Williams-Sonoma: A Fundamentally Good Buy On Sale Now

Key Points

• Williams-Sonoma had a healthy quarter in Q1 and provided favorable guidance; the 10% price plunge is a signal to buy more.
• Capital returns include dividends and share buybacks that reduced the share count significantly over the past year.
• Analysts and institutions provide a solid support base; the stock price rebound will be robust when it begins.

Williams-Sonoma NYSE: WSM is fundamentally a good buy because of its operational quality, fortress balance sheet, cash flow, and ability to sustain value-building capital returns. It is on sale in Q2 2025 because the guidance update provides no catalyst for a rally. The guidance was reaffirmed to include an outlook for growth, solid margin, and the ability to sustain value-building capital returns, including the dividend and share repurchases.

The dividend is attractive enough, yielding more than 1.5% in May, running under 30% of the earnings outlook, and growing annually at a high-double-digit pace. Still, the share buybacks make this stock a must-own name for total-return investors. 

Williams-Sonoma is a capital-returning machine that has accelerated the pace of share repurchases over the past year. The amount repurchased in Q1 is more than double the prior year's figure, aiding a 4.9% year-over-year reduction in the share count, and the pace could be sustained for several more quarters.

The remaining $1.1 billion is sufficient for roughly 12 quarters at the Q1 pace, a pace that is rapidly building leverage for shareholders.

The balance sheet reflects the impact of accelerated share repurchases, including reduced cash and equity. However, the 1.9% decline in equity is negligible in light of the share count reduction and outlook for future cash flow.

Although near-term headwinds and macroeconomic uncertainty impact business in 2025, this company is set up to sustain a mid-single-digit top-line growth pace for the next decade and to sustain a robust margin while it does. 

In this scenario, the stock trades at a deep value relative to its forward outlook, suggesting its stock price could more than double in value over the next decade. 

Sell-Side Activity Provides a Solid Support Base for Williams-Sonoma Stock

As sketchy as the 10% price plunge caused by the earnings report looks, this market is unlikely to move significantly lower due to robust sell-side support. The sell-side support is most evident in the 99.5% institutional ownership and ramp in bullish activity this year, compounded by the analysts' sentiment trends.

Those include increasing coverage, firming sentiment, and a rising price target that forecasts a move into the $175 to $200 range. The risk for investors is that the upside potential may be limited in early 2025, and the robust gains won’t come until later in the year or in 2026 once macroeconomic headwinds have subsided.

Williams-Sonoma Shines in Q1; Reaffirms Solid Outlook for 2025

Williams-Sonoma had a healthy quarter in Q1 with revenue growing more than 4% to $1.73 billion, outpacing MarketBeat’s reported consensus by 350 basis points. Positive comps in all retail brands drove the strength, led by a 7.3% gain in the core Williams-Sonoma channel.

The other growth pillar, Pottery Barn Kids, also performed well, growing by 3.8% compared to slower growth paces at Pottery Barn and West Elm. 

Margin is another area of strength. The reported figures show a decline versus last year, but this is due in part to the extra 53rd week and in part to an out-of-quarter impact not repeated in 2025.

On an adjusted basis, the gross margin contracted only 60 basis points, with occupancy leverage and efficiency nearly offsetting reduced merchandise margin and operational efficiencies reducing SG&A expense. 

The adjusted operating margin expanded by 70 basis points, leaving the earnings up a leveraged 8.8% and a dime above consensus. 

The only bad news is that guidance was only reaffirmed. This forecast assumes slowing traffic and sales despite the Q1 strength, but it may be cautious due to uncertainties in the outlook.

The critical takeaway is that full-year guidance assumes sequential margin improvement, positive cash flow, and sustainable capital return.