On Thursday, Morgan Stanley adjusted its stance on Williams-Sonoma (NYSE:WSM), upgrading the stock from Underweight to Equalweight and notably increasing the price target to $270.00, up from the previous $155.00. The revised price target is based on approximately 17 times the firm's anticipated earnings per share (EPS) for the year 2025, which is estimated to be $16.05.
This valuation aligns with projections for 2024 and assumes an EBIT margin of around 16.8%, which, while lower than the 17.7% margin seen in 2021, is significantly higher than the 8.6% margin in 2019.
Williams-Sonoma is believed to have navigated through the most challenging phase of its recent business cycle, particularly concerning top-line revenue and margin pressures. Morgan Stanley now recognizes the company's capacity to achieve operating leverage even against a backdrop of subdued demand.
This outlook is supported by the reaffirmation of the EBIT margin guidance of 16.5%-16.8% during the Q4 2023 earnings call, which the company expects to maintain even if sales remain soft.
Looking ahead, the Home Furnishings sector, where Williams-Sonoma operates, is anticipated to show improvement throughout 2024 and into 2025. Morgan Stanley predicts a stabilization or mid-single-digit growth in sales for Williams-Sonoma during these years, contrasting with a 5.5% decline in 2023. With EBIT margins expected to remain in the mid- to high-teens, the firm forecasts a return to mid-single-digit EBIT growth for Williams-Sonoma.
The upgrade reflects a shift from Morgan Stanley's previous expectation that margins could shrink back to 2019 levels as the broader category normalized, promotions increased, and expenses rose disproportionately on lower sales volumes. The new outlook suggests a more optimistic view of Williams-Sonoma's potential performance in the coming years.
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