Why Williams-Sonoma and Adobe Systems Shares Are Hitting Highs

In this segment of the Motley Fool Money podcast, host Chris Hill is joined by Million Dollar Portfolio's Jason Moser, Hidden Gems Canada's David Kretzmann, and Motley Fool Pro and Options' Jeff Fischer slice up the investment thesis for a pair of companies that enjoyed healthy stock bumps this week. Kitchen-focused retailer Williams-Sonoma (WSM 0.15%) served the market better-than-expected profits and revenue for its fiscal fourth quarter. But those expectations reflect the troubled situation for brick-and-mortar chains -- even those making real headway with their e-commerce efforts.

So, what's the outlook and what is the differentiator that could allow it to prosper in the new omnichannel world? Also, Adobe Systems (ADBE 0.89%) shares set a new all-time high thanks to strong profits and particularly impressive subscription revenue -- up nearly 30%. The company's Creative Cloud just keeps performing, as well as its digital media segment -- it's a lot more than just PDFs and Photoshop, you know.

A full transcript follows the video.

This video was recorded on March 16, 2018.

Chris Hill: Williams-Sonoma hitting a 52-week high after fourth quarter profits and revenue came in higher than expected. Jason, you do most of the cooking in your house. Were you upgrading your kitchenware?

Jason Moser: [laughs] You know, I do all the cooking in our house, Chris, and I'm proud of that. My mom taught me well. For Williams-Sonoma, I do not give them much of my business, and when I do it's usually because of a fire sale. It was not a bad quarter, but there are some concerns investors need to be watching for it in the next several years. I think the fall from grace this stock has seen since mid-2015 is no outlier. There are good reasons behind it. 

We talk about opening stores at more of a tempered pace. I think with Williams-Sonoma, they're not going to be opening many more stores. So, e-commerce, on the good side, is now more than half of sales. The bad news is, it's also more than half of sales, so you kind of wonder, how much farther that can really go? So, they're fighting this battle on two fronts with Amazon and Wayfair. And I actually think there is a dynamic to the meal delivery kits as well, people are using their kitchens differently. I think those reasons put together are why the stock is trading for a round 13-14X 2018 estimates. It is retail, after all, and retail has had some sort of challenges here. Williams-Sonoma seems to be doing OK, but I'd be cautious.

Hill: Well, they've done better than average in terms of specialty retail when it comes to the omni-channel approach. The idea that e-commerce is now more than 50%, they've demonstrated in the last five to 10 years that if any specialty retailers are going to make the leap, maybe not to 100% e-commerce but growing that even further, I feel like they can do that, which maybe gives them an edge, along with, their stuff has a pretty good reputation in terms of their brand. And thinking about Ulta, it's almost like with specialty retail, you need one extra thing going for your business. I think in Williams-Sonoma, it's their track record. I think in Ulta, it's the subscriptions. How many people do they have in their membership?

David Kretzmann: Their loyalty program is about 28 million members now.

Moser: Yeah. I think which Williams-Sonoma, the only concern there is, with e-commerce, it's more like they're kind of trading one for the other. The physical sales are going to e-commerce. It's not like they're adding. That's why you're seeing the challenges in the top line growth there, which are ultimately reflected in the value of the stock today.

Hill: Adobe Systems hitting a new all-time high today after strong first quarter profits. Adobe's subscription revenue also grew nearly 30%. That's a lot of PDFs, Jeff.

Jeff Fischer: [laughs] Well, I'm glad it isn't only PDFs.

Hill: Am I the only one who thinks of PDFs when they hear the name Adobe?

Fischer: No, definitely not, I think many people do, and I think that's maybe why the shares have surprised many people the last few years since 2015 or so. Revenue has jumped from $4 billion-ish to now nearly $8 billion-ish, it's headed toward. The company is doing extremely well, Chris, with its Adobe Creative Cloud, which is a subscription service for creating, managing, sharing digital content, as well as the Adobe digital media branch, which includes the Acrobat, the reader, the sign and scan documents. That's all doing very well. 

But Adobe also has advertising management, cloud software, analytics and marketing management cloud. So, they've moved to the cloud. They're allowing you to manage your whole digital presence, from creation to communication to collaboration. So, a lot of businesses, a lot of individuals, students, are all using this. 88% of revenue is of a recurring nature, so it's a powerhouse. Earnings grew more than 60%. The stock trades at 33X forward estimates. Margins are exceptional. It's a very strong business.