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Why Williams-Sonoma’s Net Margin Expanded in Q2 2018

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WSM’s Q2 margins

In the second quarter, Williams-Sonoma (WSM) posted a gross margin, EBITDA margin, and net margin of 36.4%, 10.4%, and 5.0%, respectively. These margins were 35.2%, 10.5%, and 4.4%, respectively, in the second quarter of 2017.

Williams-Sonoma’s gross margin improved by 1.2% due to the reclassing of other income to revenues due to the implementation of the new standard of revenue recognition and higher selling margins.

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Conversely, the company’s EBITDA margin declined by 0.1% due to an increase in the company’s SG&A (selling, general, and administrative) expenses. The company’s SG&A expenses increased from 28.4% to 29.7% due to the implementation of its new revenue recognition standard, higher digital advertising investments, and an increase in hourly wages. These expenses were partially offset by catalog advertising optimization.

The company’s net margin improved by 0.6% due to the lower effective tax rate. The enactment of tax reforms in December 2017 led the company’s effective tax rate to fall from 34.8% to 28.8% during the quarter.

Peer comparisons

For the same period, analysts expect RH (RH) and Bed Bath & Beyond (BBBY) to post net margins of 7.1% and 2.3%, respectively.

Outlook

For the next four quarters, analysts are expecting Williams-Sonoma’s net margin to improve from 6.2% to 6.4% due to sales leverage from positive comparable brands sales growth and a lower effective tax rate.

Next, we’ll look at Williams-Sonoma’s second-quarter EPS.

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