If you're a Williams-Sonoma (WSM 4.43%) shareholder, this year's return undoubtedly put a smile on your face. With people forced to stay at home and avoid large gatherings, they have increased their shopping for home goods. This isn't lost on investors, though.
Earlier this month, the share price rose sharply after Williams-Sonoma reported another strong quarterly result. With the stock up nearly 50% for the year, is the price too inflated right now?
On a roll
Williams-Sonoma, with its well-known, high-quality furnishings and other home products sold under its namesake and Pottery Barn brands, among others, was in a prime position for growth when the pandemic hit. That's because it already had a strong e-commerce presence, with this channel comprising about 50% of its sales coming into the year. So, even though governments forced the company to close its stores, customers were easily able to find Williams-Sonoma's goods online.
You can see this in the company's strong results. Williams-Sonoma's fiscal third quarter (ended Nov. 1) revenue grew by better than 22% versus the prior year to $1.8 billion. This boosted the company's earnings per under U.S. GAAP 170% to $2.56.
Judging by the stock's strong upward move this year, investors are expecting people to continue buying its home goods at a brisk pace.
However, this is not an easy feat, since there are challenges confronting Williams-Sonoma that are outside of its control. With the virus rearing its ugly head and cases already increasing before the Thanksgiving holiday, the economy, which is already in a recession, could weaken further.
While people remaining home has been good for business, a sustained economic downturn would undoubtedly hurt the housing market and Williams-Sonoma's results. Last decade, when home sales dropped precipitously, the company's results felt the effect. Its 2008 sales fell by 15%, followed by another 8% decline the following year.
That's not to say that Williams-Sonoma, which keeps offering new products, isn't a good company. As Laura Alber, chief executive officer, stated on the company's third-quarter earnings call:
These results demonstrate our company's ability to deliver long-term profitable growth post pandemic. Our company's mission is to enhance the quality of people's lives at home. We have built our business with this mission at the forefront, investing in areas that matter most to our customers. These include high-quality, well-designed, sustainable products at a great value because of our scale and vertical supply chain; inspiring marketing; and the convenience of our high-touch digital-first omnichannel experience.
Management admits there is near-term uncertainty, declining to provide 2020 guidance after reporting third-quarter results last month. Its long-term goals are to grow revenue by a mid- to single-digit percentage, expand the operating margin, and generate a return on invested capital that is higher than the industry's average.
There are certain risks investors should know about before making this stock part of your portfolio. That's why, right now, it is better for investors to wait on the sidelines until you see how things play out.