Will William-Sonoma' Initiatives Help Offset Weak Sales?

On Sep 16, we issued an updated research report on Williams-Sonoma, Inc. (NYSE:WSM) , a home furnishings retailer.

Williams-Sonoma is one of the largest e-commerce retailers in the U.S. The company offers exclusive designs for home furnishing products and enjoys a strong international presence. It also enjoys a competitive advantage owing to its multi-brand/multi-channel business model.

Second-Quarter Recall

Recently, the company reported second-quarter 2016 results wherein its earnings were in line with expectations and were flat year over year. Although revenues missed the consensus mark, it increased 2.8% owing to higher comparable brand sales.

While growth at West Elm was impressive, trends at Pottery Barn slowed down. A soft retail environment and cautious consumers prompted management to lower its 2016 EPS guidance. Williams-Sonoma expects 2016 earnings per share in the range of $3.35–$3.55, lower than the prior expectation of $3.50–$3.65. The company also slashed its full-year revenue guidance. Net revenue is now expected between $5.08 billion and $5.23 billion, lower than the prior expectation of $5.15–$5.25 billion.

Comparable brand revenues are projected to grow 1%-4%, lower than the prior projection of 3% to 6%. The company expects adjusted operating margin in the range of 9.4%–9.8%, below the prior expectation of 9.8%–10%.

Williams-Sonoma depends on consumer discretionary spending, which is affected by general macroeconomic conditions, consumer confidence, employment levels and other factors. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly, thanks to higher health care costs and still-tightened credit availability. We note that the rate of increase of comparable brand revenues has decreased significantly from 8.8% in 2013 and 7.1% in 2014 to 3.7% in 2015.

Retail Environment & Initiatives

Williams-Sonoma is in the middle of a transformation drive which aims to address the slowdown in traffic and attract new customers. The company is transforming its marketing strategy and placing more emphasis on digital targeted marketing, remodeling of stores and liquidating less productive SKUs or stock keeping units from its inventory through retail outlets.

The company continued to execute its supply chain initiatives, offsetting some of the pressure on margins. Through these initiatives, it has reduced shipping and fulfillment costs, deliveries per order and inventory.

During the second quarter, total inventories decreased 6.6% year over year due to the company’s inventory optimization initiatives. This marks the first decline since early 2010.

We acknowledge the fact that Williams-Sonoma needs to generate higher sales and profits in its Pottery Barn and Williams-Sonoma brands. That said, the company continues to enjoy benefits from its multichannel platform and portfolio of brands.

Zacks Rank & Key Picks

Williams-Sonoma carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the retail sector include Tempur Sealy International Inc. (NYSE:TPX) , Haverty Furniture Companies Inc. (NYSE:HVT) and Fortune Brands Home & Security, Inc. (NYSE:FBHS) . While Tempur Sealy International sports a Zacks Rank #1 (Strong Buy), Haverty Furniture Companies and Fortune Brands carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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