The narrow-moat retailer boasts strong brand equity and opportunity for international expansion.
Narrow moat Williams-Sonoma
delivered tepid third-quarter comp declines of 0.4%, hindered by results in the Pottery Barn brand. Pottery Barn (representing 42% of 2015 sales) generated comp declines of 4.6%, while PBkids (13% of sales) experienced comp declines of 1%. The bright spot in the firm’s performance came from the West Elm brand (16% of sales), which delivered comp growth of 12%. In our view, the top-line drivers of the business ahead remain West Elm, International, and white space extensions like Rejuvenation and Mark and Graham, all which saw solid demand in the quarter. Our long-term thesis, that Williams-Sonoma remains a best-in-class retailer with strong brand equity and opportunity for international expansion, remains intact. We plan to maintain our $73 fair value and view shares as undervalued, trading at 13 times our 2017 estimate.
Jaime Katz, CFA, is a senior equity analyst for Morningstar.
We may revise our 2016 forecast modestly, as our prior outlook called for $5.2 billion in revenue and $3.50 in EPS, slightly above the updated range of $5.070-$5.150 billion in revenue and $3.35-$3.45 in EPS, as third-quarter revenue tracked slightly behind the pace we had in our model. Commentary was mixed on the rest of the year, with management noting the firm’s home furnishing brands outperformed the industry (which fell 1.7% per U.S. Census) in October, while the election provided some uncertainty for consumers in November, supporting a tepid forward outlook. This puts and takes balance ahead with an easier comparison (fourth-quarter 2015 delivered comps of 0.8%) along with the risk of an increasingly promotional environment and incremental labor cost pressures. All in, this puts Williams-Sonoma placed to postpone operating margin expansion until 2017, when new product innovation flows through the retail channel and supply chain initiatives can pay off. Longer term, we still forecast operating margins of 12% (from 9.8% in 2015) as product innovation drives better pricing, and SG&A leverage takes hold.
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