Williams-Sonoma Fires Up the Kitchen and Stock Heats Up 12%

Upscale home-products retailer Williams-Sonoma, Inc. (WSM) beat Wall St. estimates Monday before the bell, indicating yet again that recent better-than-expected retail sales data may be the real deal, and that the U.S. consumer may finally be turning the corner.  The company, which also operates the Pottery Barn, Pottery Barn Kids and West Elm, reported fiscal Q1 EPS of $0.86/shares on $1.09 billion in revenue vs. profits of $0.12/share on $1 billion in revenue for the same quarter last year.

You’d be right to think that any comparison to Q1 last year would be sure to turn out favorable for a retailer of pricey home furnishings, but when you consider that analysts had WSM pegged at EPS of just $0.73, one must admit that they’re moving inventory a lot faster than people thought they could.  And if what they’re moving is $99 cutting boards (on sale!), well then we might just have a situation on our hands, and a good one at that.

Like so many other retailers, the economic downturn has taught WSM what it means to have a lean operation.  As the recession set in, CEO Howard Lester cut inventories by more than 20%, closed down several underperforming stores, and cut other expenditures, like advertising and administrative costs.  As a result, SG&A fell to 28.5% of sales from 31.8% and gross margins expanded from 33.7% to 41.4%.  They also found enough extra cash lying around to bump up the dividend 8.3% to $0.13/share.

WSM traded up greater than 12% during Monday’s session, and as was the case with Nike last week, we’ve now got a company trading at long-term highs.  Shares have extended about 17% from any kind of base, so I would recommend waiting before opening up a new position.  At this point, I’d like to see a break above the long-term basing pattern you see on the chart below before I buy any shares.

If you’re interested in putting on a trade, I’d recommend using a $29.91 buy-point, opening up a position on a break of that near two-year base, especially if the break come on volume.  Note that the chart below is displaying weekly periods, and that you should always be using weekly periods for trades based on that much data.

Disclosure: No holdings in WSM.