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Can Williams-Sonoma's Digital Innovation Combat Cost Woes?

Zacks Equity Research

Williams-Sonoma, Inc.’s WSM solid e-commerce growth, focus on innovation, along with marketing and digitalization techniques are substantial growth drivers. This multi-channel specialty retailer’s shares have declined 0.9% in the past year, comparing favorably with its industry’s fall of 20.3%. Notably, the company’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average being 8.7%.



However, high costs associated with continued investments in e-commerce, employment-related expenses, shipping costs and a competitive retail environment remain concerns for this Zacks Rank #3 (Hold) company.

Key Growth Drivers

Williams-Sonoma has been increasing its market share on strong e-commerce growth. Its E-commerce segment, which generates 55% of net revenues, operates through e-commerce websites and direct mail catalogs. Moreover, the company saw 9.4% revenue growth in its e-commerce channel in the first nine months of fiscal 2018. The company anticipates a higher growth rate in the upcoming quarters.

It focuses to re-platform mobile sites to Progressive Web App (“PWA”) technology, streamline checkout process, and implement the next-generation of machine learning, on-site search as well as personalization experience.

Keeping in mind the ever-changing preference of consumers, Williams-Sonoma seeks to keep innovating its products. The company addresses the demand for new products very efficiently. Also, collaboration with eminent brands and designers is one of its strategies to attract new customers, invent new trends, as well as widen the company’s social media reach.

Consequently, it has shifted its advertisement spending toward social media campaigns and cross-brand initiatives to increase customer engagement, as well as cross-selling opportunities in its brands. In fact, the company’s acquisition of Outward, Inc., a leading 3D imaging and augmented reality platform, will enhance product visualization and design capabilities. In the fiscal third quarter, the company released the customer-facing version of Outward-powered professional design tool called Design Crew Room Planner.

It has been strategically transforming the retail business by offloading the fleet of underperforming stores, selectively investing in new stores, along with remodeling and relocating the existing ones. In the fiscal third quarter, Williams-Sonoma remodeled five stores and opened three new stores. Moreover, the company plans to close another 21 stores upon lease expiration in the fiscal fourth quarter.

Concerns

Despite reporting better-than-expected earnings over the past few quarters, the company reported lower-than-anticipated revenues in the fiscal third quarter. Also, its weak comps apparently disappointed investors. The downside was largely due to port delays in China that led to a delay in fulfilling orders. In the fiscal third quarter, comps grew 3.1%, down from the fiscal second quarter’s growth rate of 4.6% as well as the prior-year figure of 3.3%.

The company’s earnings are significantly affected by continued investments in e-commerce. Moreover, higher spending on digital advertising is leading to higher SG&A expenses. Again, higher employment-related and shipping costs are pressurizing the margins of the company. In the first nine months of fiscal 2018, non-GAAP operating margin contracted 30 basis points to 6.9%, owing to the above-mentioned headwinds.

Stocks to Consider

Some better-ranked stocks in the Retail-Wholesale sector are RH RH, Darden Restaurants, Inc. DRI and Carrols Restaurant Group, Inc. TAST. While RH sports a Zacks Rank #1 (Strong Buy), Darden Restaurants and Carrols both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

RH has an expected earnings growth rate of 175.4% for fiscal 2018.

Darden Restaurants’ earnings for fiscal 2019 are expected to increase 18.9%.

Carrols has a projected earnings growth rate of 70% for 2018.

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