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Robert Stephens, CFA
Robert Stephens, CFA
Articles (227) 

Why Williams-Sonoma Could Surge Higher

An improving growth strategy may boost its financial performance

January 21, 2019 | About:

An increasingly innovative strategy could boost Williams-Sonoma Inc.'s (NYSE:WSM) financial outlook. It is seeking to improve the customer experience through new products and services. It is increasing investments in its loyalty program, while also providing customers with greater choice and convenience.

A refreshed marketplace strategy and international expansion are key parts of an evolving growth strategy. It is also remodeling existing stores and opening new ones as it seeks to improve its competitive advantage.

Although tariffs are a potential threat, they are being offset by cost reductions elsewhere. Having declined 3% in the last year versus a 6% fall for the S&P 500, the stock could have investment appeal.

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Increasing innovation

Innovation could catalyze the company’s stock performance. It is seeking to leverage the opportunities within its multibrand portfolio through the release of a customer-facing version of its professional design tool called Room Planner. It has been met with a positive response from customers, having created over 15,000 rooms since it was launched in August.

The company has also released its cross-brand registry program called The One Registry Collective, which allows customers to create a registry that includes items from its various brands in one place. It aims to address increasing demand for convenience and personalization among a millennial-driven audience.

Williams-Sonoma is also investing it its cross-brand loyalty program, The Key. It is improving the overall branding and design of the program, while making online enrollment faster and simpler. The program's total membership has increased 200% over the last year. An expansion of the company’s cross-channel shopping capabilities offers customers greater convenience. The introduction of in-store pickup for online purchases of it Pottery Barn and West Elm brands has increased customer engagement and addresses a growing demand among consumers for greater flexibility when shopping.

Evolving strategy

The business is focusing to a greater extent on the development of its marketplace strategy, which includes a wider range of curated products that complement its core collection. It provides scope to trial new products and price points, as well as increase growth without inventory cost. In the long term, marketplace is expected to increase group revenue by 5%. The company is expanding its international presence through the introduction of Pottery Barn Kids in the U.K. It has also agreed to enter into a partnership with Reliance Brands in India, which is due to commence in 2020.

Investment in its stores is being increased, with five stores remodelled in the most recent quarter. Its revamped stores are averaging double-digit growth in annualized sales. It also opened three new stores last quarter. They are outperforming the wider estate, with West Elm stores beating their first-year performance sales by 25% on average.

Risks

The company’s performance in the most recent quarter missed estimates. Its comparative sales growth was 3.1%, which was below guidance of 4.2%. Its revenue of $1.357 billion was $6 million below forecasts. The company said slowing sales growth was due to a congestion in imports from China caused by companies stockpiling products in anticipation of new tariffs. The introduction of additional tariffs remains a possibility. Guidance on revenue and earnings growth next year is relatively low, with forecast growth of 1.5% and 3% respectively.

In response to the Chinese tariff, the company is seeking to renegotiate costs with its vendor partners. It has reported good progress in this area as a result of its vertically integrated multi-country supply chain and its long-term relationships with vendors. It is also seeking to offset the impact of tariffs with cost cuts across the business. It is making progress in reducing costs across areas such as data processing, janitorial and utilities.

Outlook

Investments in an improved customer experience could boost the company’s stock price performance. Williams-Sonoma is seeking to develop its loyalty program, while expanding choices for customers. Further product and service innovation could differentiate its offering and improve its competitive advantage.

An enhanced marketplace strategy and expansion into international markets could offer improved financial performance. Store remodeling and the opening of new stores are catalyzing sales performance, with further investments expected.

While tariffs pose a threat to its outlook, Williams-Sonoma is seeking to reduce costs across its business. Having outperformed the S&P 500 in the last year, the stock could offer investment appeal.

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