Williams-Sonoma stock skyrockets | MarketBeat

Williams-Sonoma New York Stock Exchange: WSM The stock’s surge is due to its persistent outperformance and the quality of its assets. The company contracted in 2023 along with the housing market, but cash flow remained solid, generating substantial capital returns for investors. The fourth quarter results continue the trend and indicate a turnaround this year. This will provide a pivot to growth accompanied by solid margins and sustained capital returns.

One of the determining factors for stock price is valuation. The stock is likely a highly valuable issue, trading at 19X earnings, but that outlook is based on the physical business. Lifestyle retailers are struggling in 2023 as consumers shift to newspaper, consumer goods and off-price retailers like The TJX Companies New York Stock Exchange: TJX, as seen in their stock prices. And it’s not like lifestyle stores are trading at high valuations. Havert’s New York Stock Exchange: HVT trades at 16X earnings, in line with Williams-Sonoma’s pre-release valuation, while Interiors by Ethan Allen NYSE:ETD trades closer to 12X

Looking at the company from an eCommerce perspective, it is undervalued. eCommerce category leader such as Arhaus NASDAQ: ARHS, RH NYSE:RHAND Wayfair NYSE: W trading at much higher valuations. Besides WSM, Arhaus is the cheapest of the bunch; trades at 24X earnings, while RH trades at 36X and Wayfair at 60X. From this perspective, the stock could gain another 25%-200% due to price multiple expansion. eCommerce represents about 65% of the business, so it makes sense to price it as such.

Is Williams-Sonoma best of breed? The results say yes

Williams-Sonoma’s results, guidance, balance sheet and capital returns demonstrate that it is a top-rated stock for investors. The company’s revenue fell 6.9% from last year, but beat expectations and was up 29% from the pre-COVID quarter. Comps fell 6.8% networkwide, with the greatest weakness in West Elm. West Elm contracted 15%, Pottery Barn fell 9.6% and Pottery Barn Kids fell 2.5%. Core brand Williams-Sonoma grew 1.6%.

The margin news is the most impressive aspect of the report. The company posted a solid operating margin of 20.1%, well above its long-term target. This represents the strength of the Williams-Sonoma brand and market, which is richer and more demanding and allows full-price sales. The bottom line is that earnings largely beat consensus and the outlook for next year is good.

The company targeted stable revenue +/- 3%, including a 53rd week plus, and margins that remained strong. The margin is expected to contract over the course of the year, but remains within the long-term target of mid-to-high teens. According to the consensus, analysts had expected revenue to decline more than 1%.

Has Williams-Sonoma increased return on capital? Basically

Another catalyst for the report is rising capital returns. The company increased its dividend by 25% and increased its repurchase authorization by $1 billion. $1 billion in share buybacks is worth 6.5% in market cap terms with the stock at a new high – the new dividend yield is just over 1.5% and that’s sustainable. The payout ratio is still below 30% and the balance sheet shows no red flags.

Cash flow has enabled a significant improvement in the balance sheet and robust cash flow is expected again this year. Balance sheet and cash flow highlights include $1.7 billion in cash flow, a 3X increase in liquidity, and a 5% increase in equity.

Do analysts think Williams-Sonoma is overvalued?

Analyst sentiment could limit Williams-Sonoma’s gains as the market beat estimates. The surge in stocks took this market above the highest target of analysts, who were not thrilled by the news. The first revision on Marketbeat’s radar is a repeat outperformance from Telsey Advisory Group with a $265 price target, $20 below the current stock, and the consensus is $80 lower than that. The bottom line is that the Williams-Sonoma stock price may not sustain new highs without upward revisions.

Technically speaking, the market is at a critical resistance target expected when it hit new highs this year. That point is near $290; a move above it would open the door to another $90 rally.

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