What happened

Shares of Williams-Sonoma (WSM -0.20%) dropped 14.5% this week, according to S&P Global Market Intelligence. The home goods retailer, which also owns Pottery Barn, didn't have any business updates this week. However, bearish sentiment from Target about consumer demand and freight costs caused the entire retail sector to drop, impacting Williams-Sonoma stock. 

So what

Williams-Sonoma was founded back in 1956, and today it has evolved into both an online and bricks-and-mortar retailer of home goods. The stock has been a phenomenal performer in the past few decades, up more than 10,000% since the 1980s. However, this week it took a tumble because of some comments made on the Target conference call

A person unpacking their furniture for their apartment.

Image source: Getty Images.

Target executives said that consumer demand has shifted product categories over the past few months as many people are back out traveling and going to social events again. Demand for apparel, home goods, and hardlines (appliances, etc.) saw a sharp drawdown from March onward, while travel, beauty, and food saw gains. Since Williams-Sonoma operates solely in the home goods market, investors were not happy with this news and decided to sell shares of the stock. It is now down 35% year to date (YTD), trailing the S&P 500 by a wide margin. This is not just limited to Williams-Sonoma. Competitor RH's stock is down even more, experiencing a 50% drawdown so far in 2022.

Investors also didn't like the commentary on inflationary and freight costs on the Target call. According to executives, freight costs are rising so quickly that Target is going to have $1 billion in extra freight expenses in 2022 compared to what they expected at the start of the year. This is weighing on the company's operating margins. Because Williams-Sonoma operates a similar online/in-store model, it is likely experiencing these costs as well. 

Now what

Williams-Sonoma's last earnings report covered its fiscal year ending in January. This was before all the crazy inflation numbers, the war in Ukraine, and changing consumer habits. Last fiscal year, its operating margin actually expanded 3.5% to 21% for the full year with strong growth from most of its brands. At the time, it guided for operating margins to be in line with 2021 this fiscal year.

That is likely not the case anymore. With inflationary pressures, consumer demand shifting, and huge freight costs, it would be quite shocking if Williams-Sonoma was able to retain its 20%+ operating margins throughout 2022. Of course, we still have to see the results to know for sure, but it is not surprising investors are selling off the stock right now.