Analyst Downgrade On This Retailer Creates Opportunity?

| About: Williams-Sonoma Inc. (WSM)

By Mitchell Clark, B.Comm.

Retail is a tough business to be in and always difficult as an investor. Williams-Sonoma Inc. (NYSE:WSM) took off after the company beat Wall Street consensus and increased its quarterly dividend by six percent on the back of 4.3 million repurchased shares in fiscal 2013. The stock moved 10% higher on the day of the company's earnings report, and it broke out of an eight-month price consolidation.

Williams-Sonoma also operates the "Pottery Barn" and "West Elm" retailers, and is pretty much a unique story in specialty merchandising in terms of its operational success.

Over the last month, a number of Wall Street analysts reduced the company's earnings expectations for this fiscal year and next. But the company did have good operational success in its fiscal fourth quarter of 2013, with a 10.4% gain in comparable revenue growth among its five retail divisions, with particular strength at West Elm.

Earnings per share increased 8.7% in the fourth quarter, and the dividend increase really pleased investors.

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Operationally, Pottery Barn is the company's largest revenue generator, about double the revenues generated from Williams-Sonoma-branded stores at $1.9 billion last year.

In the fiscal first quarter of 2014, the company expects comparable total sales to grow between four and six percent. The company has been conservative with previous forecasts; many companies have a tendency to lowball their outlooks to make "outperformance" easier.

Williams-Sonoma's long-term track record is solid, however, and it's been a good performer on the stock market. Its 20-year chart is featured below:

Click to enlarge

Chart courtesy of www.StockCharts.com

The company is doing better than a lot of other retailers, and management said that it is gaining market share over the competition.

E-commerce sales are now almost half of total revenues. This has helped the company's financial performance, especially as brick-and-mortar retailers experienced a weather-related slowdown.

With a dividend yield of just less than two percent and a forward price-to-earnings ratio of 17.5, this stock isn't expensively priced. Institutions own about 94% of this stock, and there's a decent amount of insider ownership for a $6.0-billion company.

But owning retailers is often a tough experience from the individual investor's perspective. (See "Discount Merchandisers Facing Earnings Squeeze in 2014?") Like restaurant stocks, tastes and trends do change, and there's always a fight in merchandising for operating margins.

What makes retailers like Williams-Sonoma attractive is their dividend income, and I'd say there's a good chance the company will effect another dividend increase this fiscal year. Management boosted its quarterly dividend to $0.31 per share last year, up from $0.22 per share the previous year and $0.17 before that. Without those dividends, the attractiveness of a mature retailer diminishes significantly.

Given Williams-Sonoma's solid fourth quarter, a decent balance sheet, and the outlook for rising quarterly dividends later in the year, this stock would be worth considering as a buy on a major price retrenchment.

I suspect that a number of Wall Street research analysts will now revise their earnings estimates upward.

Disclosure: No positions