Williams-Sonoma: Soft short-term prospects, bullish long-term

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justin sullivan

Williams-Sonoma (New York Stock Exchange:WSM) continues to perform well, but momentum is likely to slow in the near term. However, the long-term outlook is positive.

Against the retail trend

Despite supply chain bottlenecks, a climate of rising inflation and weakening consumer confidence, US consumer lifestyle brand Williams-Sonoma has so far bucked the retail trend with strong performances in recent quarters. Net income for the second quarter of 2022 (quarter ended July 2022) increased 9.7% year over year to $2.1 billion, accelerating from the first quarter of 2022 when revenue increased 8.1% year-over-year. The company’s top-tier performance outperformed the industry (US furniture retail sales. two% in the nine months to September 2022), while rivals like Fair Path (W) Y cram (OSTK) have been experiencing consecutive year-over-year revenue declines in recent quarters.

Williams-Sonoma’s gross profit increased 8.2% year-over-year to $928 million, while net profit increased 8.5% year-over-year to $267 million. However, margins continued to decline sequentially; gross margins fell to 43.5% in the second quarter of 2022 from 43.8% in the first quarter of 2022 and 44.9% in the fourth quarter of 2021. Net margins fell to 12.5% ​​in the second quarter of 2022, from 13.4% in the first quarter of 2022 and to 16.1% in the fourth quarter of 2021.

Williams-Sonoma Quarterly Gross Margins and Net Margins %

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Likely weak short-term outlook

High inflation coupled with rising interest rates is pressing US home buying activity and an anticipated recession suggest a soft near-term outlook as consumers cut back on discretionary spending. Additionally, pandemic-related tailwinds are subsiding and with a number of purchases made during the pandemic, buying activity is likely to slow in the near term. Challenging macro conditions could limit topline growth in the near term.

On the cost side, supply chain challenges and inflationary conditions are expected to continue to persist in the second half of 2022, which could affect margins.

Various growth drivers to support long-term performance

However, in the longer term, there are reasons to be optimistic about the company’s prospects. Williams-Sonoma targets an upper-middle to wealthy demographic that is relatively immune to economic headwinds and yet more likely to recover faster from any economic downturn. The long-term prospects for the industry are intact; furniture is a growing market with projections that expect a simple medium low single-digit percentage growth in the US and a average single digit growth worldwide in the coming years.

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Key strengths include a growing brand portfolio and growing brand value

The company enjoys several strengths; Within its target demographic, Williams-Sonoma offers a growing portfolio of brands catering to sub-segments; West Elm, the company style but affordable quality-conscious brand goals millennials while Williams-Sonoma targets a more affluent and mature demographic and Pottery Barn falls in the middle. This not only increases the market the company is targeting, but also opens up cross-selling opportunities; cross-brand customers represent 60% of total sales in 2021, and management believes they can capture a larger share of the portfolio from their existing customers.

The company continues to build on its multi-brand strategy with emerging brands like Rejuvenation and Mark and Graham, both of which appear to be enjoying strong traction (double-digit gains in Q2 2022).

While expanding its collection of brands, the company is also building its current set of brands and pricing power; management continues to highlight its efforts to remove sitewide promotions, and those efforts seem to be paying off with company margins on an uptrend in recent years, especially even in 2021 when inflation, chain dislocations of supply and strong promotions impacted margins. for many rival retailers such as house deposit.

Williams-Sonoma % Gross Margins

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Williams-Sonoma Net Margins %

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Omnichannel Strategy Could Help Drive Market Share Gains

In line with its digital-first (but not just digital) strategy, Williams-Sonoma continues to strengthen its omnichannel capabilities, combining its offline store footprint with its online stores. In the short term, their offline presence could help them capture share from online-only stores as consumers return to in-store shopping after the pandemic (the trend is hitting online-only retailers like Wayfair, for example, who is losing market share to omnichannel players), but in the longer term, an omnichannel strategy could help drive sales as consumers become more waiting retailers to offer shopping routes both online and offline. This is particularly true among digital natives younger buyers like millennials and Gen-Z shoppers (who happen to be Williams-Sonoma’s fastest-growing customer segment). Growing omnichannel strengths coupled with innovative products and proactive branding efforts should help the company’s brands stay fresh and continue to resonate with a younger audience, putting the company in a better position to capture a larger audience. part of their portfolio spending as they move up the income ladder. and upgrade to higher-end brands.

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Exploring new avenues of growth with international growth ambitions and B2B business

The company has been exploring new avenues for growth that should help fuel growth and diversify revenue streams in the coming years; B2B delivered a solid 32% YoY growth in Q2 2022, and on track to be a $1 billion business this year. The company continues to focus on building this new business by diversifying its product offerings; in November the company added commercial grade kitchen products for its B2B clients, and in October the company risky in the corporate gift market, building a dedicated corporate gift sales team comprised of product experts ready to help customers put together personalized corporate gift sets. Corporate gifts are a $7 billion market, and the brand recognition and strengths of the company’s resources, including its store presence, broad product offering, and human resources, suggest that the company is well positioned to capture a share of the high-end segment. of this market.

Meanwhile, its overseas expansion efforts continue. The majority of Williams-Sonoma’s revenue is generated in the US, which accounted for 94% of revenue in 2021. Notable efforts in this area include the company’s expansion into India; India’s consumer market is flourishing and the country is expected to become the world’s third largest economy by 2027, outperforming Japan and Germany according to Morgan Stanley, Indian consumer spending is expected to double as well and home goods are expected to see higher consumer demand. Pottery Barn, Williams-Sonoma’s mid-tier brand and largest revenue generator (Pottery Barn and Pottery Barn Kids and Teen together accounted for 42% of revenue in 2021), which launched in India in 2021, where Pottery Barn enjoy some brand awareness given the popularity of the 1990s sitcom FRIENDS in the country, it could be well positioned to capture a portion of that spending. The Pottery Barn and Pottery Barn Kids website launched in India in the second quarter of 2022, with stores expected to open in the third quarter of 2022 and further expansion in 2023.

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General household consumption in India, 2021 and 2031

Morgan Stanley

decent finances

Williams-Sonoma is in a decent financial position; The company has very little financial debt (most of its debt consists of capital leases). A decent financial position not only allows the company to navigate short-term financial hurdles, but also better positions it to invest in long-term organic growth initiatives such as brand building, portfolio expansion, and growth in the business. abroad, as well as to take advantage of any opportunities for inorganic growth. that can come up.

Operating cash flows have also been stable over the past decade. 2020 saw an unprecedented jump in operating cash flows as lockdowns led people to spend heavily on furniture during the pandemic; however, this momentum normalized in 2021 and is likely to continue in the future.

Williams-Sonoma Operating Cash Flows

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risks

Inventory risks could potentially affect performance in the short term. Inventory turnover has been falling sequentially and the company’s inventory levels have been increasing. While this may have been a response to ongoing supply chain bottlenecks, it increases the risk of an inventory buildup that not only drives up storage costs, but can further reduce margins if the company becomes is forced to increase promotional discounts to move unsold inventory.

Williams-Sonoma Inventory Days

ITUC market

Williams-Sonoma shares currently have high short-term interest, suggesting pessimism about the company’s near-term prospects.

Summary

Premium furniture retailer Williams-Sonoma has so far delivered consistent results despite challenging economic and operating conditions. However, the near-term outlook is likely to be dim as weakening home buying activity could weigh on revenue and supply chain bottlenecks and costs that impact inflation.

Longer-term prospects for the furniture industry are intact with forecasts expecting steady growth and the company is poised to count on several growth drivers, including B2B sales and international growth. The company’s efforts to strengthen its omnichannel capabilities could help capture market share, while its efforts to build its brand through quality products and limited promotions could improve pricing power and thus the margins.

With a P/E of 6.9, Williams-Sonoma is pretty cheap; however, with short-term interest relatively high, investors may want to wait for a better entry point.

analysts they are mostly neutral in action.

Analyst Rating - Williams-Sonoma

WSJ

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