Williams-Sonoma (WSM 3.66%) posted its latest earnings report on May 23. For the first quarter of fiscal 2023, which ended on April 30, the home furnishings retailer's revenue dropped 7% year over year to $1.76 billion and missed analysts' expectations by $30 million. Its adjusted EPS fell 25% to $2.64 but still topped estimates by $0.27.

Williams-Sonoma's growth rates were disappointing, but a lot of that disappointment had already been baked into the stock's near-50% decline from its all-time high in November 2021. The stock also trades at just 8 times forward earnings and pays an attractive forward dividend yield of 3.2%. Could it actually be a good stock to own as the bear market drags on?

A person shops for light fixtures in a store.

Image source: Getty Images.

It's still a "best in breed" home furnishings retailer

Williams-Sonoma operates four main banners: its namesake brand, Pottery Barn, Pottery Barn Kids and Teen, and West Elm. It's driven the growth of all four brands with three main strategies: expanding their digital channels, launching more exclusive brands, and limiting promotions to preserve their pricing power and gross margins.

That's how Williams-Sonoma avoided the fate of Bed Bath & Beyond and other similar retailers that lacked its robust e-commerce platforms, appealing in-house brands, and high-end appeal in the crowded home furnishings market. Williams-Sonoma's expansion of its digital channels also enabled it to keep growing throughout the pandemic as other brick-and-mortar retailers shut down. That's why it generated more than 70% of its revenue from digital channels in fiscal 2020.

As this table illustrates, Williams-Sonoma's growth accelerated significantly throughout fiscal 2020 and fiscal 2021 as many of its industry peers struggled. But that growth spurt ended in fiscal 2022, and its slowdown continued this year.

Comps Growth by Brand

FY 2019

FY 2020

FY 2021

FY 2022

Q1 2023

Williams-Sonoma

0.4%

23.8%

10.5%

(1.7%)

(4.4%)

Pottery Barn

4.1%

15.2%

23.9%

14.9%

(0.4%)

Pottery Barn Kids and Teen

4.5%

16.6%

11.6%

(0.4%)

(3.3%)

West Elm

14.4%

15.2%

33.1%

2.5%

(15.8%)

Total

6%

17%

22%

6.5%

(6%)

Data source: Williams-Sonoma.

That slowdown was caused by tough comparisons to the pandemic, supply chain disruptions, inflationary headwinds for discretionary spending, and weak sales of new homes. West Elm -- which had been popular with millennial shoppers and a major growth engine in its previous years -- was more severely affected by the macro headwinds than its other brands because a larger percentage of its sales came from furniture. It's trying to offset that slowdown by diversifying West Elm's business with more textiles, decorations, accessories, entertainment items, and seasonal products.

During the first quarter conference call, CEO Laura Alber said the "first half of the year will be tougher with the strong comps we are up against and the declining macro," but that the company's growth would likely be stronger in the second half as its "compares get easier" and its "supply chain cost pressures start to roll off." CFO Jeff Howie also reiterated the company's long-term target of generating "mid to high single-digit top-line growth."

For the full year, Williams-Sonoma expects its revenue to come in between a 3% decline to 3% growth. That outlook might seem tepid, but it's still better than analysts' expectations for a 4% decline.

Its inventories are stable, but its margins are slipping

Unlike many other retailers, Williams-Sonoma isn't drowning in unsold inventories. In the first quarter of 2023, its merchandise inventories stayed nearly flat year over year and declined 4% sequentially to $1.4 billion.

But it's been taking some margin-squeezing markdowns to maintain those stable inventory levels, and that pressure is being exacerbated by its higher shipping and freight costs. As a result, its gross margin fell 530 basis points year over year to 38.5% in the first quarter, while its operating margin shrank 570 basis points to 11.4%.

Those declines are worrisome, but it expects its operating margin to stabilize and rebound to 14% to 15% for the full year -- compared to its operating margin of 17.3% in 2022. It reiterated its expectations for its operating margin to rise above 15% over the "long term," but analysts still expect its adjusted EPS to drop 18% this year.

Is Williams-Sonoma a buy, sell, or hold?

Williams-Sonoma is better-run than many of its industry peers, but it will likely stay out of favor this year as the housing market cools off and inflation curbs consumer spending on big-ticket items. If you already own Williams-Sonoma's stock, there's no point in selling it right now when its valuations are low, and its dividend is high.

But if you don't already own it, there are plenty of other stocks which are trading at low valuations, paying higher yields, and facing fewer near-term headwinds. So, for now, investors should simply hold this stock instead of selling or buying it.