Williams-Sonoma Still Holds Durable Appeal, But Sales Trajectory Concerns Linger

Peter Benedict of Baird says sales inflection at Pottery Barn is key to Williams-Sonoma, Inc. WSM’s FY2017 plans as concerns over sales trajectory persist.

Williams-Sonoma noted a positive response to its efforts aimed at expanding the Pottery Barn's reach and plans to continue selectively remodeling stores.

“Some sequential improvement in PB's 1Q CBR (vs. 4Q) seems likely, but a return to positive comps later in the year remains key to delivering FY17 plan,” Benedict wrote in a note.

Mixed Q4 Results

For the fourth quarter, Williams-Sonoma reported adjusted EPS of $1.55, which exceeded Street's $1.51 estimate as margin upside offset softer sales.

That said, sales remained weak, with comps falling 0.9 percent due to a slowdown at West Elm along with Pottery Barn which continued its negative sales.

West Elm, which is the company’s key growth engine, reported lower comps at 6.5 percent versus 12 percent in the third quarter, 15.8 percent in the second quarter and 19 percent in the first quarter.  Pottery Barn comps fell 4.1 percent and missed consensus expectations of 2.3 percent drop.

Outlook Assumes Improved Trends

However, the company’s full-year outlook assumes improved trends. The FY2017 comp guidance of 1-3 percent reflects an improvement from second half 2016 (down slightly) and first quarter's planned (1 percent) - 2 percent.

“With West Elm comps likely to slow from FY16's robust 12.8%, turning the trajectory of Pottery Barn is critical,” Benedict added.

The company sees FY2017 EPS of $3.45 - $3.65 versus Street's $3.61 estimate. That said, guidance is back-end weighted, with first quarter EPS projected down 5–15 percent to $0.45-$0.50 (Street at $0.54).

As such, Benedict maintained his Neutral rating on the stock, with a price target of $48.

“While we see long-term value in WSM's omni-channel platform and portfolio of well-known/proprietary brands, 4Q results/FY17 guidance reinforce our near-term concerns over the trajectory of sales/margins,” Benedict added.

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