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Why Is Williams-Sonoma (WSM) Up 26% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Williams-Sonoma (WSM). Shares have added about 26% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Williams-Sonoma (WSM) Q1 Earnings & Revenues Beat Estimates

Williams-Sonoma Inc. reported better-than-expected results in first-quarter fiscal 2019. Non-GAAP earnings of 81 cents per share surpassed the Zacks Consensus Estimate of 68 cents by 19.1%. The figure also grew 21% year over year.

Moreover, revenues of $1,241.1 million beat the consensus mark of $1,222 million by 1.6% and grew 3.2% year over year.

Comps increased 3.5% in the fiscal first quarter compared with 2.4% growth in fourth-quarter fiscal 2018. Yet, the reported figure was down from 5.5% in the year-ago quarter.

The company’s West Elm brand’s comps grew 11.8% compared with 9% growth in the prior-year quarter. Pottery Barn and Pottery Barn Kids and Teen grew 1.5% and 1.2% versus 2.7% and 5.3% in the prior-year quarter, respectively. However, the Williams Sonoma brand’s comps declined 1.6% in the quarter compared with 5.6% comps growth registered in the year-ago period.

Operating Highlights

Non-GAAP gross margin was 35.9%, down 10 basis points (bps) from first-quarter fiscal 2018. The downside was mainly due to higher shipping costs, primarily driven by a greater mix of furniture sales. This was partly offset by benefits from product margin expansion and strong occupancy leverage.

Non-GAAP selling, general and administrative (SG&A) expenses accounted for 28.9% of net revenues compared with 29.7% in the year-ago quarter, reflecting a decrease of 80 bps owing to leverage across advertising, employment and general expenses, thanks to benefits from cost-savings initiatives.

Non-GAAP operating margin was 7% in the quarter, up 70 bps year over year.

Financials

Williams-Sonoma reported cash and cash equivalents of $107.7 million as of May 5, 2019 compared with $339 million on Feb 3, 2019.

During the fiscal first quarter, the company invested $36 million and returned more than $70 million to stockholders through dividends and share repurchases, comprising $37 million in dividends and $34 million in share repurchases.

Fiscal 2019 Guidance Lifted

Given solid fiscal first quarter and the growth trend witnessed by Williams-Sonoma in early second quarter, the company now expects non-GAAP earnings per share in the band of $4.55-$4.75, up from the prior expectation of $4.50-$4.70.

Net revenues are projected in the range of $5.670-$5.840 billion. Comps are likely to grow 2-5% year over year. Non-GAAP operating margin is expected to be in line with the fiscal 2018 level.
It expects an incremental buyback of shares under a repurchase authorization of approximately $678 million.

The company expects to close 30 stores during the year, bringing down the total store count to 595 by the end of the year.

Long-Term View Reaffirmed

Total net revenues are expected to grow in mid-to-high single digits. Non-GAAP operating income is likely to be in line with revenue growth, thereby driving operating margin stability. The company expects above-industry average ROIC in the long term.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Williams-Sonoma has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, 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 broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Williams-Sonoma has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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