Williams-Sonoma Rides On Strong E-Commerce Amid High Costs

Williams-Sonoma, Inc.’s (NYSE:WSM) consistent enhancement of e-commerce channel, optimization of supply chain and the transformation of retail fleet through investment in new and remodeled stores have been the principle growth drivers.

Recently, the company reported fourth-quarter 2017 earnings, which surpassed the Zacks Consensus Estimate by 3.1%. The figure increased 8.4% from the year-ago quarter’s level. Net revenues came ahead of the consensus mark and improved 6.2% year over year. Comparable brand revenues rose 5.4% in the quarter, better than 3.3% increase in the preceding quarter and 0.9% decline in the year-ago quarter. The figure marks the highest fourth-quarter comps registered by the company in several years, driven by broad-based strength in all its brands.

Revenues in the e-commerce segment were up 8.4%, while the Retail segment improved 3.9% from the prior-year quarter.

Key Growth Drivers

E-commerce channel has driven substantial growth for Williams-Sonoma. The segment generates around 53% of revenues and has been consistently posting impressive results. The company saw a 5.5% growth in its e-commerce channel in 2017. Williams-Sonoma is expected to generate more revenues from e-commerce, as it focuses on re-platforming its mobile sites to progressive web app technology, streamlining checkout process and implementing the next-generation of machine learning, on-site search as well as personalization experience.

In addition to focused investment in the e-commerce segment, Williams-Sonoma consistently innovates to keep pace with the changing preferences of consumers. The company collaborates with celebrated brands and designers to offer exclusive designs on home furnishings products. The company believes that collaborations with designers and brands attract new customers as well as introduce new trends in home furnishing.

The company is focused on enhancing customer experience through improved and innovative marketing techniques. In order to drive brand awareness, it shifted advertising spend toward social media campaigns and in cross-brand initiatives to increase customer engagement and cross-selling opportunities across its brands. Such initiatives drove total customer growth by 5%, the highest increase since 2014.

In 2017, the acquisition of Outward, Inc, a leading 3D imaging and augmented reality platform, is expected to improve product visualization and design capabilities. This will elevate customer experience, increase conversion and reduce returns for William-Sonoma.

Concerns

The specialty e-commerce and retail businesses are highly competitive. Williams-Sonoma competes with other retailers that market similar merchandise. The substantial sales growth in the e-commerce industry in the last decade has encouraged the entry of competitors and introduced new business models. Increased competition might dent Williams-Sonoma’s sales and operating results.

Moreover, although Williams-Sonoma derives substantial revenues from efficient catalog circulation and digital marketing, it is affected by costs associated with continued investments in e-commerce. Further, supply chain investments are denting the company’s operating margins. In 2017, the company’s operating margin was down 70 basis points (bps) year over year.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the Retail-Wholesale sector are Dillard's, Inc. (NYSE:DDS) , Macy's, Inc. (NYSE:M) and Kohl's Corporation (NYSE:KSS) .

Earnings for Dillard's, a Zacks Rank #1 (Strong Buy) company, are expected to increase 21.3% this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Macy's has a solid ROE of 24.9%, higher the industry average of 11.2%. The company sports a Zacks Rank #1.

Earnings for Kohl's, a Zacks Rank #2 (Buy) stock, are expected to increase 25.1% this year.

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