This High-End Home-Goods Store Is in Store for a Great 2014

With the rebound in the economy and housing picking up, this home-goods store looks to be a great investment for 2014.

Feb 10, 2014 at 10:41AM

As the economy improves and discretionary income goes up, people will have more money to spend. That's one of the biggest bull cases for the retail industry. However, there's one retail sector that will see the benefits of both a rising economy and rebounding housing market. With the housing market rebounding, there will be more people with houses to decorate and fill with various products.

Williams-Sonoma (NYSE:WSM) is one of the best companies to get exposure to the rebounding retail market and take advantage of the increase in housing demand. Williams-Sonoma is a retailer of high-quality products for the home.

Williams-Sonoma's investments in e-commerce are paying off for the company as the internet becomes the go-to avenue for shopping. Williams- Sonoma already gets slightly more than 45% of revenue from the direct-to- consumer segment. Over the next half decade, Williams-Sonoma expects its direct-to-consumer sales to grow to more than 50% of sales. Thanks to this, its operating margin is at decade highs over the trailing-12 months, at nearly 10.3%.

Meanwhile, it's also seeing strength in its retail business. Third-quarter results showed that operating income for the retail segment was up 12% year over year. This marked the first quarter in six that the company saw a year-over-year gain. And comparable-store sales were up 8.2%.

Why Williams is best in breed?
Williams-Sonoma's return on capital of above 23% is a new peak for the company, and it has an impressive free cash flow yield of right at 5%. The weak housing market put a damper on consumer spending. Yet, even through the downturn, Williams-Sonoma has kept inventory levels in check. Its inventory turnover ratio is back above 4 times after getting as low as 3.5 times in 2009.

A couple of other major home-goods retailers include Bed Bath & Beyond (NASDAQ:BBBY) and Pier 1 Imports (NYSE:PIR). Bed Bath & Beyond trades at less than 13 times earnings, while Pier 1 trades at 15.6 times. However, Bed Bath doesn't pay a dividend, while Pier 1's is 1.3%.

Bed Bath & Beyond is already down 20% year to date after offering a weaker-than-expected full-year outlook. However, investors can take solace in the fact that Bed Bath has zero debt. This is a much more advantageous balance sheet than some of its peers, including Macy's and its 132% debt-to-equity ratio. Bed Bath also customizes its merchandise offering to cater to specific markets.

Alex Smith took over as CEO in 2007 after leaving TJX. That same year, Pier 1 posted a $228 million loss. It lost money for two more years. After flirting with bankruptcy in 2009, Pier 1 has come roaring back. Pier 1 generated $32 million in profit in 2010 and has grown that number to $201 million as of fiscal 2013.

Bottom line
With a business model that supports strong cash flow generation and negligible debt, investors should look for Williams to return more cash to shareholders. It already pays a forward dividend yield of 2.3%. Over the last three years, Williams-Sonoma has managed to reduce its shares outstanding by 10% and up its quarterly dividend payment by 80%.

Williams-Sonoma is a solid investment and trades just below its five-year average multiple. Meanwhile, Bed Bath and Pier 1 could be solid investments for other reasons. Bed Bath offers home goods in the lower- to mid-priced range, while Pier 1 is still a turnaround story.

But does all that make Williams-Sonoma the Fool's top stock for 2014?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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