Williams Sonoma: Undervalued Best-in-Class Retailer

Narrow moat

We may revise our 2016 forecast modestly, as our prior outlook called for $5.2 billion in revenue and $3.50 in EPS, slightly above the updated range of $5.070-$5.150 billion in revenue and $3.35-$3.45 in EPS, as third-quarter revenue tracked slightly behind the pace we had in our model. Commentary was mixed on the rest of the year, with management noting the firm’s home furnishing brands outperformed the industry (which fell 1.7% per U.S. Census) in October, while the election provided some uncertainty for consumers in November, supporting a tepid forward outlook. This puts and takes balance ahead with an easier comparison (fourth-quarter 2015 delivered comps of 0.8%) along with the risk of an increasingly promotional environment and incremental labor cost pressures. All in, this puts Williams-Sonoma placed to postpone operating margin expansion until 2017, when new product innovation flows through the retail channel and supply chain initiatives can pay off. Longer term, we still forecast operating margins of 12% (from 9.8% in 2015) as product innovation drives better pricing, and SG&A leverage takes hold.

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