Will Williams-Sonoma’s Q1 Earnings Boost Its Stock?


May. 27 2020, Published 8:47 a.m. ET

Amid the global sell-off due to the COVID-19 outbreak, Williams-Sonoma (NYSE:WSM) fell to a low of $26.01 on March 18. Since then, the company’s stock has made a significant recovery. As of May 26, the company was trading at $69.65, which represents a rise of 167.8% from its March 18 lows. The company’s stock price rose due to the stronger broader equity market and the expectation of a shift in consumers’ discretionary spending towards the home goods category. Williams-Sonoma will likely report its first-quarter earnings on Thursday after the market closes.

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Analysts’ expectations for Williams-Sonoma

For the first quarter, analysts expect Williams-Sonoma to report revenue of $1.08 billion. The amount represents a fall of 13.2% from $1.24 billion in the first quarter of 2019. Temporarily closing stores amid the shelter in place guidelines could lower the company’s sales. Meanwhile, the incremental growth in Williams-Sonoma’s e-commerce sales amid the COVID-19 outbreak could offset some of the declines. In the fourth quarter, the company’s e-commerce sales grew by double-digits to form 57% of the company’s total revenue. Meanwhile, Williams-Sonoma’s management focuses on providing an expanded and more relevant product assortment, acquiring new customers, and developing innovations to enhance the customer experience across its e-commerce, stores, and the supply chain to drive its SSSG.

Moving to the EPS expectations, analysts project the company to report an adjusted EPS of $0.01 for the quarter. The amount represents a fall of 98.2% from $0.81 for the quarter. Lower sales, a decline in the EBITDA margin, and higher D&A (depreciation and amortization) expenses could lower the company’s EPS. However, a lower effective tax rate and a decline in the number of shares outstanding could offset some of the declines. Analysts expect Williams-Sonoma’s EBITDA margin to fall from 10.8% in the first quarter of 2019 to 5.7%. The decline in the gross margin and sales deleverage from negative SSSG could bring the company’s EBITDA margin down. The company’s D&A expenses could rise by $3.2 million to $49.6 million.

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Williams-Sonoma’s dividend yield and valuation multiple

On March 18, Williams-Sonoma announced quarterly dividends of $0.48 per share, which will be paid on May 29 to shareholders recorded as of April 24. As of May 26, the company’s dividend yield was 2.76% with its stock trading at $69.65. On the same day, Bed Bath & Beyond’s (NASDAQ:BBBY) dividend yield was 10.15%.

As of May 26, Williams-Sonoma was trading at 24.2x analysts’ 2020 EPS expectation of $2.88 and at 16.6x analysts’ 2021 EPS expectation of $4.19. These EPS expectations represent a YoY decline of 40.5% in 2020 and an increase of 45.4% in 2021. At 16.6x the 2021 EPS estimates, the company’s valuation multiples look reasonably attractive.

Analysts’ recommendations

On Tuesday, Telsey Advisory Group upgraded Williams-Sonoma from “market perform” to “outperform” and doubled its target price. To learn more, read Telsey Upgrades Williams-Sonoma before Its Q1 Earnings. On May 18, Wedbush upgraded the stock from “neutral” to “outperform” and raised its target price from $46 to $80. On May 13, RBC increased its target price from $69 to $70. As of May 26, analysts’ consensus target price was $56.89, which represents a potential fall of 18.3% from its current stock price. Meanwhile, Wall Street prefers a “hold” rating for the stock. Among the 23 analysts, 56.5% recommend a “hold,” 26.1% recommend a “buy,” and 17.4% recommend a “sell.”

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YTD stock performance and my take on WSM

Despite the recent surge, Williams-Sonoma is still trading 5.2% lower this year as of May 26. The weakness in the broader equity market appears to have led to a fall in the company’s stock price. So far this year, Williams-Sonoma has outperformed its peers and the broader equity markets. Bed Bath & Beyond and RH (NYSE:RH) have returned -56.7% and 7.1% YTD. The S&P 500 Index has fallen by 7.4% during the same period.

Overall, I’m bullish on Williams-Sonoma’s initiatives. The stock has increased too quickly. So, I would wait until the company reports its first-quarter performance to make any investment decision. I would also be interested in management’s commentary on the growing tension between China and the US. Notably, Williams-Sonoma imports some materials from China.


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