How Williams-Sonoma's Diverse Product Range Could Offset Larger Home Furnishings Dip, Analyst Says

Telsey Advisory Group analyst Cristina Fernández reiterated Outperform rating on Williams-Sonoma, Inc. WSM, raising the price target to $146 from $135. WSM will report Q2 earnings Wednesday, August 23, before the markets open.

The analyst expects demand for home furnishings to soften further during Williams-Sonoma's 2Q23 relative to 1Q23, with U.S. Census Bureau data showing a (5.7%) decline YoY in sales at furniture and home furnishings stores. 

Precisely, Telsey expects comparable brand sales at Williams-Sonoma to decline (7.4%), worse than (6.0%) in 1Q23. 

Relative to other retailers that generate 80%-85% of sales from big-ticket furniture, Williams-Sonoma should benefit from also selling smaller-ticket decor, baby/kids, and kitchen items, as well as its exclusive collaborations.

On the cost side, the analyst thinks the company remains committed to eliminating site-wide promotions, although clearance activity has been higher YoY. 

Similar to last quarter, the gross margin in 2Q23 will be pressured significantly by high supply chain costs as the product bought last year is sold.

Fernández models 550 bps of pressure in 2Q23 to 38.0% vs. 523 bps in 1Q23. 

Prudent cost management in areas like advertising and employment should result in SG&A expense leverage. 

The analyst estimates the operating margin contraction of ~515 bps YoY to 12.0% (FS at 11.8%). 

The analyst's 2Q23 EPS estimate is $2.72, up from $2.62 previously vs. FS at $2.72.

The 2023 estimate is $13.75 vs. FS at $13.54, up from $13.45.

For 2024, the analyst models EPS of $14.55, up from $14.15 previously.

Also Read: What To Expect From Williams-Sonoma's Q2 Earnings? Analyst Sees Chance For Positive Surprise

Price Action: WSM shares are trading higher by 1.47% to $133.54 on the last checked Friday.