Williams-Sonoma, Inc. (WSM), a leading retailer of household furnishings, appliances and other goods, has posted strong growth in its top and bottomline numbers every year in the last three years. There is very little debt on the company’s balance sheet, and it has introduced robust growth plans to achieve an ambitious target of becoming an $8-billion-company in the near future. With those in place, we expect the retailer to achieve its desired mid to high single-digit revenue growth rates, and low double-digit to mid-teen earnings growth rates within the next three years.
We are bullish on the stock on the aforementioned factors, and believe the company’s differentiated product offerings, increased geographic reach, and well performing e-commerce business will bolster its growth moving forward.
Williams-Sonoma, Inc., which came into being in 1956, has a very large presence in the market for home goods. In fiscal ’13 (FY13), the company generated revenues of $4 billion through its various retail chains, including stores that operate under its namesake brand, Pottery Barn stores, and franchised operations.
The California-based retailer also sells kitchen and home products through specialty stores, a website, and a catalog business in the US, Canada and Puerto Rico. It has recently entered the UK and Australian markets as well, and caters to Middle Eastern countries through various franchises.
The company segments its revenues by five major brands, namely: Pottery Barn, Williams Sonoma, Pottery Barn Kids, West Elm, and PBteen.
Williams-Sonoma’s Pottery Barn business, which brings in 44% of its sales, is the company’s largest brand by revenues. The company’s namesake brand, on the other hand, contributes 22% of its annual revenues, while Pottery Barn Kids, West Elm and PBteen each contribute 14%, 12% and 5% respectively. The remaining 3% of its revenues are classified as Other, and collectively represent revenues generated by two smaller brands: Rejuvenation, and Mark and Graham.
Rejuvenation and Mark and Graham’s revenue growth rates have outpaced the growth rates of the company’s larger brands, averaging 44% annually during the last three years. The company’s West Elm brand, another high-growth brand, has grown at an annual rate of 27%, while other brands have registered sluggish growth. The only exception is Williams Sonoma, which has reported a fall in revenues of around 1% annually in the same time frame.
By Distribution Channel
Williams-Sonoma also segments its revenues by the channels it uses to distribute products: Retail and Direct-to-Customer.
Retail, which reports sales made through retail stores and shipping fees charged on merchandize deliveries, is the company’s largest distribution channel. It accounts for 52% of the company’s sales.
On the other hand, the company’s Direct-to-Customer business, which accounts for revenues recorded under Williams-Sonoma’s e-commerce and catalog businesses, contributes 48% of the company’s topline. The Direct-to-Consumer channel has grown at a faster rate than the Retail channel, with revenues from the former increasing at a three-year compound annual growth rate (CAGR) of 13% through FY13.
Williams-Sonoma generates the bulk of its revenues (96%) from its operations in the United States, and the remaining from businesses overseas.
Revenues from the company’s International businesses have increased at a CAGR of 26% in the last three years, while revenues from the domestic market have improved at a CAGR of 9% in the same time frame.
*Data for FY13 has not yet been made available
Williams-Sonoma’s revenues and earnings have increased at a CAGR of 8% and 13% respectively in the last three years, with FY13 revenues registering at $4.4 billion and earnings at $2.8 per share.
The Street estimates revenues of $4.7 billion in FY14, a 7% improvement over FY13 sales. Earnings, on the other hand, are expected to grow 12% year-over-year (YoY) to $3.20 per share.
Williams-Sonoma’s cash flows from operations (CFOs) have improved at a CAGR of 8% on the back of strong growth in earnings and revenues over the last three years.
Free cash flows (FCF), however, have narrowed at a CAGR of -4% over the same period because the management increased capital expenditures by 46% over the period.
Analysts expect CFOs to cross $500 million and FCFs to improve to $286 million in FY14.
The management is committed to maximizing shareholder value and increasing returns, as reflected by the fact that it has historically utilized excess cash to either invest in growth, or to return value to shareholders via dividends and stock buybacks. Shareholder returns have been increased at a CAGR of 24% in the last three years, and the company has reduced its market float by 12% to 94 million outstanding shares in the same time frame.
The company returned $351 million to shareholders in FY13, almost a third of which was dedicated to dividend payments, and the remaining utilized to repurchase shares.
The company has $511 million remaining under a recently-authorized share buyback program worth $750 million in total. The program, authorized in March last year, is due to expire in 2016.
The management recently announced that it had raised the dividend for 1QFY14 by 6.5%, bringing the said quarter’s dividend to 33 cents per share. At an annual dividend of $1.32 per share, Williams-Sonoma stock currently offers a dividend yield of 2.05%.
Dividends have been increased at a CAGR of 29% in the last three years. The company has raised dividends nine times ever since it paid its first dividend in 2006.
Williams-Sonoma is also no longer heavily leveraged: it currently holds only $3.75 million in debt on its balance sheet, down 98% from $330 million at the end of FY13. This strengthens shareholders’ position in the company, as it allows the company considerably leeway in increasing shareholder returns. Williams-Sonoma currently has a debt-to-equity ratio of less than 1%.
Here is a breakdown of these companies’ individual performances in the last three years:
* Because the fiscal years of each company end in different months, the calendar year (CY) has been used to calculate growth in order to obtain standardized metrics.
Williams-Sonoma’s revenues and earnings have increased at a lower rate than both its competitors’ comparable growth rates. However, the company is expected to register higher growth in the ongoing fiscal year compared to its two peers.
Williams-Sonoma, Inc. (WSM) Stock Price Performance
The company’s stock price has surged 47% in the last one year, and competitors Bed, Bath and Beyond and Pier 1 have lagged far behind it in terms of share price performance. The S&P 500 index has risen 27% in the same period.
Williams-Sonoma stock was changing hands for around $66.80 apiece when this analysis was written, almost $21.80 higher compared to its share price twelve months ago.
Earnings Review (4QFY13)
Williams-Sonoma’s share price rallied strongly on March 13, 2014, when the company announced better-than-expected results for the fourth quarter of its 2013 fiscal year (4QFY13). The company revealed that earnings and revenue growth had remained strong despite the harsh winter, which had stung most other retailers during the all-important holiday season.
Revenues for the quarter (which ended February 1, 2014) came to $1.47 billion, marking YoY growth of over 4%. Earnings, on the other hand, rose 8.7% YoY ($1.38 per share) if the impact of the extra week included in the quarter is excluded from calculations.
Comparable store sales (comps) growth, too, beat Street estimates, registering an improvement of 10.2% on a YoY basis. Growth in the said metric was led by the company’s West Elm brand, which saw comps rise 18% YoY.
The management issued lower-than-expected guidance for 1QFY14 last week, however, stating that it forecasts the company’s per share earnings to be between 41 and 44 cents in the ongoing quarter, and revenues to be in the range of $920-$940 million.
The management expects the company’s earnings for the full fiscal year (FY14) to range between $3.05-3.15, while revenues are anticipated to be in the range of $4.63-4.71 billion. In contrast, analysts had projected earnings of $3.17 a share on revenues of $4.69 billion.
The company currently generates only 4% of its revenues from operations overseas; however, it now plans to increase focus on expanding its reach in international markets.
Last year, Williams-Sonoma tapped the UK and Australian markets by opening a total of six retail stores in the said regions. In FY13, the company also established a franchise in the Philippines, and is currently expanding in the Middle Eastern region as well. It also broadened its geographic reach by opening up its e-commerce channel to cater to many locations outside the US.
The company also invested heavily in infrastructure and building a support system for its global operations in FY13, and anticipates the subsequent benefits of the infrastructural development to be realized from FY14 onwards. The management has already announced it will open eight additional stores in Australia in the ongoing fiscal year.
Efficient, Vertically-Integrated Supply Chain
The company is in the midst of bringing its outsourced upholstered furniture delivery hubs in house. It is also regionalizing its fulfillment capabilities in order to develop a vertically-integrated supply chain, which will make its operations even more efficient.
Last year, the company successfully brought furniture delivery hubs in house in three geographical regions and expanded furniture manufacturing operations in the US. It aims to directly source all foreign purchases by the end of fiscal ‘14.
E-commerce, which accounts for about 92% of the company’s Direct-to-Customer business, continues to be a major growth driver for the company. The segment registered average annual growth of 18% in the last three years, and in FY13, contributed $1.95 billion to the company’s topline.
The company realizes the importance of its e-commerce division as a means to bolster growth moving forward, and is making investments in order to enhance its quality of service through this channel. At the same time, Williams-Sonoma is also developing fulfillment centers to improve customers’ online shopping experience.
West Elm is one of the fastest-growing brands in Williams-Sonoma’s portfolio. In 2013, the brand’s revenues crossed the $500 million mark, coming in at $530 million. Sales generated by the brand had increased at a three-year CAGR of 27%, while comps had increased 21% each year during the same time frame.
The management is particularly pleased with the performance of this brand, and believes that West Elm has grown on the back of aggressive efforts to build the brand’s image in FY12. 10 additional stores for the brand were inaugurated last year, and the company plans to open 12 new stores in seven new markets in FY13.
The company is optimistic as regards the brand’s future potential, and believes that West Elm could bring in revenues of over $1 billion if a strong multi-channel distribution strategy is in place and the brand is developed properly. The management believes that a focus on differentiated product assortments and engagement with communities and artisan groups will also help strengthen the brand.
Williams-Sonoma, Inc. (WSM): Stock Valuation
Williams-Sonoma’s shares are currently valued at 20 times the company’s estimated per share earnings in the next twelve months. That price-to-earnings (P/E) multiple means the stock is trading at a premium valuation to its peers, Bed Bath & Beyond and Pier 1, which are trading at P/E multiples of 13x and 15x, respectively.
The company’s shares are also trading at premium to its own three-year average P/E multiple (17x), and the S&P 500 index (currently trading at a P/E multiple of 15x).
Williams-Sonoma stock may seem expensive right now, but we feel its premium valuation is well deserved.
In fact, we think the stock offers more upside, based on the fact that the company’s product offerings are exclusive to it and highly popular; it is increasing its geographical presence; it has posted strong growth in its West Elm brand; and is improving its e-commerce business. The company’s robust cash flows, minimally-leveraged balance sheet, and increased shareholder returns make it a worthy investment. We give Williams-Sonoma a buy rating, and recommend you add it to your portfolio.