Look for Williams-Sonoma Sales and Shares to Pick Up

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Williams-Sonoma Inc. (NYSE:WSM) is specialty retailer that many shoppers are familiar with. It is generally one of those store brands that parents avoid bringing their children into, given the expensive and often fragile home merchandise available. The company is quite profitable, and the stock is up 17 percent year-to-date. The company specifically operates in two segments: Direct-to-Customer and Retail. It offers cooking, dining, and entertaining products, including cookware, tools, electrics, cutlery, tabletop and bar, outdoor, furniture, and a library of cookbooks essentials under the Williams-Sonoma brand.

It also offers furniture, bedding, bathroom accessories, rugs, curtains, lighting, tabletop, outdoor, and decorative accessories under the Pottery Barn brand. It further has products designed for creating spaces where children can play, laugh, learn, and grow under the Pottery Barn Kids brand. The company also provides an assortment of products under the West Elm brand, as well as a line of furniture, bedding, lighting, decorative accents, and others for teen bedrooms, dorm rooms, study spaces, and lounges under the PBteen brand.

In addition, it offers lighting and home goods product lines, including lights, hardware, furniture, and home décor that span periods back to the 1870s under the Mark and Graham brand. The company markets its products through e-commerce websites, direct-mail catalogs, and specialty retail stores. The stock is attractively priced at 23 times earnings; it is not too cheap nor too expensive. Can the stock move higher from here? An analysis of the company’s recent performance can help answer this question.

In the last quarter, net revenues grew 9.7 percent to $974 million versus $888 million in the prior-year quarter, with comparable brand revenue growth of 10 percent. Operating income grew 16.5 percent to $74 million and operating margin was 7.6 percent versus 7.2 percent in last year’s quarter. Non-GAAP operating income grew 11.4 percent. Diluted earnings per share grew 20 percent to 48 cents. Non-GAAP earnings per share grew 17.1 percent. Comparable brand revenue growth increased 10 percent on top of 7.2 percent last year.

Direct-to-customer net revenues in increased 17.2 percent to $491 million from $419 million in last year’s quarter and generated 50 percent of total company net revenues in the quarter, compared to 47 percent last year. Retail net revenues increased 3.1 percent to $483 million from $469 million last year, primarily driven by West Elm and Pottery Barn, and partially offset by a decrease in its international franchise operations. Operating margin was 7.6 percent compared to 7.2 percent last year, while non-GAAP operating margin was 7.5 percent. Finally, merchandise inventories at the end of the quarter increased 28.6 percent to $850 million from $662 million at the end of last year’s quarter.

President and CEO Laura Alber said in a press release: “Innovative, high-quality product, personalized service, relevant marketing and strong execution across all brands drove these better than expected results. With 50 percent of our revenue in the direct channel this quarter, we believe our multi-brand, multi-channel platform is driving consistent market share gains and providing us with a sustainable competitive advantage. We are executing against all of our growth strategies, investing in our business while improving our profitability, and returning capital to our stockholders. Looking towards the balance of 2014, we are confident in our strategies and believe we are well positioned to deliver on both our near and longer term goals.”

To me, the quarter was quite strong, and I think things are looking up. This type of retailer does better when housing improves, and although housing has limped along, the company has done well. I think housing will start to pick up. This sector has lagged. Despite this, the company sees net revenues in the second quarter of fiscal 2014 in the range of $1.02 billion to $1.04 billion. It sees comparable brand revenue growth in the quarter to be in the range of 4 percent to 6 percent. Finally, it sees diluted earnings per share in the range of 49 cents to 52 cents. Considering the growth relative to last year these numbers represent, I think the stock will climb higher.

Disclosure: Christopher F. Davis holds no position in Williams-Sonoma and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $76 price target.

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