price-earnings target of 14 to 16 takes into account Williams-Sonoma's strength in e-commerce with an unknown time for the retail sector as a whole.

Therefore, I have a price target range of $89 to $102 for Williams-Sonoma. Shareholders of the stock could see as much as a 14% gain in share price. Added to this would be the current annualized dividend of $1.92. The yield would be 1.9% at the high end of my price target range. Investors could see mid-double-digit total returns.

Williams-Sonoma has shown over the past two quarters how effective it is at creating value through its e-commerce business. Three-quarters of all sales in the second quarter came from this channel. This will likely be a blueprint for future growth as consumers become more accustomed to shopping online, even for larger items like furniture, for when retail returns to more a normalized way of life.

The stock sold off following the earnings release, likely due to the returns that have occurred this year. Shares of Williams-Sonoma trade with a valuation below the stock's long-term average, which means the current price could be an excellent entry point. I reiterate my buy rating on the stock.

Disclosure: The author has no positions in any stocks mentioned in this article.

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