Williams-Sonoma's Minimal Downside Risks

| About: Williams-Sonoma Inc. (WSM)

Back in January, we discussed Williams Sonoma (NYSE:WSM), a specialty retailer of home products, as a possible value investment. Since then, the stock is up some 20% while the company's latest results indicate that it does indeed have the ability to weather the economic storm.

Sales in Q4 2008 fell almost 27%, which would be enough to send many companies deep into the red. With WSM's relatively flexible cost structure, however, it managed to eke out a profit. With a drop in sales of that magnitude, one would ordinarily expect a battered gross margin and ballooning SG&A costs as a percentage of sales. The company has managed to cut its costs drastically however, showing a gross margin of 34% and SG&A costs as a percentage of sales only 1.5 points higher than last year (after backing out impairment charges).

Many of the company's cost cutting initiatives won't be seen until next year's results, however. As the company gets its cost structure in line with depressed demand (including by renegotiating certain of its operating leases), it expects be able to derive profits between $1 and $2 per share for 2009. Not a bad return when you consider the share price of $10 and the minimal downside risk considering WSM's balance sheet strength, with some select items shown below:

Cash: 150 million

Inventory: 570 million

Current Assets: 940 million

Debt: 24 million

Market Cap: 1.1 billion

Disclosure: Author has a long position in WSM