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Can Williams-Sonoma (WSM) Replicate '19 Performance in 2020?

Zacks Equity Research

Year 2019 has turned out to be an eventful one for Williams-Sonoma, Inc. WSM. So far this year, the stock has gained 46.7% compared with the industry’s growth of 40.4%. The company’s strengthened focus on innovation, marketing and digitalization techniques bodes well. Solid growth in e-commerce, West ELM and emerging businesses added to the upside.

However, soft comps in the namesake brand and higher shipping expenses pose concerns.

Growth Catalysts

Being one of the largest e-commerce retailers in the United States, Williams-Sonoma has been gaining market share on strong e-commerce websites, direct mail catalogs and retail stores along with shipping fees received for the delivery of merchandise. Also, the company’s ongoing investments in merchandising of brands, efficient catalog circulations and digital marketing are gaining traction. Notably, its innovative efforts drove e-commerce growth, contributing 57% to total revenues in third-quarter fiscal 2019.

Moreover, the company’s focus on enhancing customer experience through technological innovation and operational improvement bodes well. During third-quarter fiscal 2019, it launched its machine-learning search engine and improved speed of the mobile site to deliver a faster and more compelling experience. Also, the company is transitioning from catalog mailing to higher-impact digital channels to drive short-term return on investment, and long-term gains and customer growth.

 


In order to drive brand awareness, and increase customer engagement  and cross-selling opportunities, the company shifted its advertising spend toward social media campaigns and cross-brand initiatives such as The Key, Design Crew Room Planner and The One Registry. It expects these initiatives to be incremental growth drivers for all of its brands in fiscal 2019 and beyond.

Concerns

Despite better-than-expected overall results in the fiscal first, second and third quarters of 2019, the company reported weak comps in its namesake brand in the third quarter. The namesake brand has witnessed flat or negative comps in the trailing four quarters on tough comparisons against higher levels of promotions. Notably, comps dipped to 1.6% in the first nine months of fiscal 2019 compared with 3.1% reported in the year-ago period.

Also, higher shipping costs and increased tariffs have been pressurizing gross margins of the company. In the fiscal third quarter, non-GAAP gross margin declined 50 basis points from the prior-year period. The decline was due to higher shipping costs, primarily attributed to a greater mix of furniture sales and the implementation of China tariffs. However, this was partly offset by strong occupancy leverage.

Zacks Rank & Key Picks

Currently, Williams-Sonoma carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Retail-Wholesale sector are Sally Beauty Holdings, Inc SBH, RH RH and Tempur Sealy International, Inc TPX. Sally Beauty Holdings and RH currently sport a Zacks Rank #1, while Tempur Sealy carries a Zacks Rank #2 (Buy).

Sally Beauty Holdings surpassed earnings estimates in each of the trailing four quarters, delivering a positive surprise of 4.2%, on average.

RH has expected earnings per share growth rate of 17.8% for three-five years.

Tempur Sealy’s 2020 earnings are expected to rise 46%.

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