Williams-Sonoma's Steady Strength

The upper-middle-class housewares retailing machine that is Williams-Sonoma (NYSE: WSM  ) continued to roll on in the second quarter. Revenue rose nearly 13%, and EPS climbed by 13% as well. Sales were helped by a 3.7% increase in comp-store sales, nearly 12% more retailing square footage, and more than 11% growth in catalog and Internet sales (with Internet sales up more than 32%).

Although comp-store sales at the flagship Williams-Sonoma chain were down a bit for the quarter, Pottery Barn and Pottery Barn for Kids were both up nicely, and outlet stores saw double-digit growth. Comparable sales at the company's Hold Everything store were down more than 17% in the quarter, but investors should remember that the company has decided to change the merchandising for this concept.

While it's just one quarter (and therefore not necessarily a signal of a trend), margins were pressured in the second quarter. Gross margin was affected by markdowns, while operating margin suffered from higher catalog expenses. Inventories were once again higher in the quarter (up 27%) as management continued its program of investing in inventory so as to achieve better in-stock performance.

Seeing as the stock was off a bit midday, it would seem as though investors might be a little put out that the company didn't raise its guidance for the remainder of the year. Of course, today is shaping up to be not so great for the major averages, so perhaps I shouldn't read much into this one-day reaction.

Speaking of guidance, though, management continues to sound a cautionary note. The company will be ramping up new stores and aggressively pushing catalogs for the holiday season, so management thinks this adds a bit of uncertainty to its prognostications. Of course, you also have the general concerns swirling around all of retail these days as analysts worry about the impact of gas prices, the housing market, and the phases of the moon.

Though they've performed well, these shares are not what I'd call cheap. Then again, how many choices do investors have in the sector? Crate and Barrel is privately held, Pier 1 (NYSE: PIR  ) is sucking wind, and companies such as Bed Bath & Beyond (Nasdaq: BBBY  ) and Linens 'n Things (NYSE: LIN  ) aren't really comparable. Maybe you could call Restoration Hardware (Nasdaq: RSTO  ) or Bombay (NYSE: BBA  ) comparable, but those two companies combined are less than one-tenth the size of Williams-Sonoma.

So long as people are willing to spend $60 to fill up their SUVs and spend $300 on jeans, I don't see why they'd stop shopping at Williams-Sonoma. I'm just not so sure I'd be shopping for its stock without a bit of a markdown first.

For more homey Takes:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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