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Undervalued Williams-Sonoma Is Well-Positioned

Narrow-moat retailer Williams-Sonoma's (WSM) second-quarter results reinforced our thesis that the company remains one of the best competitively positioned home furnishing operators, with potential incremental market share gains ahead. Supported by the positive economic fundamentals supporting housing turnover (driving new furniture purchases), we think the portfolio of brands under the Williams-Sonoma umbrella still has the broadest income and age demographic reach of many of the operators in the home furnishing set, providing the firm with a trove of knowledge on consumer spending behavior over a life cycle. This should allow for best in class merchandising and strategic marketing, facilitating rising brand awareness and equity with its consumer base. Brand comps of 2.8% in the second quarter mark the second sequential quarter of an upswing (after rising 0.1% in the first quarter), with Pottery Barn, PB Kids, West Elm and Pbteen all delivering rising brand comp performance on a sequential basis, a factor that implies merchandise is resonating well with consumers.

The firm’s full-year outlook remains unchanged, calling for sales of $5.165 billion-$5.265 billion, adjusted operating margins of 9.4%-9.6%, and earnings per share of $3.45-$3.65. Given that our previous model forecast sales of $5.25 billion, operating margins of 9.4%, and EPS of $3.58, we don’t plan any material change to our $65 fair value estimate and view shares as undervalued. While we think pressure can ebb and flow depending on the promotional environment (particularly with a company like Wayfair spending around 12% of sales on advertising versus 5%-6% at Williams-Sonoma), we think Williams-Sonoma will emerge from intermittent periods of pricing duress strong thanks to its tactical marketing strategies, particularly with the revenue stream set to become less lumpy as franchise locations become a bigger proportion of the business longer term, diversifying geographic risk.

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