Williams-Sonoma (WSM) Banks On Innovation, Faces High Costs

Williams-Sonoma, Inc.’s (NYSE:WSM) strong brand portfolio along with focus on innovation and transformation has been the principle growth driving factor.

However, investments in e-commerce and supply chain continue to weigh on operating margins, thereby posing a concern.

Recently, this multi-channel specialty retailer of premium quality home products announced third-quarter fiscal 2017 results.

Adjusted earnings of 84 cents per share were in line with the Zacks Consensus Estimate. Earnings also increased 7.7% from the year-ago level.

Net revenues of $1,299 million were slightly higher than the Zacks Consensus Estimate of $1,293 million and were up 4.3% year over year. However, net revenues reflect an estimated $7-million impact of lost sales associated with the hurricanes in Texas, Florida and Puerto Rico.

Key Growth Drivers

Williams-Sonoma is one of the largest e-commerce retailers in the United States. The e-commerce segment generates around 53% of revenues and has been consistently posting strong results. In fact, in the first nine months of 2017, this segment reported net revenues of $1.9 billion, up 4.2% from the year-ago level. The company’s investments in merchandising of its brands, efficient catalog circulations and digital marketing help drive e-commerce revenues.

In addition to focused investment in its e-commerce segment, Williams-Sonoma continuously innovates to keep up with the changing preferences of consumers.

The company is currently in the midst of a transformation drive to address the slowdown in traffic and to gain more customers. In fact, the company managed to drive third-quarter traffic by reworking on its marketing strategy, focusing more on digital marketing and investing in store remodeling.

Concerns

The specialty e-commerce and retail businesses are highly competitive. Williams-Sonoma competes with other retailers that market lines of merchandise similar to it. The substantial sales growth in the e-commerce industry in the last decade has encouraged the entry of competitors and new business models as well. Increased competition might dent Williams-Sonoma’s sales and operating results.

Moreover, although Williams-Sonoma derives substantial revenues from efficient catalog circulation and digital marketing, it is affected by costs associated with continued investments in e-commerce. Further, supply chain investments are denting the company’s operating margins. In fact, for the first nine months of 2017, the company’s operating margin was 7.1%, down 20 basis points (bps) year over year.

Also, the company has been reporting soft comparable brand revenues for quite some time now. The rate of increase in comparable brand revenues has contracted significantly from 8.8% in 2013 and 7.1% in 2014 to 3.7% in 2015 and 0.7% in 2016. In the third quarter of 2017, the company’s West Elm and Pottery Barn comparable brand revenues compared unfavorably with the prior quarter.

Meanwhile, shares of Williams-Sonoma have underperformed its industry on a year-to-date basis. The company’s shares have lost 4.4% as against the industry’s gain of 2.6%. Estimates for the current fiscal quarter and year have also moved down 3% and 1.4%, respectively, over the past two months.

Nevertheless, strategic initiatives, innovative marketing techniques, focus on innovation and retail optimization are key growth drivers for this Zacks Rank #3 (Hold) company.

Stocks to Consider

A few better-ranked stocks in the Retail-Wholesale sector are Beacon Roofing Supply, Inc. (NASDAQ:BECN) , The Home Depot, Inc. (NYSE:HD) and RH (NYSE:RH) .

Beacon Roofing sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

The company’s current-year earnings are expected to increase 19.6%.

Current-year earnings for Home Depot are expected to grow 14.1%. The company carries a Zacks Rank #2 (Buy).

RH carries a Zacks Rank #2. Its current-year earnings are projected to grow 119.3%.

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