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Williams-Sonoma Is Still a Buy

- By Jonathan Poland

Home furnishings are likely to be one of the last products sold directly online, if ever. Consumers still like to see and feel a new couch or dining room table before they buy. Williams-Sonoma Inc. (WSM), a leader in the $120 billion sector, should remain a slow growth story going forward. With its stock down nearly 30% since the market selloff began in September, it is time to buy.

In the last decade, Williams-Sonoma has increased sales from $3.3 billion to over $5.5 billion while also expanding profit margins and buying back stock. This has meant high growth in net income, which has risen from $30 million in 2009 to $274 million in the last 12 months. In the last five years alone, Williams-Sonoma has generated over $1.2 billion in net profit.


Yet, analysts are still cautious on the owner of Pottery Barn, Williams-Sonoma and West Elm. On Monday, Credit Suisse reaffirmed its view on the home furnishings space for 2019 as it expects margin pressure for traditional players such as Williams-Sonoma and Bed Bath & Beyond (BBBY) amid "channel shifts (online and value), aggressive price and shipping promotional activity," along with "elevated investments in marketing, supply chain and technology."

This was after a fiscal third quarter that saw adjusted earnings exceed expectations and positive comparable growth of 3.1%. Since bottoming the day before the government shutdown began, the stock has rebounded a little more than 15%, but there's more to come.

Furniture and high-end home goods both have a pretty long shelf life, which puts Williams-Sonoma in a much better position than Bed Bath & Beyond over the long term. More importantly, the company's e-commerce platform is doing great with sales up 8.2% year over year, accounting for 55% of the company's top line. West Elm is the top performer thanks to popularity among the up-and-coming millennials.

In the next two years, the company is expecting to earn over $8 per share, 16% of the current market capitalization, while paying out 3.25% in dividends - a number that is likely to grow with Williams-Sonoma's earnings over the next decade. It's hard to extrapolate out in periods of stability, much less our current environment, but even if Williams-Sonoma's margins remain the same, based on current sales growth (4.2%), net income would surpass $415 million on revenue of roughly $8.3 billion in 10 years. If the company keeps its aggressive buyback policy, earnings per share could be in the $7 range. Finally, if the shares are priced at 15 times, the stock would trade at $105 per share and pay a $3.50 dividend.

These are a lot of "ifs," but considering the industry and how well Williams-Sonoma is doing shifting with the trend, it's entirely possible the real numbers in 2028 will be even better.

Disclosure: I am not long or short any stocks mentioned in this article.

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This article first appeared on GuruFocus.