What slow economy?
Williams-Sonoma (WSM) has been posting an average annual return of about 25% for the past three years, and shows no signs of stopping.
WSM’s innovations have kept customers churning through the checkout line, fueling last quarter’s 8.6% increase in revenues to $888 million, and 21% improvement in earnings to 41 cents a share — both figures trumped Wall Street expectations for $868 million in revenues and 36 cents per share in profits.
There’s little to quibble about … but maybe that in and of itself is an issue? Namely, has Wall Street factored in all this good Williams-Sonoma news already, making a new investment ill-advised? To see, let’s take a look at the pros and cons:
Multi-Brand, Multichannel Model: WSM does not look at the Internet or mobile as threats, but as a synergistic part of the immersive retail experience. As a result, the company has invested heavily in its digital assets. This also has involved a push into social media marketing, on platforms like Facebook (FB), Twitter and Pinterest. Such efforts mean little if the product line is not inspiring, but over the years, the company has been laser-focused on evolving breakout brands, such as Pottery Barn, Pottery Barn Kids, West Elm and PBteen. And during the past year, WSM added others, including West Elm Market, Agrarian, and Mark and Graham.
Global Expansion: For the most part, WSM’s footprint is in the U.S. and Canada, but the company is now looking to move into foreign markets, starting with Australia. WSM has taken a disciplined approach, understanding that real estate selection is critical to success and cannot be rushed. And in some cases, a franchise approach might actually make the most sense — that’s Williams-Sonoma has been doing in the Middle East.
Shareholder Focus: While WSM continues to invest in growth, the company also has been mindful of its investors. A key part of this is an emphasis on stock repurchases. In Q1, buybacks came to $41 million, with another $709 million left in the program. Helping things is WSM’s ability to generate cash; for the latest quarter, operating cash flows came to $325 million, and $222 million of that was returned to shareholders.
Macroeconomy: While the U.S. economy appears to be on track, the recovery has been sluggish. That means an economic shock — say, an implosion in China — could easily derail things. Worse yet, in light of WSM’s focus on the premium market, the impact could be severe. (See: 2008, when WSM plunged 68%.)
Bandwidth: Williams-Sonoma has done a tremendous job in understanding the tastes of consumers, though that kind of connection isn’t easy to sustain. WSM has been moving into markets — such as for kids and teens — that are known to be fickle, not to mention this expansion could mean growing difficulty trying to juggle so many brands.
Valuation: The stock is a bit pricey on a price-to-earnings basis, including a trailing P/E of nearly 21 and a forward P/E of more than 17. Also, its five-year expected price/earnings-to-growth ratio of 1.5 is higher than competitors like Bed Bath & Beyond (BBBY) and Pier 1 (PIR).
Williams-Sonoma is spot-on with its multi-brand, multi-channel strategy. Consumers want something different and high quality, and they’ll pay through the nose for it.
WSM’s long history of gauging the consumer looks like it will continue swimmingly, with no clear challenges ahead, and healthy comparable brand sales growth of 7.2% in the most recent quarter (up from 5.4% in the year-ago period).
So should you buy Williams-Sonoma? Yes — while the stock is a little frothy, that’s to be expected for a company with strong brands and a consistent growth ramp.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.