The narrow-moat retailer should see incremental market share gains ahead.
By Jaime M. Katz, CFA | 08-23-17 | 09:00 PM | Email Article

Narrow-moat retailer  Williams-Sonoma's second-quarter results reinforced our thesis that the company remains one of the best competitively positioned home furnishing operators, with potential incremental market share gains ahead.

Jaime Katz, CFA, is a senior equity analyst for Morningstar.

Supported by the positive economic fundamentals supporting housing turnover (driving new furniture purchases), we think the portfolio of brands under the Williams-Sonoma umbrella still has the broadest income and age demographic reach of many of the operators in the home furnishing set, providing the firm with a trove of knowledge on consumer spending behavior over a life cycle. This should allow for best in class merchandising and strategic marketing, facilitating rising brand awareness and equity with its consumer base.

Brand comps of 2.8% in the second quarter mark the second sequential quarter of an upswing (after rising 0.1% in the first quarter), with Pottery Barn, PB Kids, West Elm and Pbteen all delivering rising brand comp performance on a sequential basis, a factor that implies merchandise is resonating well with consumers.

The firm’s full-year outlook remains unchanged, calling for sales of $5.165 billion-$5.265 billion, adjusted operating margins of 9.4%-9.6%, and earnings per share of $3.45-$3.65. Given that our previous model forecast sales of $5.25 billion, operating margins of 9.4%, and EPS of $3.58, we don’t plan any material change to our $65 fair value estimate and view shares as undervalued. While we think pressure can ebb and flow depending on the promotional environment (particularly with a company like Wayfair spending around 12% of sales on advertising versus 5%-6% at Williams-Sonoma), we think Williams-Sonoma will emerge from intermittent periods of pricing duress strong thanks to its tactical marketing strategies, particularly with the revenue stream set to become less lumpy as franchise locations become a bigger proportion of the business longer term, diversifying geographic risk.

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Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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