Williams-Sonoma’s WSM stock has seen a remarkable surge of 20%. Despite contracting in 2023 along with the housing market, the company has shown resilience with solid cash flow, delivering substantial returns for investors. The recent Q4 results indicate a potential shift back to growth this year, with promising margins and continued capital returns.
One of the key drivers behind this surge is the stock valuation. While currently trading at a high 19X earnings, this figure is primarily based on its brick-and-mortar business. Unlike other lifestyle retailers facing challenges in 2023, Williams-Sonoma’s market positioning remains robust, reflected in its valuation in comparison to peers like TJX Companies and Haverty’s.
From an eCommerce standpoint, Williams-Sonoma is undervalued. Peer eCommerce leaders such as Arhaus, RH, and Wayfair trade at significantly higher valuations. Given that eCommerce makes up 65% of Williams-Sonoma’s business, there is potential for significant price-multiple expansion, with the stock possibly increasing by 25% to 200%.
Assessing Williams-Sonoma’s Performance
Williams-Sonoma’s latest results, guidance, balance sheet, and capital returns establish it as a best-in-breed stock for investors. Despite a 6.9% drop in revenue compared to the previous year, the company outperformed expectations and saw a 29% increase from the pre-pandemic quarter. Notably, while comps across the network dipped by 6.8%, the core Williams-Sonoma brand saw growth of 1.6%.
Of particular note is the company’s robust 20.1% operating margin, surpassing its long-term target. This reflects the strength of Williams-Sonoma’s brand in a more affluent market, enabling full-price sales. The earnings exceeded expectations by a significant margin, with a positive outlook for the upcoming year.
The company’s revenue guidance for the coming year is expected to remain flat or see a slight change, including an additional 53rd week. While margins may experience some contraction, they are projected to stay strong within the mid-to-high teens range, aligning with long-term targets. Analysts, who initially anticipated a revenue decrease, are now more optimistic about the company’s performance.
Capital Returns and Financial Strength
Another positive from the report is the increase in capital returns. Williams-Sonoma raised its dividend by 25% and expanded its stock repurchase authorization by $1 billion. With $1 billion in buybacks representing 6.5% of the market capitalization at the current high, the new dividend yield is around 1.5% and sustainable. The company’s payout ratio remains below 30%, and its balance sheet shows no concerning indicators.
Significant improvements in the balance sheet were fueled by healthy cash flow, with a similar trend expected to continue this year. Key highlights include $1.7 billion in cash flow generation, a triple increase in cash holdings, and a 5% boost in equity.
Analysts’ Outlook on Williams-Sonoma
Analysts caution that Williams-Sonoma’s current market price may cap further gains as it surpasses their highest estimates. While the stock has surged, analyst sentiment remains somewhat reserved. Initial revisions, such as the reiterated Outperform rating from Telsey Advisory Group, suggest price targets slightly below the current levels. However, technical analysis indicates a potential breakout above critical resistance levels, hinting at further upside if breached.
The article “Williams-Sonoma Surged 20% and Could Double in Price” first appeared on MarketBeat.
