The narrow-moat company eased its outlook for the remainder of 2016 due to a softer retail landscape.
As narrow moat-rated Williams-Sonoma
battles a difficult retail landscape and increasingly competitive e-commerce environment, the firm tapered its outlook modestly for the remainder of 2016, lowering expected sales from $5.2 billion to $5.15 billion at the midpoint. Greater pressure seems to be coming from the ability to raise prices, hold market share, and leverage costs, resulting in a downtick in expected operating margins by 30 basis points (to 9.4%-9.8%) ultimately reducing earnings to $3.45 from $3.58 at the midpoint. This modest reduction is prudent in light of the retail spending environment, and the magnitude of the change has been better than a number of other brick and mortar retailers have declared this year. We don’t plan to make any material change to our $76 fair value estimate, and see housing and demographic fundamentals as supportive of the underlying demand of the business, at least until 2020, when some of the near-term housing support could slow.
Jaime Katz, CFA, is a senior equity analyst for Morningstar.
Second-quarter results were mostly in line with the pace of growth in our model, with the exception of retail sales and gross margin outcomes. Retail sales were slower than our low-single-digit cadence would have implied, rising less than 1%, but e-commerce fell in line with our mid-single-digit trend, at 5%. We expect to reduce the second-half cadence of retail sales which continue to struggle as mall traffic wanes, while we suspect that e-commerce can continue to click away at a mid-single-digit pace thanks to tactical e-commerce advertising campaigns. We plan to revise our model longer term on the gross margin line, which contracted 70 basis points to 35.4% in the quarter (making for the ninth quarter of gross margin declines), as occupancy costs rose and higher franchise revenues were included in the mix. We don’t expect franchise to slow as the company expands globally, and think the rising percentage of franchise revenue will dampen gross margin expansion potential over the next decade.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.