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The balance between internal expectations and Wall Street's desires has been front and center recently. Due to the presentations being given at the ICR XChange conference this week, companies are releasing revised forecasts ahead of time, and many are falling short of what the Street was looking for. The newest victim is Williams-Sonoma (NYSE: WSM ) , which just announced that it still plans to hit its previous forecast. That sent the stock down over 5% in early trading yesterday.
With these moves, the price correction is often well-deserved as the company's growth prospects become clearer. As with all the correction, though, the move usually reflects investors' concerns about what has happened, not necessarily what will happen. Here's a rundown of Williams-Sonoma's current position, and a glimpse at its future.
The newest release
The main focus of today's release was the 4.8% increase in holiday revenue. Williams-Sonoma brought in just over $1 billion in the nine weeks leading up to the end of the year. If the company hits its revenue goal, the holiday sales will represent about 25% of the total revenue brought in this year, highlighting why the season is so important. If the company were to hit the top end of its fourth-quarter guidance at $1.4 billion, then it would be in line with analyst estimates. But income looks like it's going to fall short of expectations, coming in between $1.21 and $1.28 per share -- forecasts were looking for $1.30 per share.
While the reason was not detailed in the announcement, the cost pressure likely came from Williams-Sonoma's work to expand into Australia. It recently announced a new center for four of its brands that is set to open in the early part of this year. If that's not the culprit, then investors need to watch out for overly discounted items during the holidays. I doubt that that will be an issue, though, as the company hit its planned holiday revenue and income. I suspect the international plan is to blame.
Expansion and competition
That expansion is going to be an excellent driver for 2013. While it won't generate a huge amount of income due to its small size, it does signal Williams-Sonoma's desire to move beyond its current borders. Right now, the company only operates in other countries through third parties. If the expansion is a success, then investors should get ready for some additional costs over the next few years, as the company ramps up its international efforts.
Luckily, last quarter Williams-Sonoma increased its gross margins, giving itself more flexibility to invest and still turn a profit. That ability should help it compete with the likes of Bed Bath & Beyond (NASDAQ: BBBY ) and Restoration Hardware (NYSE: RH ) . Bed Bath & Beyond had an excellent operating margin last quarter of 13.3%, which puts it ahead of Williams-Sonoma with its 8.4% margin last quarter. Both easily beat out Restoration Hardware, which is in the midst of its own expansion. Last quarter, the company only managed a 0.7% operating margin. However, that should start to taper off as the company slows its physical growth.
The bottom line
Williams-Sonoma's price adjustment is probably a fair reflection of the company's growth potential. It currently trades at a P/E of 18, which is just about average. With its 5% growth this coming quarter and a decent list of upcoming investments, that's probably going to be the average rate of growth for the next year. After that, I'd start to look for the international expansion to start paying off, pushing that growth figure up as the stores start to make up a bigger percentage of total stores. Overall, I like the potential from Williams-Sonoma and I think the stock is fairly priced.
As for competition, Bed Bath & Beyond has been a fairly solid performer for years, and even with its recent pullback, it seems to be one of the only big-box stores that has managed to keep the dream alive. I'm going to be watching the next earnings release very closely to see what else is on offer. Restoration Hardware is currently looking cheap, relative to its sales. But the fact that it's got expansion on the brain makes me a bit wary.
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