If You Have It, Keep It, but Williams-Sonoma Stock Is About to Top Out

Williams-Sonoma stock is enjoying a well-deserved post-earnings lift, but I'm not sure the rally can go much higher

This week domestic home furnishing retailer Williams-Sonoma (NYSE:WSM) blew investors away with impressive second quarter results and a rosy outlook for the current quarter and Williams-Sonoma stock responded accordingly, shooting 7% higher in after hours trading.

The results also shined a spotlight on the retail space, where several firms have delivered this quarter. Now, with good news on the table and Williams-Sonoma stock trading above $60 per share, traders are wondering how much higher the rally will fly and whether or not the stock can make it back to its 2015 highs above $80 per share.

Q2 Beat

Williams-Sonoma stock was soaring on Thursday morning after the firm delivered both a top and bottom line beat with its second quarter results. Revenue rose to $1.28 billion, beating estimates of $1.26 billion and besting last year’s $1.2 billion.

Perhaps more important, the firm reported an impressive 4.6% increase in same-store-sales. The firm’s Pottery Barn brand saw comps rise 2% and it’s namesake brand saw a 1.6% rise, but Pottery Barn Kids and Tee was up 5.7% and West Elm saw an impressive 9.5% increase in same-store-sales.

Another aspect of the report that investors cheered was the fact that e-commerce revenue rose 8.9% to $687 million. That means that online sales now make up 53.9% of Williams-Sonoma’s overall sales, a respectable jump from the 53.7% that was reported last quarter.

The results show that Williams-Sonoma is thriving in the new retail landscape, especially when it comes to building out it’s online presence in the face of fierce competition. Management was able to raise it full year revenue and eps guidance on the back of the second quarter beat, leaving investors hungry for more gains from the homeware retailer.

Any Bad News?

The second quarter results yielded very little that investors could complain about- Williams-Sonoma is clearly on track to have a successful year. However, that doesn’t mean that Williams-Sonoma stock doesn’t come without risk- simply operating in the retail space offers a unique risk of its own.

While the retail apocalypse appears to be coming to an end, the industry still is plagued with obstacles that are largely out of the companies’ hands. For one, consumers are fickle and getting harder and harder to reach effectively.

There are low switching costs for homeware retailers like Williams-Sonoma, so a poor product lineup can easily persuade loyal customers to look elsewhere. There’s also a risk that lower-priced competitors will grab marketshare, especially in the event of an economic downturn.

Speaking of which, Williams-Sonoma’s success is closely tied to the housing market and the wider economy. A downturn could negatively impact the store and hurt the company’s future prospects. 

Plus, the retail industry has seen a great deal of promotional activity over the past year as stores compete for marketshare. That makes for a challenging environment that could cause WSM to sacrifice margins in order to compete with rivals.

Bright Future

However, those risks aside, Williams-Sonoma stock is looking pretty good at the moment. Management has been disciplined in its operational efficiency and that is paying off with higher margins and an added layer of padding should the economy take a turn for the worst.

Plus, as companies like Wayfair (NYSE:W) and Amazon (NASDAQ:AMZN) continue to push their way into the home furnishing space, Williams-Sonoma’s efforts to keep costs down will pay off should price-wars and competitive promotions start to eat away at the firm’s marketshare.

The Bottom Line on Williams-Sonoma Stock

Williams-Sonoma stock deserves the lift it’s getting- its financial results prove that the company is on a firm path to success and barring an unforeseen event Williams-Sonoma looks likely to deliver through the back half of the year.

I believe Williams-Sonoma stock has further to climb, but I don’t foresee the stock getting back above $80 any time this year. There are simply too many risks in the retail space and the company doesn’t have a wide enough moat to make it a sure-buy.

If you’ve been holding on to your Williams-Sonoma shares over the past year, I wouldn’t sell just yet as it looks like the firm has more to deliver, but I’m not keen to take a position myself at the current levels. 

As of this writing, Laura Hoy was long AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2018/08/williams-sonoma-stock-top-out/.

©2020 InvestorPlace Media, LLC