Why Williams-Sonoma Stock Surged 27%

Williams-Sonoma (NYSE:WSM) stock gained about 27% in Wednesday’s trading following the company’s Q3 earnings report – taking its total gains so far this year to 76%. The company, which is known for its premium kitchenware and home furnishings, operates multiple retail brands including its eponymous stores, West Elm, Pottery Barn, and Rejuvenation. And the sizable jump in stock price follows an earnings beat by the company along with several favorable trends in key metrics. WSM stock has comfortably outperformed the S&P 500 index, which in itself has rallied strongly following the Trump election. While the benchmark index has gained 25% so far this year, there are risks on the horizon. In fact, here is a scenario which could see the S&P Crash More Than 40%.

Notably, the retail environment has been mixed over recent quarters with consumer spending remaining muted. The home goods space in particular – which the company caters to – has seen a slump amid home prices, inflation, and lower demand for home renovations post-Covid. However, the company bucked all these trends to come up with earnings figures that were better than expected.  While revenues declined about 3% year-over-year to $1.8 billion, net income rose 5% year-over-year to $249 million from $237 million last year. The company also upped its guidance indicating that it now expects annual net revenue to decline in the range of -3.0% to -1.5% for the year, with same-store sales in the range of -4.5% to -3.0%.

The company’s better-than-anticipated performance can be attributed in part to its pricing strategy. Williams-Sonoma says that it is focused on being more upfront about product costs, moving away from the variable promotional pricing that many of its competitors continue to adopt.  This strategy should help the company reinforce its premium image while enabling it to build more trust with its customers. Moreover, this pricing model might also help the company reduce the tendency for shoppers to delay purchases in anticipation of discounts. The strategy is also apparently helping margins.  Operating profit margins rose to 17.8% from 17% in the year-ago quarter. The company now forecasts operating margins of between 18.4% to 18.8% for the year. Gross margin also expanded by 230 basis points year-over-year to 46.7% led by higher merchandise margins as well as supply chain efficiencies.

The increase in WSM stock over the last few years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 69% in 2021, -30% in 2022, and 80% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could WSM face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Following the recent rally, WSM stock trades at about 20x estimated 2024 earnings. Although this isn’t a particularly high multiple, near-term growth is a major concern.  Revenues are expected to contract this year and remain flat next year per consensus estimates. Competition has also been mounting in the form of more online upstarts.

That said, there are several positives as well. The Fed has lowered interest rates twice since last September, and a potentially lower rate environment could bolster the overall housing market, potentially driving remodeling and renovation projects – a key driver for the company’s product sales. Williams-Sonoma has also been pretty proactive in returning value to shareholders. It repurchased $533 million worth of stock in the last quarter and has bought back roughly 4% of its outstanding shares year-to-date. Additionally, the company boosted its dividend and executed a stock split earlier this year, indicating that it is confident about its growth prospects.

[1] Returns as of 11/21/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates