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Why Williams-Sonoma Is a Buy

By Pearl Wang – Oct 15, 2020 at 7:30AM

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The specialty retailer has tailwinds supporting its revenue growth.

Specialty home goods retailer Williams-Sonoma (WSM 1.16%) has weathered what has been a volatile 2020 pretty well, taking advantage of consumers continuing to spend to improve their living spaces during this pandemic-dominated time when more people are staying home more and working remotely.

The California-based company's West Elm and Pottery Barn brands are growing briskly and look well-positioned to do so. There's also the benefit of a very strong housing market that is helping demand for home goods. Is now a good time for investors to get in on the growth potential?

Recent results show brisk growth and strength

Williams-Sonoma reported strong second-quarter (which ended Aug. 2) revenue growth of 8.8% year over year, boosted by significant e-commerce growth of 46%. The results were impressive given that some of its stores were only just reopening following COVID-19-related closures. Stores performed better than expected during the quarter.

Interior of Williams-Sonoma store

Image source: Williams-Sonoma.

The consumer discretionary company noted positive trends at West Elm and Pottery Barn. West Elm continues to deliver very strong net comps year over year at 7% and on a two-year basis of 24.5%. CEO Laura Alber spoke of West Elm's performance in the quarter on the Q2 earnings call: "This brand continues to have high appeal, particularly in our furniture categories where we saw substantial growth in indoor and outdoor, as well as key successes in home office, dining, and storage furniture this quarter." Pottery Barn also delivered a net comp of 8.1% during the period.

Consumers are spending more to update living spaces

According to the consultancy McKinsey, Americans' behavior has shifted to spending more time at home on meals and domestic activities. An article about changes in U.S. shopping behavior by the company notes that "consumers still expect to spend more time on at-home activities, even in less-restricted regions." This bodes well for purveyors of home goods and furniture, as consumers are more likely to invest in a comfortable, elevated home environment if they plan to spend more time there.

Williams-Sonoma's second quarter saw a pronounced increase in work-at-home solutions, outdoor furniture, and products to update the family living space. A shift toward home schooling and remote learning due to COVID-19 is driving purchases of study-at-home solutions, including home study furniture. This boosted business at Pottery Barn Kids and Teen.

Additionally, the company's e-commerce strength and positioning will allow it to thrive as consumers increasingly shop online and want a seamless shopping experience. Alber believes behavioral changes post-COVID-19 will continue: "Over the past five months, we have seen an acceleration in online sales, and with our powerful digital platform and trusted brands, we are maximizing the shift and driving e-commerce sales to new levels."

In the homes furnishing space, Williams-Sonoma continues to work to gain market share as some retailers thrive while others are closing stores. Big-box retailer Target saw 30% growth in home goods during the quarter ended June 30. There's been opportunity to convert customers of home goods company Pier 1 Imports, as the chain filed for bankruptcy and closed all its 500+ stores this year. Williams-Sonoma's CEO Laura Alber is confident in Williams-Sonoma thriving in the space vs. competitors: "the differentiator with us is that we have curated brands, you don't have to search through a ton of products. You can trust the level of quality." 

The housing market is red-hot

The housing market in the U.S. has been expanding briskly, with existing home sales reaching a 14-year high in August, boosted by historically low interest rates and low levels of inventory in many parts of the country. Sales of previously owned homes increased by 2.4% in August versus July, when they were up 24.7%.

Some of this growth is attributed to an increase of people moving out of cities and into suburbs, following concerns and lifestyle changes post-COVID-19. As more Americans work from home, they are also looking for more space. At the same time, people are moving to more rural areas, given the shift to remote work.

Overall, Williams-Sonoma's revenue growth is supported by many tailwinds. Not only is the company executing well, but there are also secular trends working in its favor. Investors may want to consider this consumer discretionary company.

Pearl Wang has no position in any of the stocks mentioned. The Motley Fool recommends Williams-Sonoma. The Motley Fool has a disclosure policy.

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