Williams-Sonoma, Inc. (WSM), which is based in San Francisco, is the world’s largest digital-first, design-led and sustainable home retailer. Its famous brands include Pottery Barn, Williams Sonoma, and Rejuvenation. For its fiscal third quarter, ended October 31, 2021, WSM’s revenues increased 16% year-over-year to $2.05 billion. This can be attributed to a 67% rise in e-commerce sales. Its gross profit came in at $895.49 million, up 26.9% from its year-ago value. Its net earnings improved 23.7% from the prior-year quarter to $249.52 million, while its EPS increased 29.5% from the same period last year to $3.29, surpassing analyst estimates by 4.8%.

However, WSM shares have retreated 2% in price since the company’s quarterly earnings release on November 18, despite its reporting impressive financials. Rising investor concerns regarding supply chain bottlenecks as seasonal demand increases have caused the shares to slump.

Nevertheless, WSM is expected to maintain its growth streak regardless of the temporary headwinds, thanks to its substantial inventory levels and leading market share. The company’s merchandise inventory increased 13% year-over-year to $2.18 billion as of October 31. Furthermore, WSM’s merchandise inventory improved 24.6% from January 31, 2021, to October 31, 2021.

Here’s what could influence WSM’s performance in the near term:

Solid Growth Prospects

WSM expects its net revenues to rise 22% to $23 in its fiscal year 2021, and its non-GAAP operating margin to range from 16.9% - 17.1%. In its third-quarter earnings release, management stated that the company is on track to achieve a $10 billion net revenue mark by 2024.

Regarding this, WSM’s President and CEO Laura Alber said, “As we enter the fourth quarter, we are seeing strong sales and margins continuing. We are thrilled with our customers’ response to our holiday and gifting assortments, and we are ready to drive an outstanding finish to the year. With our strong results to date, our winning positioning in the industry, and our outperforming growth strategies, we are more confident than ever in the long-term strength of our business.”

Analysts expect WSM’s revenues to rise 11.9% in its fiscal fourth quarter (ending January 2022) and 22.4% next year to $2.56 billion and $8.30 billion, respectively. The company’s EPS is expected to increase 20.5% year-over-year to $4.76 in the current quarter and 56.9% year-over-year to $14.18 in 2022. Also, WSM’s EPS is expected to grow at a 14.8% CAGR over the next five years.

Higher-than-Industry Profit Margins

WSM’s 43.2% trailing-12-month gross profit margin is 20.4% higher than the 35.89% industry average. The company’s 12.84% and 19.03% respective net income and EBITDA margins are significantly higher than the 6.56% and 12.73% industry averages.

Its 12.5% levered free cash flow margin is more than double the 6.18% industry average And WSM’s 70.1% ROE compares with the 17.64% industry average. In addition, WSM’s 23.06% ROA is 270.7% higher than the 6.22% industry average.

Favorable POWR Ratings

WSM has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

WSM has a Quality grade of A, which is in sync with its high-than-industry profit margins. Also, the company has a Growth grade of B. This is justified because its revenues and net income have increased at CAGRs of 13.4% and 55.6%, respectively, over the past three years.

Of the 61 stocks in the B-rated Home Improvement & Goods industry, WSM is ranked #9.

In total, we rate WSM on eight different levels. Click here to view WSM ratings for Sentiment, Momentum, Stability, and Value.

Bottom Line

As the parent company of some of the most popular retail brands in the United States, WSM is expected to witness substantial demand this holiday season. Though investors are concerned about supply-chain bottlenecks creating a bullwhip effect due to port congestion and lockdowns in China and Vietnam, the company’s strong inventory levels are expected to offset the negative impact to a great extent. Thus, we think buying the dip in WSM right now could be profitable.

How Does Williams-Sonoma (WSM) Stack Up Against its Peers?

While WSM has a B rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Acuity Brands, Inc. (AYI) and Kingfisher PLC ADR (KGFHY), which have an A (Strong Buy) rating.

WSM shares were trading at $210.10 per share on Wednesday afternoon, down $1.40 (-0.66%). Year-to-date, WSM has gained 109.44%, versus a 26.58% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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