Williams-Sonoma Gets Cold in the Second Quarter

Williams-Sonoma crashed by a whopping 11.2% after reporting earnings for the second quarter on Wednesday. Although the market seems to be overreacting to the negative news, in the short term, rising inventory levels are a valid reason for concern. Is the dip in Williams-Sonoma a buying opportunity, or is it time to run away from the stock before things continue getting worse?

Aug 27, 2014 at 7:53PM

Captura De Pantalla

Source: Williams-Sonoma.

This article originally appeared as part of ongoing coverage in our premium Motley Fool Stock Advisor service. We hope you enjoy this complimentary peek!

Shares of Williams-Sonoma (NYSE:WSM) crashed by more than 11.2% on Wednesday after the market close, as the specialized retailer of home and furnishing products delivered disappointing earnings guidance for the third quarter of the year. Is this just a bump in the road for Williams-Sonoma or a sign of harder times to come for the company?

The numbers
Total sales during the quarter ended on Aug. 3 came in at $1.039 billion, a 5.8% increase versus $982 million in the same period last year, and roughly in line with Wall Street analysts' expectations based on data compiled by Thomsom Reuters. Comparable brand revenues grew 5.7% during the quarter.

Direct-to-consumer revenue increased 9.4% to $523 million during the quarter. The segment represented 50% of total sales, an increase versus 49% of total revenue coming from the direct-to-consumer segment in the second quarter of 2013. Williams-Sonoma has done a great job at building a successful online sales channel, and the latest earnings report confirms that the company continues doing quite well in that crucial area.

ConceptQ2 2014 Comp Sales GrowthQ2 2013 Comp Sales Growth 
Pottery Barn 4.4% 9.9%
Willams-Sonoma 3.4% (0.4%)
Pottery Barn Kids 5.6% 8.2%
West Elm 16.7% 16.5%
PBTeen (1%) 16.3%
Total 5.7% 8.4%

Source: Williams-Sonoma earnings report.

Gross margin declined to 36.8% of revenue versus 37.6% of sales during the same quarter last year. On the other hand, sales, general, and administrative expenses declined as a percentage of revenue, falling from 29.6% of sales to 28.6% during the quarter. This allowed Williams-Sonoma to deliver increased operating margin, at 8.2% of sales versus 8% during the same quarter in 2013.

In all, earnings per share came in at $0.53, an 8.2% increase from $0.49 per share in the second quarter of 2013 and also in line with Wall Street forecasts according to estimates compiled by Thomson Reuters.

The context
As fellow Fool Sara Hov wrote in her earnings review for the previous quarter, Williams-Sonoma had reported piping-hot results for the first quarter of the year, and the stock was trading at all-time highs leading to the second-quarter report, so perhaps investors got too carried away in their optimism. When expectations are too high, reporting in line with analysts' forecasts is sometimes not enough for the market.

On the other hand, guidance for the third quarter of the year was materially lower than expected, and this seems to be the biggest reason for concern in the report. Management expects revenue during the third quarter to be in the range of $1.1 billion to $1.13 billion, while Wall Street analysts are on average forecasting $1.13 billion in revenues for the quarter, according to data compiled by Thomson Reuters.

If the company delivers sales in line with its own guidance, that would imply an annual growth rate of between 4.6% and 7.4% from $1.052 billion in total revenues during the third quarter in 2013. Although this is quite a wide range, the middle-of-the-range number would represent 6%, hardly a reason to panic. 

Earnings guidance looks quite weak, though. Williams-Sonoma expects earnings per share during the coming quarter to be between $0.58 and $0.63, while analysts polled by Thomson Reuters are on average forecasting $0.66 in earnings per share during the third quarter.

Williams-Sonoma reported earnings per share of $0.58 during the third quarter in 2013, so the middle-of-the-range number would represent an annual increase of only 4.3%.

It´s important to note that inventory increased steeply during the quarter. Merchandise inventory as of the end of the quarter stands at $895 million, a big 21.4% increase from $737 million at the end of the second quarter last year.

Management attributed a considerable part of this increase to the fact that Williams-Sonoma began taking ownership of its inventory earlier in the supply chain during the second quarter in 2013. Still, inventory increased 17% when adjusted for these considerations.

The fact that inventories are growing much faster than sales could indicate that Williams-Sonoma is getting stuck with too much merchandise, and it could be sign of increased pricing discounts, and lower profit margins, in the middle term.

Key takeaway
Performance during the second quarter was not all that dismal, and investors tend to overreact to disappointing news when expectations are particularly high. Keeping this in mind, the short-term decline in Williams-Sonoma may turn out to be buying opportunity for long term investors.

On the other hand, rising inventory levels in comparison to sales may indicate that the company could need to improve its merchandising strategy, and it could also be a sign of lower margins in the middle term as the company cuts prices to accelerate sales and streamline inventory levels. The market may be overreacting to negative news, but that doesn't necessarily mean that everything is going well at Williams-Sonoma.

Andrés Cardenal owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers