Share price of Williams-Sonoma, Inc. (WSM) jumped 7.45% in afterhours trading as the company‘s third quarter 2014 earnings per share and revenues exceeded both the company’s expectations and the Zacks Consensus Estimate. The company also raised its earnings guidance for fiscal 2014.
Williams-Sonoma’s third-quarter 2014 adjusted earnings (excluding one-time items) of 68 cents per share beat the Zacks Consensus Estimate of 63 cents by 7.9%. Earnings exceeded the company’s expected range of 58 cents to 63 cents and increased 17.2% year over year on the back of top-line growth and operating margin increase.
Net revenue of $1.14 billion increased 8.7% year over year and was also higher than the company’s expected range of $1.1 billion to $1.13 billion. It exceeded the Zacks Consensus Estimate of $1.12 billion by 1.8%. The net revenue increase was driven by an 8.7% increase in comparable brand revenues.
Comparable Brand Revenues
As stated by the company, comparable brand revenues include retail comparable store sales, direct-to-customer sales, shipping fees, sales returns and other discounts related to current quarter sales. Comparable stores are permanent stores in which gross square footage did not vary more than 20% in the past one year and which have been open for the past 12 months without closure for seven or more consecutive days.
Comparable brand revenues grew 8.7% in the quarter, higher than 8.2% increase in the prior-year quarter, owing to strong sales growth, particularly in Williams-Sonoma and Pottery Barn Kids. Comparable brand revenues also exceeded the company’s expected range of 4% to 6% increase.
Williams-Sonoma’s comp brand revenues increased 4.3%, an improvement from 1.4% increase in the prior year quarter due to solid performance across categories including tools, cutlery entertaining and table top. Proprietary and exclusive products, particularly Williams-Sonoma Home, performed well.
Pottery Barn’s comp brand revenues increased 7%, thanks to strong performance from proprietary upholstery collections in Sutter Street facility and bedroom furniture collections. However, it was lower compared to 8.4% increase in the prior year quarter.
Pottery Barn Kids’ comp brand revenues increased 8.6%, higher than 3.9% increase in the prior year quarter. The segment revenue increase was driven by solid performance of the nursery and furniture categories.
West Elm’s comp brand revenues increased 17.4%, driven by strong performance across categories. During third quarter 2014, West Elm opened nine new stores, including one in Australia. However, it was lower compared to 22.2% increase in the prior year quarter.
PBteen’s comp brand revenues increased 11.7%, driven by strong business across furniture, textiles and decorative accessories categories. However, it was lower than a 16.7% increase in the prior year quarter.
Segment Details
E-commerce (formerly Direct Store Delivery) Segment: The segment reported net revenue of $587 million in the third quarter of 2014, up 14.7% year over year, mostly driven by Pottery Barn and West Elm. The segment generated 51% of the total company net revenue in the third quarter compared with 49% in the prior year quarter.
Retail: The segment reported net revenue of $556 million in the third quarter of 2014, up 3.1% year over year, driven by solid business by West Elm and Pottery Barn brands, partially offset by a decline in Williams-Sonoma owing to eight fewer stores during the quarter.
Margin Details
Adjusted gross margin of 37.7% declined 90 basis points (bps) during the quarter owing to lower selling margins in the e-commerce channel. Adjusted operating margin was 9.2% in the quarter, up 40 basis points from the prior year quarter on the back of higher revenues in the e-commerce channel.
As a percentage of revenues, selling, general and administrative expenses were 28.6%, down 120 basis points, due to an increase in advertising efficiency, leverage of employment cost and lower general spending.
Financial Update
Williams-Sonoma had unrestricted cash and cash equivalents of $107.7 million as of Nov 2, 2014, higher than $70.6 million as of Aug 3, 2014.
During third quarter 2014, Williams-Sonoma repurchased 1.2 million shares worth $83.0 million. As of Nov 2, 2014, the company had approximately $316 million available under its share repurchase authorization of $750 million announced in Mar 2013. The company returned $31 million to shareholders as dividends during the quarter.
Fourth Quarter 2014 Outlook
Williams-Sonoma expects earnings per share for the fourth quarter of 2014 in the range of $1.42 to $1.50 compared with $1.38 in the prior year quarter.
The company expects net revenue in the range of $1.53 billion to $1.58 billion. Comparable brand revenues are expected to increase in the range of 4% to 6% during the quarter. Operating margin is expected to remain flat year over year.
2014 Outlook Upped
On the back of a better-than-expected performance in the third quarter of 2014, Williams-Sonoma raised its earnings outlook for fiscal 2014. For 2014, Williams-Sonoma expects adjusted earnings per share in the range of $3.11 to $3.19, compared with the prior expectation of $3.07–$3.17 and higher than $2.84 per share earned in fiscal 2013.
The company expects net revenue in the range of $4.68 billion and $4.73 billion, compared to the prior expected range of $4.65 to $4.73 billion.
However, the company maintained its outlook for comparable revenues, operating margin, income tax rate and store count for fiscal 2014.
Comparable brand revenues are expected to grow in the 5% to 7% range. The company expects operating margin in the range of 10.2% to 10.4%. Income tax rate is expected to range between 38.3% and 38.8%. The company expects to end 2014 with 594 stores, with 33 store openings during the year.
Williams-Sonoma currently carries a Zacks Rank #3 (Hold).
Investors interested in the retail sector can consider stocks like Ethan Allen Interiors Inc. (ETH), Restoration Hardware Holdings, Inc. (RH) and Safeway Inc. (SWY). While Ethan Allen Interiors and Safeway sport a Zacks Rank #1 (Strong Buy), Restoration Hardware holds a Zacks Rank #2 (Buy).
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