By Sam Boughedda
Barclays analysts downgraded shares of Williams-Sonoma, Inc. (NYSE:WSM) and RH (NYSE:RH) to Equal Weight in a note to clients Monday.
RH's price target was cut to $243 per share from $328, while Williams-Sonoma's price target was lowered to $114 from $192.
The analysts said the firm is downgrading the stock based on a weakening housing cycle that they believe will have a trickle-down impact on home furnishing spending over the next 12 to 24 months and high-end wallet pressure.
The housing market has been pressured by rising interest rates and mortgage rates, alongside soaring inflation this year, with US home sales falling for the ninth month in a row in October.
"We are downgrading both WSM and RH based on: 1) a weakening housing cycle that we believe will have trickle-down impact on home furnishing spending over the next 12 to 24 months; 2) rising inventory positions that we expect to build and worsen over the next several quarters; 3) deceleration in demand, with potentially negative comps causing deleverage of the business model; and 4) a mean reversion in operating margins, subsequently causing EPS downside risk for 2023 and 2024," wrote the analysts.
The analysts added that Williams-Sonoma is "now the second data point among higher-end home furnishings retailers to announce a 3Q22 demand comp that was 'slightly negative' and business trends that are 'inconsistent and choppy.'"
Meanwhile, they added that RH brand elevation may hit a near-term ceiling, while there is a risk to its European debut.
"We now see hard evidence of the housing market slowdown impact on high-end home furnishings retailers. With RH Contemporary recently launching with price points roughly 30% higher than current prices, we believe this may also curb demand in the near-term. Lastly, we believe that looming, and worsening, recessionary risks in the UK and continental Europe may delay the timing of new store openings, RH England and RH London, most immediately, and the broader European launch in the medium term. For these reasons, we also step to the side on shares of RH," the analysts added.