Shares of home goods retailer Williams-Sonoma (WSM 1.73%) have fallen 44% over the past year as the market worries that inflation and a cooling economy (as well as a slowing housing market) will hurt demand for high-end home furnishings.
The stock's decline was further exacerbated by last week's post-earnings sell-off. The company reported strong comparable revenue growth of 8.1% but missed analyst expectations for earnings -- and management pulled 2024 guidance due to the uncertain macroeconomic picture. But this is a high-quality company with an impressive track record of growth and ample opportunity for years of growth ahead as e-commerce further penetrates the home goods category.
Furthermore, the stock looks attractive from a valuation standpoint and returns a lot of capital to shareholders via share buybacks and a growing dividend. The sell-off has created an opportunity to buy this high-quality growth stock at an attractive entry point.
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Building a monster growth stock
Williams-Sonoma is an omnichannel retailer of high-quality furniture and other products for the home. It is one of the largest e-commerce companies in the United States. Brands under its umbrella include Pottery Barn (along with Pottery Barn Kids and PB Teen), West Elm, its namesake Williams-Sonoma brand, and more. The company has a physical footprint across North America, Australia, and the United Kingdom, and it also franchises its brands internationally.
Williams-Sonoma has achieved tremendous results. The company has grown earnings per share at a 50% rate over the past three years. Today, there are more than triple what they were just a few years ago. This is an impressive track record of growth, but Williams-Sonoma could still just be getting started as a growth stock.
Management says it has a total addressable market of $830 billion and only a 1% share of this market today. Total addressable market figures should usually be taken with a grain of salt, but regardless of the exact figure, Williams-Sonoma seems poised for plenty of future growth because home goods is a large and fragmented industry.
Williams-Sonoma finds that about 80% of home goods purchases are still made at brick-and-mortar locations, and about 50% of sales come from small regional operators. This gives a well-resourced, omnichannel player with a large digital presence like Williams-Sonoma a leg up on the competition as consumers continue to shift toward online shopping.
In 2021, 66% of Williams-Sonoma's $8.1 billion in revenue came from e-commerce. According to Euromonitor, only about 30% of housewares and home furnishing sales are made online. That's much lower than other industries, indicating that Williams-Sonoma should benefit as more home goods shopping shifts online. The company is growing revenue at a faster rate than the industry (with 22% revenue growth versus 7% for the industry), indicating that it is taking market share.
At a bargain valuation
Shares of Williams-Sonoma are attractively valued. The stock now trades at just 7.5 times earnings. This is only about half of the average multiple for the S&P 500 and half of the multiple it traded at one year ago, making Williams-Sonoma a true bargain.
The shares also looks attractively valued when evaluating the stock using a price/earnings-to-growth (PEG) ratio. This metric accounts for earnings growth in valuation by dividing a stock's price-to-earnings multiple by its earnings growth rate. Stocks with a PEG ratio under 1.0 are generally considered to be undervalued, so Williams-Sonoma looks attractive with a PEG ratio of 0.86.
In addition to this bargain-bin valuation, Williams-Sonoma pays a dividend, and shares currently yield 2.5%. Between its dividend and share repurchases, the company has returned $2.5 billion to shareholders over the last five years. This mix of attractive valuation and returns to shareholders is a winning combination for investors.
A high-end stock in the clearance section
Williams-Sonoma is a longtime winner navigating through some short-term headwinds. The stock is down sharply year to date, but the company has plenty of growth ahead as it takes market share in a fragmented industry and as e-commerce makes up a larger share of the home goods revenue over time.
The shares are attractively priced at just 7 times earnings, with a growing dividend and a sizable share repurchase program sweetening the deal. Williams-Sonoma looks like a compelling long-term buy after the sell-off.
