Why Is Williams-Sonoma (WSM) Up 14% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Williams-Sonoma (WSM). Shares have added about 14% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Williams-Sonoma due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Williams-Sonoma Q1 Earnings Beat on E-commerce Growth

Williams-Sonoma Inc. reported better-than-expected first-quarter fiscal 2020 results. Defying market expectations, the company’s comps increased year over year in the quarter, buoyed by accelerated comps growth in the e-commerce business. Notably, Pottery Barn's e-commerce demand gained momentum throughout the quarter.

Earnings & Revenues

Non-GAAP earnings of 74 cents per share surpassed the Zacks Consensus Estimate of 9 cents by 722.2%. The figure, however, declined 8.6% year over year.

Revenues of $1,235 million beat the consensus mark of $1,079 million by 14.5% but remained almost flat year over year. The better-than-expected revenues were driven by a significant acceleration in e-commerce revenue growth to more than 30%.

Comps increased 2.6% year over year in the fiscal first quarter compared with 7.6% growth in the preceding quarter and 3.5% in the year-ago quarter. Although comps were lower sequentially and on a year-over-year basis, the fact that the company registered comps growth despite having all of its 616 stores closed for more than half of the quarter is encouraging.

Pottery Barn Kids and Teen’s comps rose 8.5% compared with 1.2% growth in the year-ago quarter. Comps in Williams Sonoma increased 5.4% against the 1.6% decline registered in the prior-year quarter. The West Elm brand’s comps rose 3.3% versus 11.8% growth in the year-ago quarter. However, comps in the Pottery Barn brand decreased 1.1% against 1.5% growth in the prior-year quarter.

Operating Highlights

Non-GAAP gross margin was 34.5%, down 140 basis points (bps) from first-quarter fiscal 2019. The downside was primarily caused by lower occupancy leverage, higher shipping costs stemming from a greater mix of furniture sales and increased e-commerce sales in the quarter.

Non-GAAP selling, general and administrative expenses accounted for 28.1% of net revenues compared with 28.9% in the year-ago quarter, reflecting an improvement of 80 bps. The upside was driven by advertising leverage owing to gradual shift in advertising spend from catalog to more efficient digital initiatives. The company also generated solid returns from advertising investments due to strength of the multi-channel model. However, non-GAAP operating margin contracted 60 bps to 6.4% in the quarter.

Financials

Williams-Sonoma reported cash and cash equivalents of $861 million as of May 3, 2020 compared with $432.2 million on Feb 2, 2020. It further boosted liquidity during the quarter by one-year extension of the $300-million term loan and a new $200-million unsecured revolving facility, which has not yet been drawn upon.

During the fiscal first quarter, the company invested $42 million in the business and returned $39 million to stockholders through dividend payouts.

Fiscal 2020 Guidance Suspended

Given the unpredictablity stemming from the coronavirus outbreak, it decided to temporarily suspend its full-year guidance.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 167.24% due to these changes.

VGM Scores

At this time, Williams-Sonoma has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise Williams-Sonoma has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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