Retail stocks have largely gotten hammered this year. Inflation, fears of a recession, and excess inventory after last year's supply chain delays have combined to shave profits and compress valuations. That's doubly true for the home goods sector, which is facing especially difficult comparisons after a boom during the pandemic.

However, one home goods retailer just posted blowout results in its third-quarter earnings report at a time when most of its competitors are struggling to muster any growth at all. That company is Williams-Sonoma (WSM 1.73%).

Nice quarter

Williams-Sonoma, which also owns Pottery Barn and West Elm, posted comparable sales growth of 8.1% in the third quarter. That was up 25% on a two-year basis and nearly 50% over the last three years. In other words, the business has exploded since the pandemic began.

Williams-Sonoma is also highly profitable, targeting operating margins of 17.6% for the full year, and the company is aggressively buying back stock to take advantage of its shares' low valuation -- trading for a price-to-earnings ratio of less than 8. Over the last year, the company has repurchased 8.3 million shares, reducing its share count by 11%. Though net income was nearly flat in the quarter, earnings per share jumped 13% thanks to the buybacks. The low valuation should help encourage more buybacks. 

Though Williams-Sonoma might seem like a stodgy retailer, the company actually gets most of its sales from e-commerce, and it's been undergoing a store rationalization program for several years. Over the last year, it has closed 30 stores to bring the total to 547, but even with those closures, revenue still increased 7% in the quarter. That's also much better than recent results form peers like RH, Wayfair, and Bed Bath & Beyond.

The catch

Williams-Sonoma stock actually finished down 6% on the earnings report Friday because the company essentially said it was stepping away from its 2024 financial targets of $10 billion in revenue and operating margin around 17.6% due to "macro uncertainty."

However, while management seemed to say that a recession could cause a delay in its goal to hit $10 billion, it also sees the macro headwinds as an opportunity to gain market share. On the recent earnings call, CEO Laura Alber said:

Since we last spoke, the macro backdrop has become more uncertain. However, what has not changed is the large and fragmented space in which we operate, where no one player owns significant market share. We believe we have an ability to capture more of this market in any environment.

Management also expressed optimism that cost pressures would ease by the second half of next year and into 2024 as inflation comes down.

The total package

Williams-Sonoma combines a well-known set of aspirational home-furnishing brands with a vertically integrated operation, including an in-house design team that is driving growth in new areas like B2B -- and that model allows the company to better control costs.

It also offers a digital-first model, but still benefits from having stores, and its operating margin should improve as the company continues to rationalize its store base. Spending on the home should continue to grow with trends like remote work supporting more time and investment in the home. 

Williams-Sonoma is priced like a struggling retailer when it's really the opposite Share buybacks should continue to juice earnings as well. At this point, the valuation is so low that the market seems to have priced in the worst-case scenario, and given management's commentary, the company should continue to gain market share and will benefit from cost tailwinds by the second half of next year.

The home goods retail stock looks like an easy bet to outperform.