Williams-Sonoma (WSM 4.05%) and Wayfair (W 0.47%) are both home furnishings retailers that sell most of their products online. Williams-Sonoma -- which owns its namesake banner, Pottery Barn, Pottery Barn Kids and Teen, and West Elm -- also operates more than 500 stores but generated two-thirds of its revenue digitally last year. Wayfair sells all of its products online through its eponymous website and four others: Joss & Main, AllModern, Birch Lane, and Perigold.
Over the past 12 months, Williams-Sonoma stock declined 30% as Wayfair's stock plummeted 75%. Let's see why the bulls abandoned these two retailers, and if either stock is still worth buying as a turnaround play for 2023.
Williams-Sonoma faces a tough slowdown
Williams-Sonoma was well-prepared for the COVID-19 pandemic because it had already expanded its e-commerce platforms over the past several years. Its core banners were also popular with Millennial shoppers, and it set itself apart from the competition by promoting its own exclusive brands. That's why its comparable revenue rose 17% in fiscal 2020 and grew another 22% in fiscal 2021 (which ended on Jan. 30, 2022).
All four of its banners generated double-digit comparable revenue growth in both years, and its operating margin jumped from 13.4% in fiscal 2020 to 17.6% in fiscal 2021. However, that growth spurt ended in fiscal 2022 as the housing market weakened, inflation rose, and it encountered COVID-related supply chain disruptions in Asia.
All those headwinds caused its comparable revenue to only rise 6.5% in fiscal 2022 as the declines at its namesake banner and Pottery Barn Kids and Teen largely offset the growth of Pottery Barn and West Elm. Its operating margin also dipped to 17.3%, even as it reined in promotions to shield its pricing power and gross margins, and it expects that figure to drop to 14%-15% in fiscal 2023. Analysts expect its revenue and EPS to decline 2% and 16%, respectively, for the full year.
That outlook seems grim, but Williams-Sonoma still expects its operating margin to stay above 15% over the long term once the macro environment stabilizes. It also authorized a fresh $1 billion buyback plan in the fourth quarter and raised its quarterly dividend by 15% to $0.90 per share, which boosts its forward yield to 3.1%. That high yield and its low forward price-to-earnings ratio of nine could limit the stock's downside potential in this tough market.
Wayfair faces an even tougher slowdown
Wayfair also experienced a major growth spurt in 2020 as the pandemic restrictions drove more people to buy furniture and home goods online. Its number of active customers jumped 55% to 31.2 million, its revenue per active customer rose 1%, and its total orders delivered increased 61%. That growth easily offset a 4% decline in its average order value (AOV) and boosted its total revenue by 55% for the full year.
Like Williams-Sonoma, Wayfair differentiated itself from its competitors by selling exclusive brands through its eponymous marketplace and four other websites: Joss & Main, AllModern, Birch Lane, and Perigold. But unlike Williams-Sonoma, Wayfair doesn't actually hold any inventories. When a customer places an order, Wayfair buys the product for them from a network of over 23,000 suppliers across the world.
That business model enables Wayfair to sell its products at lower prices than traditional furniture retailers, but it also limits its ability to reach higher-end customers with premium products. When its growth cooled and it encountered more inflationary headwinds, Wayfair was forced to raise its prices to pass on its higher costs to the consumer. But since Wayfair had less pricing power than higher-end retailers like Williams-Sonoma, its price hikes drove away shoppers.
The company's number of active customers declined 13% in 2021 and dropped another 19% to 22.1 million in 2022. Its total orders delivered also tumbled by the double digits during both years, which offset the higher AOV from its inflation-induced price hikes, so its revenue fell 3% in 2021 and dropped 11% to $12.2 billion in 2022. It also posted a staggering net loss of $1.3 billion in 2022 -- compared to a net loss of $131 million in 2021.
Analysts expect Wayfair's revenue to decline 2% this year, as it remains deeply unprofitable. But based on those estimates, its stock trades at less than one times this year's sales -- which suggests that any good news could lift the stock higher.
The obvious winner: Williams-Sonoma
Williams-Sonoma merely faces a cyclical slowdown, but Wayfair could face an existential crisis as it struggles to retain customers in this tough inflationary environment. Both companies still face supply chain issues, but Williams-Sonoma seems much better positioned to ride out the storm than Wayfair. Therefore, investors can still consider buying Williams-Sonoma as a cheap dividend play, but they should avoid Wayfair until inflation is finally reined in and the macro situation improves.