Williams-Sonoma's (WSM 3.27%) stock dipped 3% on March 16 after it posted its latest earnings report. For the fourth quarter of fiscal 2022, which ended on Jan. 29, the home furnishing retailer's revenue fell 1.9% year over year to $2.45 billion and missed analysts' estimates by $150 million. Its comparable brand revenue, which excludes new store openings and closings, dipped 0.6%. But its adjusted EPS still rose 1.4% to $5.50 and cleared the consensus forecast by $0.04.

For the full year, Williams-Sonoma's revenue climbed 5.2% to $8.67 billion, its comparable brand revenue rose 6.5%, and its adjusted EPS grew 11.4% to $16.54. Those growth rates seem stable, but Williams-Sonoma's stock remains down more than 20% over the past 12 months. Will it impress the bulls again and bounce back this year?

A person removes a vase from a box.

Image source: Getty Images.

A digital-first approach to selling home furnishings

Williams-Sonoma owns four main brands: its namesake banner, Pottery Barn, Pottery Barn Kids and Teen, and West Elm. All four of those banners generated strong double-digit comparable revenue growth in fiscal 2020 and fiscal 2021 -- even as other home furnishing retailers grappled with weak sales and store closures throughout the pandemic.

Here's a look at comparable revenue growth by brand.

Brand

FY 2019

FY 2020

FY 2021

FY 2022

Williams-Sonoma

0.4%

23.8%

10.5%

(1.7%)

Pottery Barn

4.1%

15.2%

23.9%

14.9%

Pottery Barn Kids and Teen

4.5%

16.6%

11.6%

(0.4%)

West Elm

14.4%

15.2%

33.1%

2.5%

Total

6%

17%

22%

6.5%

Data source: Williams-Sonoma.

Williams-Sonoma's growth accelerated during those two years for three reasons. First, it had already built up a robust e-commerce ecosystem prior to the pandemic. As a result, more than 70% of its revenues in fiscal 2020 came from its digital channels -- which experienced soaring sales during the crisis -- instead of its brick-and-mortar stores.

Second, Williams-Sonoma differentiated itself from its competitors -- which included Target, Home Depot, and Ikea -- with its own exclusive in-house products. It also emphasized the quality of those products with its marketing campaigns while limiting its promotions to retain its pricing power. In fiscal 2020, more than 70% of its products at its namesake banner were exclusive to its stores. Lastly, it aggressively expanded West Elm, which attracted more millennial shoppers than its other banners, with more franchised stores and outdoor products.

However, its robust growth during those two years also set it up for tough year-over-year comparisons in fiscal 2022. Weak sales of new homes, inflationary headwinds, and supply chain disruptions in Asia exacerbated that slowdown.

For fiscal 2023, Williams-Sonoma expects that deceleration to persist with roughly flat annual revenue growth -- negative-3% to positive-3%. But over the long term, it still expects to maintain "mid- to high-single-digit" annual revenue growth. Analysts currently expect its revenue to dip 3% in fiscal 2023 before rising 2% in fiscal 2024.

What about Williams-Sonoma's margins?

Williams-Sonoma's gross and operating margins both hit record highs in fiscal 2021, driven by its brisk online sales, reduction of promotions, and the ongoing expansion of its higher-margin franchised stores. But in fiscal 2022, its gross and operating margins retreated from those record levels as it grappled with higher supply chain costs and inflationary headwinds.

Metric

FY 2019

FY 2020

FY 2021

FY 2022

Gross margin

36.3%

38.9%

44%

42.4%

Operating margin

7.9%

13.4%

17.6%

17.3%

Data source: Williams-Sonoma.

It expects that pressure to reduce its operating margin to 14%-15% in fiscal 2023. But during the latest conference call, CEO Laura Alber predicted that its operating margin would climb above 15% over the long term "once the external environment improves". Analysts expect its EPS to decline 17% this year but rise 6% in fiscal 2024.

Williams-Sonoma plans to keep buying back its shares as it navigates those near-term headwinds. It already bought back $880 million in shares in fiscal 2022, and it just authorized a new $1 billion buyback plan. Its current valuations suggest it might be a good time for buybacks right now: At $117 per share, it trades at less than nine times this year's earnings. Home Depot, which faces many of the same housing-related headwinds as Williams-Sonoma, trades at 18 times forward earnings. Target, which is grappling with a similar post-pandemic slowdown, also has a forward price-to-earnings ratio of 18.

It also raised its quarterly dividend by 15% to $0.90 per share, which boosts its forward dividend yield of 3.1%. Target and Home Depot pay forward yields of 2.7% and 2.9%, respectively. That low valuation and high yield could limit Williams-Sonoma's downside potential even as its near-term growth stalls out.

Where will Williams-Sonoma stock be in a year?

I don't expect Williams-Sonoma's stock to take off over the next 12 months, since it faces another challenging year and there aren't any meaningful catalysts on the horizon. However, it's still a well-run retailer -- and its stock could be a safe place to park your cash as investors continue to favor value over growth in this volatile market.