It is difficult to think about buying a stock trading at a 52-week high and near its all-time high. However, I believe that the risk with buying Williams-Sonoma (WSM) at current price levels could be well worth it. First, the company is conservatively managed and has a strong balance sheet and reasonable valuation measures. Second, it is growing by expanding overseas and acquiring other companies, thus creating greater economies of scale for its proven operating model and brands. And finally, expected demographic and housing trends in the U.S. and Canada should benefit Williams-Sonoma for the foreseeable future.
Williams-Sonoma estimates that it will generate sales of about $4 billion in 2012 or 8% higher than 2011, while its operating margin will be within a close range to its 2011 margin of about 10%. It is clear that the company is able to grow profitably without incurring additional debt by financing growth with its cash flow. There is no other publicly traded company that is similar to Williams-Sonoma. For comparison purposes we can look at Bed Bath & Beyond (BBBY), Wal-Mart (WMT), and Amazon.com (AMZN), which have operating margins of 16.6%, 5.9%, and 1.2%. It appears that Williams-Sonoma is positioned in the middle where it can provide good quality products at reasonable prices.
In terms of valuation, the shares trade at a price to tangible book value ratio of about 3.6, which is lower than that of Bed Bath & Beyond, Wal-Mart, and Amazon.com of 4.2, 5, and 23.2, respectively. On a price to earnings ratio the company trades at about 17.3 times its 2012 estimated earnings, slightly higher than that of Bed Bath & Beyond (14.8) and Wal-Mart (15), but significantly lower than Amazon.com (334). Again, a direct comparison is difficult, but Williams-Sonoma has a valuation that is within an acceptable range.
In addition to solid profit margins and decent valuation, the company has no debt and is repurchasing shares. As of the end of July 2012, it had $63 million left on its most current share buyback plan. The company pays a quarterly dividend of $0.22 per share for an annual yield of about 2%, which is not bad given the low interest rate environment. Bed Bath & Beyond and Amazon.com do not pay a dividend and Wal-Mart has an annual dividend yield of 2.2%. Similar to Williams-Sonoma, Bed Bath & Beyond and Amazon.com have no debt while Wal-Mart has about $41 million of long-term debt or about 17% of its market capitalization of $248 billion. Overall, Williams-Sonoma has rock-solid fundamentals and a stock that is reasonably valued and pays a dividend of 2%. This is not bad for a company that plans to double its size in 10 years.
Most recently, Williams-Sonoma announced that it would expand by opening four company operated stores in Sydney, Australia. Culturally, the Australian market, similar to the U.S. and Canada, likes cooking and entertainment as well as gift giving. Most importantly, Australia has enjoyed a strong economic growth in the past decade and its GDP is currently ranked 13th in the world by size. This expansion is in addition to 16 company operated stores in Canada and about a dozen franchised stores in the Middle East (some of which are operated and managed by women).
The company is able to create brands internally and through acquisitions. During the late 1990s and early 2000s, Williams-Sonoma launched Pottery Barn Kids, West Elm, and Pottery Barn Teens brands. Currently, these three brands generate over $1 billion in revenue per year. In addition, the company is increasingly developing its own products at its Williams-Sonoma stores. These products are more unique, meet more specific customer needs, and also have higher margins.
More recently, at the end of last year, Williams-Sonoma acquired Rejuvenation for $25 million. The company plans to grow Rejuvenation brand by integrating it into its operating platform, while keeping Rejuvenation management independent in running the business. It will not be a surprise if there are similar but larger acquisition in future years as Williams-Sonoma platform is easily scalable.
Another avenue for Williams-Sonoma is its direct-to-consumer (DTC) segment, which accounts for about 44% of sales. Also, it is growing faster than the retail segment. Bed Bath & Beyond and Wal-Mart have much lower on-line sales as a percentage of their total sales. This is why Bed Bath & Beyond is constantly mailing 20% off coupons and Wal-Mart is expanding into food. Amazon.com, on the other hand, does not have a brick and mortar presence, which are essential for many of the product categories that Williams-Sonoma is selling. Williams-Sonoma has a clear advantage by offering superior customer experience both in its stores and online. Also, its ability to integrate data analytics into its DTC division allows it to leverage its millions of customers and decades of retailing experience. The planned launch of a new DTC brand at the end of 2012 could provide further growth to Williams-Sonoma top and bottom lines.
Economists are increasingly becoming optimistic that the housing market is recovering and that house remodeling is on the rise. This trend should benefit Williams-Sonoma. In addition, its Pottery Barn brand is conservative and is especially appealing to the baby-boomers while West Elm has a more modern look. In addition, the United States and Canada (and Australia) are experiencing some of the highest population growth rates in the developed world, which also bodes well for Williams-Sonoma.
Williams-Sonoma's goal is to double its size in 10 years. If an investment in the stock is also able to double at the same time, this implies an annual return of 7% plus dividend. There are certain risks but it appears that Williams-Sonoma stock is valued well compared to its peers. The company has a solid balance sheet and a management that is shareholder friendly. Williams-Sonoma has a proven ability to grow its own brands, acquire new companies, and provide superior customer experience in its stores and through its web sites and catalogues. There are risks coming from continued economic weakness, competitors, and strategic mistakes. However, Williams-Sonoma has powerful internal as well as external tailwinds, which should continue to reward its stockholders beyond the current share price.