Williams-Sonoma: Time To Buy At Rock-Bottom Prices

Williams-Sonoma NYSE: WSM has proved the quality of its brands yet again. The Q4 results are mixed but in a good way, where margin strengths offset the top-line weakness. The takeaway for investors is that the business is sound, the company’s model is well-proven, and the client base is loyal. The result is robust cash flows that have allowed another increase to the dividend and the upping of buyback plans to $1 billion.

The $1 billion in planned repurchases is worth about 12.5% of the market cap, with shares trading near long-term lows, and the dividend is also healthy. The dividend increase is worth 15% to investors and has a forward yield above 3.0%. 

Trading at only 7X earnings, this stock is a bargain among retailers that income investors should consider for their portfolios. The company has increased for 16 consecutive years and is on track to reach Dividend Aristocrat status. The payout ratio is below 25% of earnings, and the balance sheet is a fortress. Cash is down on a YOY basis, but this is due to investment activities expected to generate returns for investors. 

Williams-Sonoma Rises On Mixed Results 

Williams-Sonoma had a solid quarter, but revenue of $2.453 billion is down compared to last year and missed the consensus estimate by a fair margin. However, margin strength offset the weakness and left the bottom line results above the Marketbeat.com consensus estimate. The revenue was driven by a -0.6% decline in comps and a -10.0% decline in sales at West Elm. Core Williams-Sonoma sales fell 2.5% but are offset by a 4% increase at Pottery Barn Kids and a 5.8% increase at Pottery Barn, the company’s largest segment. 

The margin was impacted at all levels by deleveraging and high freight costs. The good news is that a decline in SG&A expenses offset gross margin contraction, leaving the operating and net income above the consensus estimates. The bottom line results are down compared to last year, but the $5.50 per share in Q4 adjusted earnings beat by nearly 100 bps despite the top line weakness. 

Regarding guidance, the company is looking for revenue to fall in a wide 6,000 basis point range, but the takeaway is sales should be flattish compared to this year. The operating margin is expected to contract to 14% to 15% from this year’s 17.3%, but the long-term targets were reaffirmed. The company continues to target mid-single-digit topline growth and an operating margin above 15%. 

The Institutions Are Buying Williams-Sonoma 

The analysts’ activity in Willams-Sonoma and consumer discretionary stocks have been muted, and Marketbeat’s tracking tools have picked up no new commentaries, but the institutions are buying. The institutions started buying this stock on a net basis in the 2nd half of 2022, which continued in 2023. The institutions own more than 99% of the stock, making this a tightly held issue, and it is one with a high short interest.

The short interest was over 14% ahead of the earnings release and may fall now that the results are in. The price action is favorable but not bullish now. The market is showing a bottom in the $110 to $120 region, and it may rebound, but a sustained rally is unlikely, given general market conditions.