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Fundamental Strength Makes Williams-Sonoma One for Your Recovery Watchlist

Tuesday, May 24, 2022 | Chris Markoch
Fundamental Strength Makes Williams-Sonoma One for Your Recovery Watchlist

Free cash flow and an attractive valuation make WSM stock an attractive option 

In a real-world example of the phrase “misery loves company,” Williams-Sonoma (NYSE: WSM) stock has fallen 15% since May 17. The reason isn’t that the retailer of premium home furnishings has issued bad news. Instead, the catalyst seems to be a reaction to the poor earnings report by Walmart (NYSE: WMT) and  Target (NYSE: TGT).  

Therefore, investors are selling because of what they expect to hear when the company reports earnings. However, with WSM stock trading near its 52-week lows it’s time for investors to add the stock to their recovery watchlist.  

What to Expect From Earnings 

Williams-Sonoma is scheduled to report earnings after the market closes on May 25. Analysts tracked by MarketBeat are forecasting earnings per share of $2.98 on revenue of $1.81 billion. Those numbers are essentially the same as the numbers the company reported in the same period last year ($2.93 EPS on revenue of $1.75 billion).  

Of course, If Williams-Sonoma beats on the top and/or, more importantly, the bottom line it could send the stock higher. So what should investors prepare for? 

Investors are likely to hear much of the same talking points they’ve heard from other retailers this earnings season. That means cost pressures due to inflation and ongoing supply chain constraints. That may put more selling pressure on WSM stock in the short term, but in an environment where quality matters, there are reasons for investors to keep their eye on the company’s stock. 


Fundamentals Are Strong 

Williams-Sonoma has some enviable fundamentals. If you’re a fan of free cash flow (FCF), you’ll like what you see from WSM. The retailer’s FCF soared from approximately $1.1 billion in 2021 to over $1.5 billion in fiscal year 2022.  

And for investors who look for favorable price-to-earnings, Williams-Sonoma has a P/E ratio of 7.26 and a forward price/earnings ratio of 6.98. Compared to the sector average, these numbers suggest that WSM stock is slightly undervalued.  

Furthermore, the company pays a dividend that it has increased in each of the last 17 years. Currently, the company pays out $3.12 per year which currently calculates to a dividend yield of 2.88%.  

Currently, analysts give WSM stock a consensus price target of $170.33 which is a 57% upside from its current level. And the stock also has institutional ownership of over 99%. 

Will Premium Brands Fare Better? 

One of the unknowns in the market is whether a bifurcation is taking place. That is, will specialty retailers like Williams-Sonoma which offer premium, high-quality home furnishings fare better in tougher economic conditions? In addition to its namesake brand, the company is the home to many signature brands such as Pottery Barn, West Elm, Mark and Graham, and Rejuvenation. 

It may seem logical that premium (I.e. more expensive) brands may fare worse in tough times. However, there is some marketing research that suggests that premium brands that can be positioned as affordable indulgences may actually thrive during recessionary times.  

This sets up well for an established, multi-channel retailer such as Williams-Sonoma. That’s because consumers will be looking for home furnishings whether because they’re buying a new home or, as some evidence suggests, they are deciding to stay – and refresh – their current space.  

Watch WSM Stock Coming Out of Earnings 

In this earnings season, it’s clear that Williams-Sonoma will have to post a substantial beat to change the negative sentiment. That means that investors should wait until the results are in before making a decision on the stock. If the company delivers strong results, investors have some room to catch the stock on the way up. And even if the numbers disappoint, the fundamental strength of the company makes it a compelling stock to watch. 

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Williams-Sonoma (WSM)
2.4834 of 5 stars
$127.74+5.5%2.44%8.29Hold$157.17
Target (TGT)
2.9219 of 5 stars
$149.01+2.9%2.42%12.36Moderate Buy$193.04
Walmart (WMT)
2.7952 of 5 stars
$125.090.0%1.79%26.90Moderate Buy$156.74
Compare These Stocks  Add These Stocks to My Watchlist 

Should you invest $1,000 in Williams-Sonoma right now?

Before you consider Williams-Sonoma, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Williams-Sonoma wasn't on the list.

While Williams-Sonoma currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

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