Williams-Sonoma Is Booming: Should You Buy?

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Home furnisher Williams-Sonoma (NYSE: WSM  ) is trading near historical highs after reporting impressive earnings last week. In a retail environment in which bigger competitors such as Bed Bath & Beyond (NASDAQ: BBBY  ) are being materially hurt by Amazon.com (NASDAQ: AMZN  ) and the online retail revolution, Williams-Sonoma is proving its ability to adapt and thrive under the new industry paradigm.

Strong performance and optimistic outlook
Sales during the quarter ended on May 4 grew 9.7% to $974 million on the back of a 10% increase in comparable-brand revenue. The number was better than Wall Street analysts' expectation of $943 million in revenue.

Comparable sales of West Elm products increased by an impressive 18.8% in the quarter, while Pottery Barn comparable sales jumped 9.7%, Pottery Barn Kids stores delivered an 8.1% increase in comparable revenue and PBteen comparable sales increased 12%. Even the more mature Williams-Sonoma concept, which has been materially lagging other brands over the last several quarters, delivered a healthy increase of 6% in comparable sales.

Source: Williams-Sonoma.

Williams-Sonoma has built a remarkably strong online business that is generating impressive performance in the direct-to-consumer segment. Direct-to-consumer revenue grew 17.2% from the same quarter in the prior year, for a total of $491 million and 50% of total sales from the Williams-Sonoma banner.

Margins increased slightly during the quarter. Gross profit margin came in at 37.8% of sales, versus 37.6% in the year-ago quarter. Selling, general, and administrative expenses declined to 30.2% of sales from 30.5% in the year-ago quarter.

Earnings per share reached $0.48 during the quarter, up 20% from the same quarter in the prior year and considerably better than the $0.44 per share expected on average by Wall Street analysts. Williams-Sonoma distributed $86 million in cash to shareholders during the period, comprised of $53 million in share buybacks and $33 million in dividends.

In a sign of confidence on the future, the company raised its financial guidance for the year. Williams-Sonoma expects sales during fiscal 2014 in the range of $4.65 billion to $4.73 billion, versus a prior range of $4.63 billion to $4.71 billion. Comparable-brand sales are expected to grow between 5% and 7%. The company also increased full-year earnings per share guidance from a range of $3.05 to $3.15 to the new range of $3.07 to $3.17.

Competitive strengths
President and CEO Laura Alber is quite confident regarding Williams-Sonoma´s ability to sustain performance over time:

Innovative, high-quality product, personalized service, relevant marketing and strong execution across all brands drove these better than expected results. With 50% of our revenue in the direct channel this quarter, we believe our multi-brand, multi-channel platform is driving consistent market share gains and providing us with a sustainable competitive advantage.

The company´s online presence is a huge strategic asset in times in which e-commerce is the name of the game in retail and Amazon is actively gaining market share versus traditional brick-and-mortar players in different categories.

Source: Williams-Sonoma.

The online retailer is known for its aggressive competitive drive and efficient operations. Amazon is willing to sell its products at razor-thin profit margins in order to beat the competition, which represents a major challenge for many companies across the industry.

Bed Bath & Beyond is clearly feeling the pressure, as the company reported really dismal financial performance for the quarter ended on March 1. Net sales declined 5.8%, to $3.2 billion from $3.4 billion in the year-ago quarter, while earnings per share came in at $1.60, lower than the $1.68 per share the company earned in the same period of 2013.

Forward guidance was also a big disappointment for investors, Bed Bath & Beyond forecast earnings for the current quarter in the range of $0.92 to $0.96 per share, down from the $0.93 the company earned during the same period of 2013.

Considering the heavy headwinds affecting competitors such as Bed Bath & Beyond in today's retail environment, the remarkably strong financial performance reported by Williams-Sonoma looks even more impressive.

Foolish takeaway
Williams-Sonoma is firing on all cylinders in a notoriously difficult environment for retailers. Strong brand power, a successful multichannel approach to the business, and solid execution are key long-term advantages and competitive strengths. Keeping this in mind, Williams-Sonoma looks well positioned to continue delivering substantial gains for investors in the years ahead.

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