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E-Commerce Strength Will Power Williams-Sonoma Higher


Specialty retailer Williams-Sonoma Inc (NYSE:WSM) reported first-quarter results at the end of May that took Wall Street by surprise. Due to the spread of the coronavirus, analysts had expected that the closing of the company's 616 stores for more than half of the quarter would result in very poor numbers.

Instead, Williams-Sonoma beat on revenue, earnings per share and adjusted earnings per share estimates, causing the stock to surge 13% higher by the end of the trading day following the release of results. Shares are nearly flat since then, but this might be a good opportunity for investors to get in the name.

Company background and recent quarterly results

Williams-Sonoma sells its products through several different channels, such as physical store locations and e-commerce channels. The company has several different brands, including the Williams Sonoma Home (which sells cooking and entertainment products), Pottery Barn (which offers furniture, bedding and decorative accessories), Pottery Barn Kids (which provides products for decorating nurseries and bedrooms), Pottery Barn Teen (which includes furniture and lighting for bedrooms and dorm rooms), West Elm (which markets home decor products), Rejuvenation (which offers hardware and furniture based on historical products) and Mark and Graham (which provides men's and women's accessories). Williams-Sonoma is valued at $6.5 billion.

On May 28, Williams-Sonoma reported first-quarter earnings results for the period ending April 30. The company's revenue declined 0.5% to $1.2 billion, which was $140 million ahead of what Wall Street had expected. Earnings per share declined 32% to 45 cents, though this was 25 cents above expectations. Excluding the cost of acquisitions and inventory write-offs, earnings per share decreased 8.6% to 74 cents. Adjusted earnings topped estimates by 67 cents. Same-store sales increased 2.6% compared to an expected decrease of almost 14%.

With its physical stores closed for half of the quarter, Williams-Sonoma leveraged its e-commerce business during the quarter.

Source: Williams-Sonoma's June Investor Presentation, slide 3.

This sales category grew 31.2% and accounted for more than 70% of total sales in the quarter. E-commerce growth was why Williams-Sonoma was able to produce essentially flat total revenue, beat the top and bottom line estimates and grow same-store sales even as retail as a whole has struggled mightily due to the Covid-19 pandemic.

E-commerce growth and its contributions to total revenue in the first quarter shows that Williams-Sonoma was very quickly able to adapt its business and provide customers the products that they wanted. That nimbleness is an attractive feature of the company.

Williams-Sonoma was already showing its e-commerce might prior to the pandemic as slightly more than half of sales already came from online shopping. The company first made online shopping available to customers way back in 1998, way before others had even toyed with the idea.

While e-commerce sales soared in the first quarter due in large part to the coronavirus, it is likely that this channel will be a robust growth driver for Williams-Sonoma whenever the economy returns to a more normal way of doing business. Approximately 80% of industry sales are still done in person at physical store locations. This gives Williams-Sonoma's e-commerce growth a likelihood of strong future growth as so many shoppers remain available to convert to online shoppers.

Nearly all of Williams-Sonoma's brands had comparable sales growth in the first quarter. The lone weak brand was Pottery Barn, which was down 1.1% year over year. The company stated on the conference call that, thanks to e-commerce, this business was positive in the month of May. Pottery Barn accounted for 39% of quarterly revenue.

Pottery Barn Kids and Teens, on the other hand, did quite well, with a combined growth of 8.5%. E-commerce sales were very strong and promotional activity was reduced, which led to higher margins. Williams-Sonoma's baby business continues to see high demand from consumers and offers the company a way to capture a larger pool of customers at a much earlier age. These brands added slightly more than 15% to total revenue.

West Elm, which contributed nearly 26% of revenues, grew 3.3%. Gains were driven by increased demand for outdoor and office furniture.

The Williams-Sonoma brand grew 5.4% and was responsible for nearly all of the remaining revenue. This increase was on account of higher demand for cookware, electrics and food and housewares. The company used its digital channels to bring live demonstrations and recipes suggestions to customers. E-commerce growth came from new customers. Williams-Sonoma said that traffic and conversion rates compared to its peak holiday season, showing how much of an impact e-commerce had for the brand.

In addition to brand and e-commerce growth, Williams-Sonoma has several other growth levers that it can pull.

For example, Williams-Sonoma announced that it had more than 10 million members in its loyalty program, The Key, and found that these consumers spent more than three times as much and made purchases twice as often than non-members. The company's ability to translate its loyalty program into higher sales rates will also be a boast to growth going forward.

Second, the specialty goods market is estimated at $330 billion worldwide. China and southeast Asia is the largest market at $150 billion. With a leadership position in an otherwise highly fragmented space consisting of much smaller companies, Williams-Sonoma can use its size and scale to attract more customers.

Williams-Sonoma ended the quarter with $2.2 billion in current assets, which included $861 million of cash, and equivalents against $1.7 billion in current liabilities, which included $488 million of current debt.

Shares of Williams-Sonoma yield 2.3% today and the company has raised its dividend for the past 14 years. It should be noted that the company has maintained the same dividend for the past six dividend payments. Based on the month that the last increase was given, Williams-Sonoma can raise its dividend this year or next year and still have its dividend growth streak intact.

The company did pull its guidance for 2020 given the continued uncertainty regarding the ongoing pandemic, but Williams-Sonoma guided toward net revenue of at least mid- to high- single-digit growth. Yahoo Finance says that analysts expect the company, on average, to earn $4.50 per share in 2020.

Final thoughts

Williams-Sonoma posted an impressive first-quarter given the circumstances. All but one of the company's major brands produced comparable sales growth. E-commerce, which has long been a strength of Williams-Sonoma, really showed how valuable this channel is to the company's business.

Using Thursday's closing price and expected earnings per share for the year, Williams-Sonoma trades with a price-earnings ratio of 18.5. According to Value Line, the stock has an average price to earnings ratio of 16.9 since 2010. While shares can be considered to be on the slightly expensive side, Williams-Sonoma's first quarter showed that its business is operating on a different plane from most other retailers. For that, the stock deserves a higher multiple.

Disclosure: the author has no position in any stocks mentioned in this article.

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This article first appeared on GuruFocus.