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Robert Stephens, CFA
Robert Stephens, CFA
Articles (217) 

Why Williams-Sonoma Is an Appealing Stock

The company’s strategy is a catalyst

July 23, 2019 | About:

Williams-Sonoma (NYSE:WSM)’s investment in its loyalty program could boost its sales and widen its economic moat. The home furnishings retailer plans to offer increasingly innovative customer features that could differentiate it from sector peers. The business will improve its digital offering in order to increase customer engagement levels. Its increasing focus on generating efficiencies may lead to more satisfied customers due to reduced wait times on their orders.

Although the stock has gained 16% in the last year versus a rise of 6% for the S&P 500 index, its valuation suggests it offers investment appeal.

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Differentiated offering

The company’s continuing investment in its loyalty program is focused on making it easier for its members to redeem their rewards. It also has plans to improve its mobile and desktop capabilities to increase the rate of enrollment in the program.

Additionally, it will use customer data to a greater extent in order to provide increasingly customized offers to loyalty program members. This could lead to incremental sales for the business, since its loyalty program members spend three times more than non-members on average.

Williams-Sonoma plans to enhance the user experience for its online room design service, Room Planner, to provide more accurate and innovative design features. The company will launch the Room Planner in its Pottery Barn children’s business in the third quarter of the current year. It will also increase the number of products that can be used within its Room Planner to widen its appeal to a broader range of consumers.

Investing in technology

The company’s launch of its machine learning search engine last quarter could improve the customer experience. It provides customers with more relevant and personalized search results that are expected to increase their engagement levels. In addition, Williams-Sonoma is investing in a new progressive web app platform that aims to increase speed and improve the user experience. It expects to make further innovative changes to its digital offering following the launch of its in-house technology test lab in the most recent quarter.

Williams-Sonoma is utilizing technology to improve its efficiency. For example, it redesigned its order tracking capability in the most recent quarter to provide its customers with more accurate updates on their orders. This has reduced its order tracking-related calls by 30%, thereby cutting its staff costs. The company completed the migration of its order management fulfilment capabilities to a new platform in the last quarter. This will improve its order processing efficiency and lead to reduced customer delivery times.

Risks

The company’s comparable sales performance in the most recent quarter was mixed. Its flagship Williams-Sonoma brand recorded a 1.6% fall in comparable sales, which was significantly lower than the 5.6% comparable sales growth it recorded in the same quarter of the previous year.

The business may be impacted by the potential for further tariffs on imports from China. While it anticipated a rise in list three tariffs from 10% to 25% in its previous guidance, it has not yet been able to offset the potential impact of proposed list four tariffs.

The business plans to transform the performance of its flagship brand through exclusive product offerings and having fewer promotions. It anticipates an increase in margin and sales as a result of these changes. The company will seek to mitigate the impact of further tariffs through continuing to move production out of China and renegotiating with its suppliers. Its multi-country supply chain is likely to make this process simpler, as the business has scope to increase production elsewhere to offset its reduced reliance on China.

Outlook

Williams-Sonoma is forecast to record a rise in earnings per share of 12% in the current year. It is expected to follow this with earnings-per-share growth of 5% next year. The stock’s price-earnings ratio of 16 suggests it could offer fair value for money given its growth prospects.

Even though the stock has outperformed the S&P 500 in the last year, it offers long-term investment potential as it implements its growth strategy.

Disclosure: the author has no position in any stocks mentioned.

Read more here: 

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Why Marriott Is a Buy 

Weight Watchers: An Undervalued Recovery Play 

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