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Summary

  • An upgrade from Bank of America send shares to fresh all time highs.
  • The company posts impressive comparable sales growth, driven by very strong e-commerce operations.
  • Shares already reflect the good news, leaving little appeal for prospective investors.

Shares of Williams-Sonoma (NYSE:WSM) are setting fresh all-time highs on the back of a bullish analyst report from Bank of America, which thinks the specialty retailer deserves a premium valuation based on its strong performance.

While I do very much applaud the current momentum and the very impressive e-commerce operations, I am hesitant to pick up shares at current premium valuations in a still cyclical industry.

I would not take on the added risk in search for additional returns, and actually hold off making an investment at current levels.

Bank of America Turns Bullish

Analyst Denise Chai at Bank of America has raised her rating on Williams-Sonoma from neutral to buy. The price target was raised by twelve bucks to $82 per share, suggesting another 14% upside from current levels before the news hit the market.

Key drivers behind the upgrade are the improved visibility and solid execution. This makes William-Sonoma one of the ¨most attractive and sustainable beat-and-raise stories in Hardlines retail¨, according to Chai.

The higher-end and big-ticket item positioning of the firm are pro's for the firm in this current environment. The $82 price target is based upon a 22 times earnings multiple based on 2015 earnings, which is a premium over the average 19.6 multiple over the past decade.

The premium is based upon the innovative tie-ups and anticipated market share gains. Chai furthermore stresses that the recommendation is not so much an outright call, but could be paired with the company's downgrade for Bed Bath & Beyond (NASDAQ:BBBY).

2014 Investor Presentation

Earlier this year, the company held an elaborate and informative investor presentation. The company stressed its high quality and highly profitable business, with the company deriving roughly half of total sales from the e-commerce business.

The company derives $2.3 billion in sales from 585 company-owned stores through its 7 unique brands, of course driven by Pottery Barn and William-Sonoma. E-commerce sales came in at $2.1 billion which is just very impressive.

The company understands the importance of the multi-channel business model, noting that customers being active across multiple channels generate 4-5 times more sales than single-channel customers. More important, the company is boosting margins in its direct-to-consumer channel with operating margins approaching 24% in 2013.

Valuing Williams-Sonoma

Back in May, the company released its first quarter results, posting a healthy 10% increase in sales driven by a similar growth rate in comparable store sales.

The company ended the quarter with nearly $113 million in cash and equivalents. Total debt stands at merely $4 million, resulting in a comfortable net cash position.

On a trailing basis, William-Sonoma has posted sales of $4.5 billion on which it posted net earnings of $286 million. Operating earnings came in at just above 10% on a trailing basis.

At $72 per share equity in the business is valued at $6.8 billion, the equivalent of 1.5 times sales and 23-24 times earnings.

Williams-Sonoma recently declared a quarterly dividend of $0.33 per share, providing investors with a 1.8% dividend yield.

Historical And Future Perspective

Over the past decade, the company has grown revenues at a very modest compounded growth rate of around 4%. Sales rose from $3.1 billion in 2004 to $4.5 billion on a trailing basis. After a difficult environment in the wake of the recession, revenue momentum has been picking up again.

Earnings have kept up pace alongside revenue growth. On top of that, the company has repurchased about 20-25% of its total share base over this time frame, adding to earnings per share growth.

Given the historical growth path and further anticipated growth of the e-commerce operations, margins could improve noticeably going forwards. The high operating margins of its e-commerce operations should allow for margins of 15% in the medium term which could translate into operating earnings of about $750 million in two year's time. This is as revenues could surpass the $5 billion mark over this time period.

Apply to that a relatively high 35-40% effective tax rate and earnings could come in around $450-$500 million in let's say two years time, given that the economy remains vibrant.

Final Takeaway

Investors have already priced in a lot of the good news in recent years, with shares roughly ten-folding from their lows of $8 in 2009. Shares currently trade at all-time-highs which is resulting in a demanding valuation amidst the premium current valuation. I find this a more than fair valuation based upon a 14-15 times earnings multiple in the favorable scenario outlined above, two or three year's down the road.

The big pro's are obvious the solid balance sheet and very strong e-commerce operations. That being said, I remain cautious with current economic circumstances already providing strong tailwinds for the high-end of the market.

I remain on the sidelines and would not jump the momentum bandwagon being induced by Bank of America.

Source: Williams-Sonoma: Little Appeal At Fresh All-Time Highs