What's Driving Williams-Sonoma's Success

Over its fourth quarter, Williams-Sonoma rode the wave of home sales to earnings success.

Mar 13, 2014 at 4:15PM

Apothecary table lovers everywhere were jubilant this morning as Williams-Sonoma (NYSE:WSM) reported higher-than-expected earnings for its fourth quarter. Investors flocked to the company in early trading, sending shares up 10% before noon. Sales drove the bottom-line success, with all of the company's divisions putting up comparable-store sales growth. Williams-Sonoma has been lugging cash to the bank as home prices return to growth, with consumers remodeling, revamping, and just generally investing in the aesthetic appeal of their houses.

Home sales drive table sales
It's not a new theme, but the trend keeps improving for Williams-Sonoma and other home-improvement retailers. As house prices rise, homeowners are gasping for air, finally finding a way out from underwater. Those folks then sell the houses they've been sitting on for the past few years, and now they're selling.

New-home sales are also on the rise, hitting a five-year high in January according to the U.S. Commerce Department. Buyers are outfitting their new pads with Williams-Sonoma's finest and fittest. West Elm, the company's furniture and decor brand, managed the biggest comparable-sales increase in the fourth quarter, pushing sales up 18.3%. Williams-Sonoma's own brand was the weakest performer, but comparable sales still rose 2.3%.

The Williams-Sonoma brand is the brand least susceptible to swings in the housing market, as the stores carry very little in the way of making a house a home. On the other hand, Pottery Barn succeeded in the fourth quarter with comparable sales up 14.6%. 

Williams-Sonoma in 2014
Management expects things to continue on a positive trend for 2014. Williams-Sonoma has forecast a 5% to 7% increase in comparable-brand sales for the fiscal year, with operating margin holding fairly steady compared to 2013. Williams-Sonoma's success has been roughly mirrored by companies like Restoration Hardware (NYSE:RH).

Restoration had incredible success in its first year-and-a-half of public trading, and the stock has risen around 120%. Sales have been the driver of that stock growth, and through the first three quarters, Restoration Hardware had increased comparable sales by 31%. That helped push earnings per share up by 135% for the first nine months.

Both brands have successfully jumped on the wave of home sales that's sweeping the U.S. -- OK, maybe that's a bit grand. Economic forecasts for 2014 are showing another year of growth, although at a slower pace. That should keep spirits high at both Williams-Sonoma and Restoration Hardware, and lead to another year of strong sales. However, investors should keep an eye on the Williams-Sonoma brand to see how the company manages sales not so strongly linked to home sales.

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Andrew Marder owns shares of Williams-Sonoma. The Motley Fool recommends 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.

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