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Published:
December 12, 2007
Williams-Sonoma (NYSE: WSM, $27.93) operates five different
retail concepts, including the highly popular Pottery Barn and Pottery
Barn Kids units. Women in particular are big fans of these stores, and
some estimates suggest that it is women who are responsible for
approximately 85% of all spending on luxury goods. The firm's
merchandise -- primarily cookware and home furnishings -- is sold
through a variety of distribution channels, including catalogs,
websites, and approximately 600 retail outlets in 44 states.
The company has delivered nothing but growth over the past decade, and
sales have quadrupled from $933 million to $3.8 billion since 1996. More
importantly, net income has raced ahead at a +17% annual clip over that
same span.
Given the weakness in the housing market, demand for home furnishing has
been lukewarm at best lately. However, as a best-in-class retailer with
a predominately high-income customer base, the firm has weathered this
cyclical downturn far better than many of its rivals. Pier One is down
nearly -50% in the last 6 months and other peers like Cost Plus World
Market and Bombay have had their struggles as well.
Yet, while many have been posting negative same-store sales figures
recently, Williams-Sonoma managed to deliver a respectable +1.1% gain
last quarter. However, with forecasts calling for soft store traffic and
flat comps for the fourth quarter, the shares have been pounded recently
-- sliding from $35 to below $30.
Still, these pressures will moderate in time, and Williams-Sonoma is
well-positioned for future growth. Because the firm has a nationwide
catalog business, it can use this channel as a testing ground for new
merchandise. By contrast, other retailers have to stockpile inventory in
their stores, only to mark it down later if it doesn't sell.
And looking ahead, the company is rapidly transitioning its
direct-marketing platform online -- where overhead costs are much lower.
The company operates six e-commerce websites, and last quarter those
sites generated sales of $266 million, up +17% from the prior year.
Overall, this efficiently managed company has very little debt, delivers
consistent revenue growth, and has churned out healthy average annual
free cash flows of $150 million over the past few years. In time, the
shares should be able to bounce back toward our fair value of $37 per
share.
Nathan Slaughter
Editor
Half-Priced
Stocks
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