Williams-Sonoma (WSM) Drops 5% In Spite Of Solid Q3 Earnings

Williams-Sonoma Inc.’s (NYSE:WSM) shares dropped 5.1% on Nov 21 in the after-hour trading session, following third-quarter fiscal 2019 results. The company posted better-than-expected results in the quarter under review as well as raised guidance for fiscal 2019 earnings and revenues on strong business trend. However, decline in comps at the namesake brand and lower gross margin might have hurt investors’ sentiments.

Nonetheless, West Elm — its biggest growth catalyst — continues to renew strength in Pottery Barn brands. Also, cross-brand initiatives such as The Key and Business-to-Business are expected to become important growth opportunities. Notably, during the third quarter, strong contributions from The Key made a positive impact on the quarterly results.

Non-GAAP earnings of $1.02 per share surpassed the Zacks Consensus Estimate of $1 by 2%. The figure also increased 7.4% year over year.

Moreover, revenues of $1,442.5 million beat the consensus mark of $1,413 million by 2.1% and grew 6.3% year over year.

Comps increased 5.5% in the fiscal third quarter compared with 6.5% growth in the preceding quarter and 3.1% in the year-ago quarter.

The West Elm brand’s comps grew 14.1% compared with 8.3% growth in the prior-year quarter. Pottery Barn’s comps rose 3.4% compared with 1.4% in the year-ago quarter. Comps in Pottery Barn Kids and Teen increased 4%, versus flat growth registered in the prior-year quarter. Notably, emerging brands — Rejuvenation as well as Mark and Graham — registered double-digit increases. However, the Williams (NYSE:WMB) Sonoma brand’s comps declined 2.1% in the quarter against 2.1% growth registered in the year-ago quarter.

Williams-Sonoma, Inc. Price, Consensus and EPS Surprise

Operating Highlights

Non-GAAP gross margin was 36%, down 50 basis points (bps) from third-quarter fiscal 2018. The downside was primarily caused by higher shipping costs, driven by a greater mix of furniture sales and impact of the implementation of China tariffs. This was partly offset by benefits from strong occupancy leverage.

Non-GAAP selling, general and administrative expenses accounted for 28.4% of net revenues compared with 28.9% in the year-ago quarter, reflecting a decrease of 50 bps. This improvement was driven by leverage across employment and advertising from higher sales as well as consistent cost-saving initiatives. Non-GAAP operating margin remains flat year over year at 7.6% in the quarter.

Financials

Williams-Sonoma reported cash and cash equivalents of $155 million as of Nov 3, 2019 compared with $339 million on Feb 3, 2019.

During the first nine months of fiscal 2019, the company invested $121 million in the business and returned $226 million to its stockholders through dividends payouts as well as share repurchases. Notably, the company paid out $113 million worth of dividends and repurchased about $113 million shares.

Fiscal 2019 Guidance

Considering solid results in the first nine months of fiscal 2019, the company now expects non-GAAP earnings per share in the band of $4.65-$4.80, up from prior expectation of $4.60-$4.80.

Net revenues are projected in the range of $5.770-$5.900 billion compared with $5.740-$5.900 billion expected earlier. Comps are likely to increase 3.5-6% year over year compared with prior expectation of 3-6%. Non-GAAP operating margin is still expected to be in line with the fiscal 2018 level.

The company expects to close 25 stores and bring the total store count to 601 by the end of the year.

Long-Term View Reaffirmed

Total net revenues are expected to grow in mid-to-high single digits. Non-GAAP operating income is likely to be in line with revenue growth and provide stability to operating margin. The company expects above-industry average ROIC in the long term.

Zacks Rank & Other Key Picks

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

Some better-ranked stocks in the Retail - Home Furnishings industry include RH (NYSE:RH) , Tempur Sealy International, Inc (NYSE:TPX) and The Lovesac Company (NASDAQ:LOVE) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1(Strong Buy) Rank stocks here.

RH earnings surpassed estimates in all of the trailing four quarters, the average being 20.2%.

Tempur Sealy’s current-year earnings are expected to rise approximately 28%.

Lovesac has three-five year expected earnings per share growth rate of 40%.

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