Williams-Sonoma Inc. (NYSE:WSM) delivered strong earnings this week, even as more traditional retailers are struggling. Specialty retail appears to be the place to be as Americans and those around the globe ponied up enough cash to push comps to impressive levels.
For the fourth quarter, WSM revenues were up 5.2% to $1.5 billion, and full-year revenues were up 7.1% to $4.7 billion. WSM’s fourth-quarter operating margin jumped 60 basis points to 15.4%, while it increased 40 bps to 10.7% for the year.
Earnings per share of WSM stock is growing strongly, with a fourth-quarter increase of 13.8% from the previous year to $1.57 per share. Full-year EPS was up 14.9% to $3.20.
WSM is enjoying the reduced expenses associated with having a robust e-commerce business, with more than 50% of revenues now coming from online purchases. Online sales in the quarter grew 9% to $770 million.
I’ve been so out of the loop on WSM that I wasn’t aware that it has several brands under its umbrella: Pottery Barn, Pottery Barn Kids, West Elm, and PBteen. Comps were decent under all of the brands, especially West Elm, where comps exploded 19.6%. All the others ranged from 2.7% to 3% in the quarter.
Williams-Sonoma full-year comps were even better, driven by earlier quarter strength. West Elm’s full-year comps were up 18.2%. The flagship Williams-Sonoma brand was up 3.8%, and the Pottery Barn brands were up between 5.7% and 5.9%.
Free cash flow was impressive at $257 million, about flat with the previous year.
For 2015, Williams-Sonoma sees total revenues of around $5 billion, with comps ranging from 4%-6%, operating margins of 10.2%-10.5%, EPS between $3.35 and $3.45, and $200 million of capital expenditures.
WSM has a solid balance sheet, with $223 million of cash on hand and no long-term debt. Williams-Sonoma management has been prudent in returning cash to shareholders, increasing the dividend to $1.40 per share, or about 1.75%.
We are living in a strangely bifurcated retail economy right now. Travel is booming, and so is higher-end retail. Yet regular retail stores are struggling, while the dollar stores are doing just fine. This translates to the more well-to-do folks spending their discretionary dollars while those still struggling with employment having to maintain tight lids on expenditures.
So do you buy into WSM stock at $79.75 per share, off its 52-week high of $84.75?
The first thing you have to do is account for the strikes and closings of west coast shipping ports. That’s expected to lower EPS by 10 or 12 cents this next fiscal year. I don’t regard this is as a permanent operational issue, so I add that back into WSM stock estimates, and that lifts the expectation to $3.47 to $3.57 per share, or $3.52 as a median.
Backing out the $2.25 in net cash, you have an effective WSM stock price of $77.50. That’s 22x fiscal year 2015 earnings, on year-over-year EPS growth of only 10%.
I think it’s too expensive. Even if EPS growth were humming along at 15%, you are just setting yourself up for trouble. I wouldn’t buy the stock here and I would consider taking profits.
As of this writing, Lawrence Meyers did not own shares of any of the aforementioned securities.
