Williams-Sonoma (WSM) Up 4.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Williams-Sonoma (WSM). Shares have added about 4.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Williams-Sonoma due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Williams-Sonoma’s (WSM) Q2 Earnings & Revenues Beat Estimates

Williams-Sonoma Inc. posted better-than-expected second-quarter fiscal 2019 results and lifted its fiscal 2019 earnings and revenues guidance, given strong business trend. However, a decline in comps at the namesake brand and lower gross margin are concerns.

Nonetheless, West Elm — its biggest growth opportunity — continues to accelerate with renewed strength in Pottery Barn brands. Also, cross-brand initiatives such as The Key and Business-to-Business are expected to become important growth opportunities.

Non-GAAP earnings of 87 cents per share surpassed the Zacks Consensus Estimate of 83 cents by 4.8%. The figure also grew 13% year over year.

Moreover, revenues of $1,371 million beat the consensus mark of $1,308 million by 4.8% and grew 7.5% year over year.

Comps increased 6.5% in the fiscal second quarter compared with 3.5% growth in the preceding quarter and 4.6% in the year-ago period.

The West Elm brand’s comps grew 17.5% compared with 9.5% growth in the prior-year quarter. Pottery Barn and Pottery Barn Kids and Teen grew 4.2% and 3.7% versus 2% and 5.7% in the prior-year quarter, respectively. Notably, emerging brands Rejuvenation and Mark and Graham registered almost 9% growth from its international operations. However, the Williams Sonoma brand’s comps declined 1.1% in the quarter against 1.6% comps growth registered in the year-ago period.

Operating Highlights

Non-GAAP gross margin was 35.4%, down 110 bps from second-quarter fiscal 2018. The downside was mainly due to higher shipping costs, primarily driven by a greater mix of furniture sales, impact of the implementation of List 3 China tariffs, and the growing share of business from franchise and trade. This was partly offset by benefits from strong occupancy leverage.

Non-GAAP selling, general and administrative expenses accounted for 28.5% of net revenues compared with 30.6% in the year-ago quarter, reflecting a decrease of 120 bps. This led to a 10-bps year-over-year expansion of non-GAAP operating margin to 6.9% in the quarter.

Financials

Williams-Sonoma reported cash and cash equivalents of $120.5 million as of Aug 4, 2019 compared with $339 million on Feb 3, 2019.

During the fiscal second quarter, the company invested $41 million in the business, and returned almost $77 million to its stockholders through dividends and share repurchases. Notably, the company paid $39 million worth of dividends and repurchased about $39 million shares.

Fiscal 2019 Guidance Lifted

Given solid fiscal first-half results, the company now expects non-GAAP earnings per share in the band of $4.60-$4.80, up from prior expectation of $4.55-$4.75.

Net revenues are projected in the range of $5,740-$5,900 billion compared with $5.670-$5.840 billion expected earlier. Comps are likely to grow 3-6% year over year versus 2-5% prior expectation. Non-GAAP operating margin is expected to be in line with the fiscal 2018 level.

The company expects to close 25 stores and bring the total store count to 600 by the end of the year.

Long-Term View Reaffirmed

Total net revenues are expected to grow in mid-to-high single digits. Non-GAAP operating income is likely to be in line with revenue growth, thereby driving operating margin stability. The company expects above-industry average ROIC in the long term.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Williams-Sonoma has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Williams-Sonoma has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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