On May 30, we issued an updated research report on Williams-Sonoma, Inc. WSM – a multi-channel specialty retailer of premium quality home products.
Strategic initiatives, innovative marketing techniques, focus on innovation and retail optimization has been driving growth for the company. However, comparable brand revenues have been sluggish for several quarters owing to soft retail environment and cautious customers.
Notably, Williams-Sonoma’s shares have gained 0.2% year to date, as against the 10.3% decline of the Retail-Home Furnishings industry. The company recently reported first-quarter fiscal 2017 results wherein earnings and revenues surpassed the consensus mark.
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Q1 Highlights
Adjusted earnings per share of 51 cents beat the Zacks Consensus Estimate by 6.3% but declined 3.8% from the year-ago level.
Net revenue of $1.112 billion was slightly above the Zacks Consensus Estimate of $1.107 billion. Net sales increased 1.2% year over year on strong growth at West Elm and Williams-Sonoma brands, along with newer businesses like Rejuvenation and Mark and Graham and international businesses.
Comparable brand revenues increased 0.1% in the quarter, significantly lower than the 4.5% increase in the preceding quarter.
E-commerce segment revenues were up 0.7% while that at Retail segment increased 1.8% year over year.
Adjusted operating margin was 6.1% in the quarter, down 90 basis points (bps) from the year-ago quarter.
Key Positives
Williams-Sonoma is one of the largest e-commerce retailers in the U.S. The segment contributed about 52% to revenues in fiscal 2016 and the first quarter of fiscal 2017. Also the company’s investment in merchandising of its brands, efficient catalog circulations and digital marketing boost its e-commerce revenues.
Product innovation plays a huge role in the company’s success. There is consistent demand for new products, which should match the changing preference of consumers. Williams-Sonoma addresses this demand very well. The company has studios which provide infrastructure for development of products, techniques and collaboration with other artists.
Williams-Sonoma is focused on enhancing customer experience through improved and innovative marketing techniques. In the first quarter of fiscal 2017, the company increased its digital advertising spend, which led to strong growth across all brands. The company will continue to find innovative marketing strategies to identify and target custom audiences.
Concerns
Williams-Sonoma has been reporting soft comparable brand revenues for quite some time. The rate of increase of comparable brand revenues has decreased significantly. The PBteen brand has been hurt the most, reporting a 6.2% decline in comparable brand revenues in 2016 compared with a 2.7% fall in 2015. Comparable brand revenues of PBteen brand decreased 14.3% in the first quarter of fiscal 2017, as against a 1.9% increase in the year-ago quarter. In fact, the company expects comparable brand revenues growth in the modest 1–3% range for 2017.
Williams-Sonoma is dependent on consumer discretionary spending, which is affected by general macroeconomic conditions, consumer confidence, employment levels and other factors. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly. The federal government’s actions related to economic stimulus, taxation, borrowing limits could affect consumer confidence and spending levels which, in turn, could hurt the economy.
Zacks Rank & Stocks to Consider
Williams-Sonoma carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the Retail-Wholesale sector include Darden Restaurants, Inc. DRI, Red Robin Gourmet Burgers, Inc. RRGB and Yum China Holdings Inc. YUMC.
Red Robin Gourmet sports a Zacks Rank #1 (Strong Buy). Full-year 2017 earnings for the company are expected to increase 2.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Yum China, a Zacks Rank #2 (Buy) stock, is likely to witness 10.7% earnings growth in 2017.
Darden, also a Zacks Rank #2 stock, is expected to witness 12.9% growth in fiscal 2017 earnings.
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