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Summary

  • Williams-Sonoma posted slightly weaker-than-anticipated second-quarter results.
  • As the company guidance for the upcoming two quarters is best characterized as soft.
  • Already operating in a very favorable operating environment I wonder what could accelerate comparable sales growth and appeal of the shares in the immediate future.

Investors in Williams-Sonoma (NYSE:WSM) have not been happy with the company's results for the second quarter.

The company reported slightly slower-than-anticipated sales growth for the quarter, as it released a third quarter and full-year outlook which fell short in terms of sales and earnings compared to upbeat consensus estimates.

With most signs on green already, I wonder what else can drive the operating performance in the future. As a result, I do not find shares attractive even after the sell-off.

Second-Quarter Highlights

Williams-Sonoma posted second-quarter sales of $1.04 billion, a 5.8% increase compared to the year before. Despite the increase in top-line sales, reported numbers fell short compared to estimates at $1.05 billion.

Despite the top-line sales growth, earnings have been lagging a bit with net earnings only being up by 3.7% to $50.7 million.

Thanks to share repurchases, the company posted an 8.2% increase in reported earnings to $0.53 per share which was in line with expectations of the investment community.

Looking Into The Numbers

Reported top-line sales growth was mostly the result of comparable store sales which rose by 5.7% compared to the year ago. CEO Laura Alber was pleased with the sales growth saying that it demonstrates the advantage of the multi-brand and multi-channel business model. Despite the company being pleased with the results, comparable sales growth fell short compared to consensus estimates calling for growth of 6.2%.

Interesting to note, sales which are direct to the consumer rose by 9.4% to $522.6 million. This implies that e-commerce sales are now making up 50.3% or the majority of overall revenues. Normal retail revenues were up by just 2.4% to $516.5 million.

A bit disappointing was the gross margin pressure with margins being down by 80 basis points to 36.8% of sales. The company did a great job containing operating expenses which were actually down by a full percentage point to 28.6% of sales, thereby boosting operating margins by 20 basis points to 8.2% of sales.

The increase in reported earnings was due to higher effective tax rates which increased to 40.5% of operating income, compared to 37.5% last year.

Looking Into The Rest Of The Year

For the current third quarter, the company anticipates to post sales of $1.10 to $1.13 billion. Underlying this growth is an anticipated 4-6% increase in comparable store sales. All of this should result in earnings of about $0.58 to $0.63 per share on a GAAP basis. This guidance was quite a bit softer with analysts anticipating earnings of $0.66 per share for the upcoming quarter.

For the entire year, sales are anticipated between $4.65 billion and $4.72 billion, aided by 5-7% comparable store sales. Diluted earnings are seen between $3.07 and $3.17 per share. Analysts were projecting full-year earnings to increase towards $3.20 per share.

Valuation

At the end of the quarter, William-Sonoma held just $70 million in cash and equivalents against which stood merely $2 million in debt, resulting in a modest net cash position. A bit disappointing to investors was the adjusted 17% increase in inventories to $895 million causing some worries as it outpaces top-line sales growth quite a bit. That being said, the financial position of the company remains quite solid.

With nearly 96 million shares outstanding at the end of the quarter, the company's equity is valued at $6.4 billion with shares trading at $67 following the release of the earnings report. This values operations at 1.4 times annual sales and 21-22 times annual earnings.

Modest Growth In A Cyclical Business

Overall revenue growth of the company was rather modest with sales increasing from $3.1 billion in 2005 to $4.5 billion on a trailing basis, growing sales at an average of just 4-5% per annum.

It should be noted that sales peaked at $4.0 billion in the fiscal year of 2008 and that following lows of $3.1 billion for the calendar year of 2009, it took the company until the fiscal year of 2013 to recover to the $4.0 billion sales level.

What has happened is that the company managed to structurally improve its profitability while it has repurchased a cumulative 20% of its outstanding share base over this time period. This has put a bit of pressure on the balance sheet with the net cash holdings approaching zero. This came after the company held a net cash position of roughly half a billion during the recession and shortly thereafter.

What's Left For Investors?

Clearly investors are not very pleased with the results. The company is already consider best-in-class, while it operates in generally favorable operating conditions targeting the upper class while it already has superior comparable store sales growth numbers.

As such it seems that all signs for this company are already on green. In that light the reported sales growth is not very impressive especially as investors wonder if there could be any incremental drivers going forwards.

At the start of July, I actually last had a quick look at the prospects for the company following an upgrade from analysts at Bank of America which send shares to fresh all-time highs at the time. I concluded that shares offered little appeal at the point amidst a premium current earnings valuation amidst already very solid economic conditions. This was despite the strong tailwinds of the relatively strong balance sheet and very well established e-commerce operations.

At the moment I reiterate that stance, not liking the overall valuation very much. While the risk/reward potential of a short position has diminished significantly after the results, this does not automatically translate into an interesting entry point either.

Source: Williams-Sonoma: Sell-Off Is Warranted With Shares Not Offering Appeal At The Moment