What happened
Shares of Williams-Sonoma (WSM 0.36%) shot up 20.2% this week, according to S&P Global Market Intelligence. The home goods retailer that owns brands like Pottery Barn, Williams-Sonoma, and West Elm reported strong quarterly results, possibly surprising investors who are worried about a potential recession and rising inflation. The stock was up as much as 24% this week.
So what
After the close on May 25, Williams-Sonoma reported its financial results for the three months ending on May 1. Comparable brand revenue grew 9.5% in the period, driven by growth of 14.6% at Pottery Barn and 12.8% at West Elm. Operating margin also stayed elevated, at 17.1% for the quarter, which is slightly surprising given the margin pressures both Walmart and Target are currently experiencing because of rising inflation. In fact, Williams-Sonoma stock sank because of poor reports from both of these retailers last week. I guess Williams-Sonoma didn't get the memo. Steady margins and solid growth led the company to generate earnings per share (EPS) of $3.50, up 20% year over year.
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Both revenue and EPS for Williams-Sonoma beat analyst expectations heading into the results, which is why the stock is up so much this week. Management also gave reassuring guidance for the full fiscal year 2022, saying that revenue is expected to grow at a mid-to-high single-digit rate with operating margins in line with 2021. This likely had investors of Williams-Sonoma stock quite pleased.
Now what
By 2024, Williams-Sonoma is expecting to generate $10 billion in annual revenue while maintaining its current profit levels. If it can achieve both these goals, the company will be generating $1.7 billion in annual operating income a year. Compared to its current market cap of $9.1 billion, that would give the stock a price-to-operating income (P/OI) of five just a few years from now. This is well below the market average and indicates that Williams-Sonoma stock could be undervalued at the moment.
Of course, we don't know for sure whether the company can achieve these goals or if it will face margin pressure in the coming quarters and years. But if you believe in its diversified set of home goods brands and the long-term viability of its business model, now could be a good time to buy some shares of Williams-Sonoma, even with the stock up more than 20% this week.
