Williams-Sonoma Inc. (WSM), incorporated in 1973, is a multichannel specialty retailer of high quality products for the home. The company was founded by Charles E. (Chuck) Williams in 1956. Williams passed in December 2015 at the age of 100.
(Chuck Williams, New York Times)
According to the company's filing, Williams-Sonoma is one of the U.S.'s largest ecommerce retailers with some of the best known and most beloved brands in home furnishings. The company currently operates its retail stores in the U.S., Canada, Puerto Rico, Australia and the U.K., and has franchised its brands to third parties in a number of countries in the Middle East, the Philippines and Mexico. Further, the company's products are also available to customers through catalogs and online worldwide.
The company's claim of being one of the U.S.'s largest ecommerce retailers was further supplemented by an article from San Francisco Chronicle in 2015 titled, "Williams-Sonoma is America's best retailer – online and in store."
In the article, Williams-Sonoma was said to be one of the risk takers in the online business. Just as when Amazon (AMZN, Financial) was turning 5 in 1999, Williams-Sonoma Chief Strategy and Business Development Officer Patrick Connolly, age 69, was already pitching and trying to convince the company's then CEO, Howard Lester, and executives that there would be benefits in integrating an online ecommerce to Williams-Sonoma's business heritage. The company then started an online business wedding registry, which was successful, and evolved into a successful omnichannel retailer.
Business operations
The company's ecommerce business contribution to its sales has been rising for the past several years. In fiscal year 2015, the company derived 50.7% of its net sales from online compared to 43.9% in 2011. On the other hand, retail store sales' contribution declined in the same period from 56.1% in 2011 to 49.3% in 2015. Nonetheless, Williams-Sonoma has continually grown its retail store sales at an annual average of 3.7% in the past five years. Contradicting the move (closing stores) its traditional brick and mortar peers are planning this year, Williams-Sonoma is (still) actually looking forward to building more stores by the end of this year, raising the number to 627.
Williams-Sonoma has several merchandising strategies, which include the names Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, Rejuvenation and Mark and Graham.
Brand names and products (from company's recent filing)
Williams-Sonoma: From the beginning, the namesake brand, Williams-Sonoma, has been bringing people together around food. A leading specialty retailer of high-quality products for the kitchen and home, the brand seeks to provide world-class service and an engaging customer experience.
Pottery Barn: Established in 1949 and acquired by Williams-Sonoma in 1986, Pottery Barn is a premiere multichannel home furnishings retailer. The brand was founded on the idea that home furnishings should be exceptional in comfort, quality, style and value.
Pottery Barn Kids: Launched in 1999, Pottery Barn Kids serves as an inspirational destination for creating childhood memories by decorating nurseries, bedrooms and play spaces.
West Elm: Helps customers express their personal style at home. Headquartered in Brooklyn, New York, the brand opened its first store in 2003 in Brooklyn, the neighborhood it still proudly calls home. Mixing clean lines, natural materials and handcrafted collections from the U.S. and around the world, West Elm creates unique, affordable designs for modern living.
PBteen: Launched in 2003, PBteen is the first home concept to focus exclusively on the teen market. The brand offers a complete line of furniture, bedding, lighting, decorative accents and more for teen bedrooms, dorm rooms, study spaces and lounges.
Rejuvenation: Founded in 1977 with a passion for old buildings, vintage lighting and house parts and great design, it was acquired by Williams-Sonoma in 2011.
Mark and Graham: Launched in late 2012, Mark and Graham is designed to be a premiere destination for personalized gift buying. With over 100 monograms and font types to choose from, a Mark and Graham purchase is uniquely personal.
The company has 618 stores – 571 stores in 43 states, Washington, D.C., and Puerto Rico; 27 stores in Canada; 19 stores in Australia and one store in the U.K. The company also has multiyear franchise agreements with third parties that currently operate 48 franchised stores and/or ecommerce websites in a number of countries in the Middle East, the Philippines and Mexico.
Among the merchandising strategies, Pottery Barn is the company's most valuable brand name.
(Pottery Barn website)
The Pottery Barn had contributed at least 40% or $2 billion to the company's sales for the past three years. Ranking next to it were the brand names Williams-Sonoma, West Elm and Pottery Barn Kids accordingly. Interestingly, Pottery Barn was actually purchased by the company from Gap in 1986 for just $6 million.
Sales and earnings performance
From the second quarter of 2014 to the first quarter of this year, Williams-Sonoma has beaten the Wall-Street consensus five out of eight times, including the first quarter of 2016, in terms of its sales numbers. Nonetheless, its market price was still badly beaten by Mr. Market by roughly 20% since.
The company has the trailing 12-month gross, operating and profit margins of 37%, 9.8%, and 6.23%. Although some retail investors may not find the profit margin number attractive, the company has been able to at least grow its book value by 0.8% and its free cash flow by 9.7% in the past five years.
Dividends, cash flow and balance sheet numbers
The company has been providing dividends since the 1990s. The company has quite a secure dividend coverage from its profits at 2.42 times. Williams-Sonoma is currently paying 41% of its profits to its shareholders, compared to a five-year average of 37%. The company has grown its dividend handouts by some 17% in the past five years.
Interestingly, Williams-Sonoma spent almost double in its share repurchasing activities not only recently but for the past six years. Overall, the company has been paying more than 100% of its profits to its shareholders through dividend handouts and share repurchasing activities.
Rapidly increasing number of shares outstanding and accumulation of debt would be definitely a red flag if observed in these types of situations, but Williams-Sonoma proved otherwise. Shares outstanding had actually fallen from 110 million to 92 million in the past six years while debt was eliminated from $9 million in 2011.
Despite these exemplary achievements, Mr. Market disregarded the 60-year-old company. In return, Williams-Sonoma's total return was less than its peers as it was heavily influenced by the company's share price performance.
(Williams-Sonoma's Total Return Chart from company's annual filing)
Valuations
Williams-Sonoma's price to earnings (P/E) and price to book (P/B) ratios are not that off when compared to Standard & Poor's 500's. Williams-Sonoma is currently trading at 16 times its earnings and four times its book value. The S&P 500 currently trades at 19 times P/E and 2.7 times P/B. Currently, the company yields slightly more than the S&P 500 at 2.6%.
Intrinsic valuation
Using 6.32% as cost of equity, 0% as cost of debt, corporate tax rate of 38% and recent quarter total equity numbers, I derived a weighted average cost of capital of 6.32%. Further, using a terminal growth of 4% and a 10-year growth of 8%, I arrived at an intrinsic valuation of $44 a share, which dictates that the current price of $53 is overvalued by 17%.
Summary
Williams-Sonoma certainly is unaffected by Amazon's online presence.
The company was able to cope with the now sprawling ecommerce business secondary to its venture in the business at an early stage, thanks to Connolly. Further, Williams-Sonoma has no debt and has been actively providing to its shareholders in whichever way it can. Unfortunately, Mr. Market does not recognize this. As a retail investor, the current valuations are attractive.
However, if one were to be influenced by the general activity of the market, there could be more opportune times to accumulate Williams-Sonoma's shares. For instance, the company faltered severely in the Great Recession to single P/E and P/B multiples despite consistently handing out dividends in that tough period. With a beta value of 0.95 (various financial resources), the company would definitely be one of the good stocks to accumulate in one's portfolio, given any massive pullbacks.
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