As an investor, one of the most important takeaways is that quality matters -- a lot. Buying tremendous businesses at reasonable valuations is a formula for investing success.
The upscale home retailer Williams Sonoma (WSM 0.15%) is arguably among the best companies in the entire consumer goods sector. A $10,000 investment in the stock made 10 years ago would now be worth $31,000, with dividends reinvested. Putting this into perspective, that is meaningfully more than the $26,000 that the same investment amount in the S&P 500 index would have grown into during that time with dividends reinvested. Let's delve into why Williams-Sonoma stock could continue to be an excellent pick for both dividend growth and share price growth.
A temporary bump in the road
| Metric | Q1 2022 | Q1 2023 |
|---|---|---|
| Comparable Brand Revenue Growth | 9.5% | (6%) |
| Non-GAAP Operating Margin | 17.1% | 12.9% |
| Diluted Share Count (In Thousands) | 72,652 | 66,696 |
Data source: Williams-Sonoma.
Williams-Sonoma's net revenue fell by 7.2% year over year to $1.8 billion in the fiscal first quarter ended May 1. At first glance, this result seems discouraging. But it's worth noting that with many consumers concerned about the prospects of a recession, spending intentions are on a clear downward trend. That's because more consumers are aiming to save money to prepare themselves for a recession. This explains how the company's comparable brand revenue swung from growth in the year-ago period to decline during the quarter.
Williams-Sonoma's non-GAAP (adjusted) diluted earnings per share (EPS) dipped 25% year over year to $2.64 for the fiscal first quarter. A slight reduction in the retailer's operating expenses and a sizable drop in its diluted share count weren't enough to offset the decline in net revenue experienced in the quarter. As a result, Williams-Sonoma's EPS decreased at a faster rate than net revenue during the quarter.
The big picture remains promising
Due to the unfavorable macroeconomic environment, analysts anticipate that Williams-Sonoma's adjusted diluted EPS are going to fall by a double-digit clip for the fiscal year ending next January. But beyond this fiscal year, it's expected that the company will return to steady earnings growth.
What's the basis for these forecasts? First, Williams-Sonoma's iconic brands helped to grow its net revenue at a double-digit annualized rate over the past five years. Second, the company operates in an expanding $830 billion total home products market. Finally, as the retailer continues to invest in its business to provide the best customer experience possible, there's reason to believe that it can seize more of this huge market as the years progress.
Williams-Sonoma's generous payout can keep rising
Williams-Sonoma's 3.2% dividend yield is exceptionally attractive compared to the S&P 500 index's 1.6% yield. And the cherry on top is that the company's dividend growth hasn't been stingy in the past 10 years; the quarterly dividend per share has nearly tripled during that time to the current rate of $0.90.
Looking forward, the specialty retailer's dividend growth should remain healthy in the years to come. The company's payout is well-supported by profits -- with an expected dividend payout ratio of around 26% for the current fiscal year. Such a low percentage payout means the retailer can retain much of its profits to strengthen the business, complete share buybacks, or further grow the dividend.
The stock is trading at a cheap valuation
Williams-Sonoma's shares have trod water in 2023, down 1% this year. That's arguably because the prospects of a recession are already priced into the stock. The stock's forward price-to-earnings (P/E) ratio of 8.4 is significantly less than the apparel, accessories, and luxury goods industry average forward P/E ratio of 10.2. At such a cheap valuation, dividend growth investors should find this stock highly enticing, both for its dividend growth and capital appreciation potential.
