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Here's Why Williams-Sonoma (WSM) Stock is a Must Buy Now

Zacks Equity Research

Williams-Sonoma, Inc.’s WSM e-commerce channel, innovative efforts, investment in merchandising of brands and digital marketing have been driving the company’s performance. Furthermore, its new West Elm stores continue to deliver better-than-expected performance, in turn leading to incremental top- and bottom-line growth.

Notably, shares of Williams-Sonoma have gained 29.1% so far this year compared with its industry’s 26.7% rally. The price performance was backed by a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in all the trailing seven quarters. Earnings estimates for fiscal 2019 and 2020 have moved 1.7% and 0.6% upward, respectively, over the past 30 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Later last month, Williams-Sonoma reported second-quarter fiscal 2019 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate by 4.8% each. Earnings and revenues also grew 13% and 7.5% year over year, respectively, buoyed by the above-mentioned tailwinds. However, higher shipping costs due to a greater mix of furniture sales are a pressing concern for Williams-Sonoma, which shares space in the industry with RH RH, At Home Group Inc. HOME and Ethan Allen Interiors Inc. ETH. Also, the company’s Williams-Sonoma brand has been witnessing flat or negative comps for the last three quarters, partially driven by tough comparisons.

Major Growth Drivers

Solid Growth in West Elm & Other Cross-Brand Initiatives: West Elm — its biggest growth opportunity — continues to accelerate with renewed strength in Pottery Barn brands. Also, cross-brand initiatives such as The Key and Business-to-Business are expected to become important growth opportunities.

Overall, the market continues to respond to West Elm’s unique offering of industry-leading design, function and value, reinforcing its potential to capture more market share domestically and beyond the borders. This is evident from its ninth consecutive year of double-digit growth and another year of strong comps growth of 9.5% in fiscal 2018. The positive trend continued in the first half of fiscal 2019, as the company registered double-digit revenue improvement (up 16.1%) and strong comps growth of 14.8% (versus 9.2% a year ago).

Meanwhile, emerging businesses — Rejuvenation and Mark and Graham — continue to expand its product offerings. New stores in Rejuvenation are also performing pretty well.

Williams-Sonoma — one of the largest e-commerce retailers in the United States — has a history of driving market share gains, supported by strong e-commerce websites, direct mail catalogs and retail stores, along with shipping fees received for the delivery of merchandise.

The company is expected to generate more revenues from the e-commerce channel, as it focuses to re-platform mobile sites to progressive web app technology, streamline checkout process, and implement the next-generation of machine learning, on-site search as well as personalization experience.

It intends to focus more on growth drivers that include West Elm, newly launched Business-to-Business offering, emerging brands such as Williams Sonoma Home, Rejuvenation, and Mark and Graham, its largest brand Pottery Barn, and namesake brand Williams-Sonoma.

Upbeat View: Backed by the strong growth momentum in first-half fiscal 2019, the company lifted its earnings, revenues and comps guidance for the current fiscal year during the second quarter conference call, even after factoring in the new tariffs.

Net revenues are projected in the range of $5,740-$5,900 billion compared with $5.670-$5.840 billion expected earlier. Comps are likely to grow 3-6% year over year versus 2-5% prior expectation. Non-GAAP operating margin is expected to be in line with the fiscal 2018 level.

The company’s continued focus on digital initiatives, new product introductions, in-home design and service, better digital capabilities, store remodels, along with increased focus on furniture are expected to drive growth.

Superior ROE: Williams-Sonoma’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 33.9% compares favorably with the industry average of 8.6%, implying that it is efficient in using its shareholders’ funds.

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Click to get this free report At Home Group Inc. (HOME) : Free Stock Analysis Report Restoration Hardware Holdings Inc. (RH) : Free Stock Analysis Report Ethan Allen Interiors Inc. (ETH) : Free Stock Analysis Report Williams-Sonoma, Inc. (WSM) : Free Stock Analysis Report To read this article on Zacks.com click here.