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Will Williams-Sonoma's Focus on Innovation Drive Growth?

Zacks Equity Research

On Aug 16, we issued an updated research report on Williams-Sonoma, Inc. WSM, a multi-channel specialty retailer of premium quality home products.

Innovation & Positive Housing Market Are Tailwinds

Product innovation plays a huge role in the company’s success. Williams-Sonoma addresses the ever-changing preferences of the customers’ demand with much expertise.  The company has studios providing infrastructure for development of new products, techniques and collaboration with other artists. The company offers exclusive designs for home-furnishing products, textiles, accessories and entertaining essentials. Williams-Sonoma also collaborates with celebrated brands and designers to offer exclusive designs on home-furnishing products.

Apart from its innovative drive, Williams-Sonoma is one of the largest e-commerce retailers in the United States. The company’s direct-to-customer segment operates through e-commerce websites and direct mail catalogues. This segment generates around 52% of its revenues and regularly posts strong operating margins.

Also, the company’s investment in merchandising the brands, efficient catalog circulations and digital marketing boosts its e-commerce revenues. In addition, it is consistently improving its website and mobile shopping experience. The company will continue to strengthen its competitive advantages through innovation in e-commerce in the upcoming quarters.

Importantly, Williams-Sonoma’s products primarily focus on home-furnishings and demand for its products is therefore related to the broader housing construction market’s performance. Positives like an improving economy, modest wage growth, low unemployment levels, a positive consumer confidence as well as a tight supply situation raise optimism about the housing sector’s performance in 2017. Thus, demand for William-Sonoma’s products should increase as well, thereby driving its revenues further.

Soft Comparable Revenues a Major Headwind

Williams-Sonoma has been witnessing soft comparable brand revenues for quite some time. The rate of increase of comparable brand revenues has decreased significantly from 7.1% in 2014 to 3.7% in 2015 and 0.7% in 2016. Comparable brand revenues inched up 0.1% in the first quarter of fiscal 2017, significantly lower than the 4.5% rise recorded in the preceding quarter. The rate of comparable brand revenue increase has softened across all the brands over the years.

The PBteen brand has been hurt the most, thus reporting a 6.2% decline in comparable brand revenues in 2016 compared with a 2.7% fall in 2015. Comparable brand revenue of PBteen brand declined 14.3% in the first quarter of fiscal 2017 compared with a 1.9% increase in the year-ago quarter. In fact, the company expects comparable brand revenues growth in the modest 1–3% range for 2017. This does not indicate any significant improvement from the current trend.

Share Price Performance

Though Williams-Sonoma’s shares have lost 8.6% so far this year compared with the 0.5% gain of its industry, earnings estimate for the current year has moved slightly upward. This signals analysts’ optimism for the stock. Going forward, strong brand portfolio along with focus on innovation and transformation should drive the stock’s performance in the upcoming quarters as well.

Zacks Rank & Other Key Picks

Williams-Sonoma carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the same sector are Dollar General Corp. DG, The TJX Companies, Inc. TJX and Target Corp. TGT, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Full-year 2017 earnings for Dollar General will likely increase 0.1%.

TJX Companies’ earnings are expected to rally 10.8% in fiscal 2018.

Target delivered positive earnings surprises in three of the last four quarters with the average beat being 16.46%.

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