Undervalued Williams-Sonoma Battles On

As narrow moat-rated

Second-quarter results were mostly in line with the pace of growth in our model, with the exception of retail sales and gross margin outcomes. Retail sales were slower than our low-single-digit cadence would have implied, rising less than 1%, but e-commerce fell in line with our mid-single-digit trend, at 5%. We expect to reduce the second-half cadence of retail sales which continue to struggle as mall traffic wanes, while we suspect that e-commerce can continue to click away at a mid-single-digit pace thanks to tactical e-commerce advertising campaigns. We plan to revise our model longer term on the gross margin line, which contracted 70 basis points to 35.4% in the quarter (making for the ninth quarter of gross margin declines), as occupancy costs rose and higher franchise revenues were included in the mix. We don’t expect franchise to slow as the company expands globally, and think the rising percentage of franchise revenue will dampen gross margin expansion potential over the next decade.

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