Can Williams-Sonoma's E-Commerce Channel Offset Margin Woes?

Williams-Sonoma, Inc. WSM has been riding on solid e-commerce growth, strong growth from West ELM and emerging businesses. Also, focus on innovation, marketing and digitalization techniques is an added positive.

This multi-channel specialty retailer recently reported better-than-expected results in first-quarter fiscal 2019. Its adjusted earnings of 81 cents and revenues of $1,241.1 million surpassed the Zacks Consensus Estimate by 19.1% and 1.6%, respectively.

Notably, shares of Williams-Sonoma have gained 21.5% so far this year compared with its industry’s 11% rally. The price performance was backed by solid earnings surprise history, having surpassed the consensus estimate in all of the trailing six quarters.

Yet, soft comps, higher shipping expenses and high costs associated with ongoing investment in e-commerce pose concerns.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Key Growth Drivers

Williams-Sonoma has been increasing profitability through significant investment in e-commerce websites and direct mail catalogs. The company’s ongoing investment in merchandising of brands, efficient catalog circulations and digital marketing are gaining traction.

The company leverages more than 50% of its business through web. Notably, it is among the top 25 internet retailers in North America (as of fiscal 2018).

Its focus on West Elm and emerging brands, namely Rejuvenation and Mark and Graham, is raising hopes for the company. Williams-Sonoma recorded notable comps growth of 11.8%.

Backed by the above-mentioned factors and growth trend in early fiscal 2019, the company raised non-GAAP earnings per share expectation for the full year by 5 cents.

Williams-Sonoma is a highly customer-centric company. Its focus on enhancing customer experience through technological innovation and operational improvement bodes well. The company shifted its advertising spend toward social media campaigns and cross-brand initiatives to drive brand awareness, and increase customer engagement as well as cross-selling opportunities. Also, continuous technological innovation and new products help the company to enhance customer engagement.

Its newest division, Williams-Sonoma Inc. Business-to-Business, made significant progress during the quarter. The company launched its in-house technology, namely Test Lab, and machine-learning search engine across the brands.


Despite reporting better-than-expected results over the last few quarters, the company’s comps growth has remained tepid. In the fiscal first quarter, the company registered comps growth of 3.5% compared with 5.5% in the prior-year period. This was largely due to its lower-than-expected performance during Easter and continued reduction in promotional activity.

Higher shipping and employment-related costs have also been pressurizing margins of the company. In the fiscal first quarter, non-GAAP gross margin declined 10 basis points from the prior-year period. The decline was due to higher shipping costs, primarily attributed to a greater mix of furniture sales.

Stocks to Consider

Some better-ranked stocks in the Retail-Wholesale sector are BMC Stock Holdings, Inc. BMCH, RH RH and Builders FirstSource, Inc. BLDR. While BMC Stock Holdings sports a Zacks Rank #1 (Strong Buy), RH and Builders FirstSource both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BMC Stock Holdings and RH’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with the average being 39.4% and 20.1%, respectively.

Builders FirstSource has a projected long-term earnings growth rate of 5%.

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