The S&P 500 is widely regarded as the best overall gauge of the U.S. stock market, as it comprises the 500 largest publicly traded companies in the country. Given the breadth of businesses that make up the index, it is considered the most reliable benchmark of overall stock market performance. To be considered for admission to the S&P 500, a company must meet the following criteria:
- Be a U.S.-based company.
- Have a market cap of at least $18 billion.
- Must be highly liquid.
- At least 50% of its outstanding shares must be available for trading.
- Must be profitable based on generally accepted accounting principles (GAAP) in the most recent quarter.
- Must be profitable over the preceding four quarters combined.
Williams-Sonoma (WSM -1.15%) is one of the most recent additions to the S&P 500, joining the benchmark on March 2024. That makes it one of only five companies to make the cut so far this year. Over the past three years, the home goods retailer has trounced the market, generating gains of 216%, compared to just 52% for the S&P 500 (as of this writing). Its performance is even more pronounced over the past decade, as Williams-Sonoma's revenue has grown 119%, net income has soared 617%, and the stock price has surged 312%.
Yet, despite the stock's consistent performance and strong track record of growth, it remains surprisingly affordable. Let's look at the opportunity ahead and why some on Wall Street believe the stock is a strong buy.
Image source: Getty Images.
Decades of experience
Williams-Sonoma is something of a household name and has been supplying consumers with home and kitchen items for more than four decades. The omnichannel retailer supplies home goods, cookware, cutlery, and even outdoor products under a variety of well-known brands, including Williams- Sonoma, Pottery Barn, West Elm, and Pottery Barn Kids.
Unlike many brick-and-mortar retailers, Williams-Sonoma has successfully navigated the transition to digital retail, deriving 66% of its revenue from e-commerce sales. The combination of in-house design services, brand portfolio, and goods at a variety of price points has helped the company consistently outperform its peers in the industry, even as other home goods retailers have stumbled.
The numbers tell the tale
No need to take my word for it. Williams-Sonoma's quarterly results paint a compelling picture. In the fourth quarter, net sales of $2.46 billion jumped 8% year over year, driven by comparable brand revenue that increased 3.1%. The company expanded its gross margin by 130 basis points to 47.3% while reducing its selling, general, and administrative (SG&A) expense rate by 10 basis points. This combination helped drive more profit to the bottom line, with diluted earnings per share (EPS) of $3.28, which increased by nearly 21%.
Despite Williams-Sonoma's impressive track record, management believes there's much more to come. The company uses a combination of data-driven marketing and artificial intelligence (AI) to fuel its competitive advantage and profitably gain market share.
Furthermore, management believes the road ahead holds a vast and expanding opportunity. Williams-Sonoma generated sales of more than $7.7 billion last year in a highly fractured market with an opportunity that amounts to $830 billion.
Finally, when it comes to shareholder-friendly practices, Williams-Sonoma is a clear winner. Since the company began paying a dividend in 2006, it has increased its quarterly payment by 1,220%. In March, management increased the payout by 16%, bringing its quarterly payment to $0.66 per share.
While the yield might seem relatively low at 1.5%, that should be viewed through the lens of the growing stock price, which has increased 312% over the past decade. Furthermore, the company uses just 25% of its profits to fund the payout, so there's plenty more where that came from.
Then there's the generous share-repurchase program. The company has been buying back stock hand over fist over the past 10 years, retiring nearly 32% of its outstanding shares. That means that each shareholder owns a growing piece of the pie.
Data by YCharts.
A bullish take
The combination of on-again, off-again tariffs and macro uncertainty has Wall Street split on Williams-Sonoma's future prospects. Of the 24 analysts that covered the stock thus far in May, seven rate it a buy or strong buy, 15 label it a hold, and only two rate it a sell. The stock is currently selling for just 20 times earnings, a reasonable price for a company with a consistent track record of growth.
Telsey Advisory Group analyst Cristina Fernandez is among Williams-Sonoma's biggest bulls. The analyst currently has an outperform (buy) rating and a $215 price target on the stock. This suggests potential upside for investors of 24% compared to the stock's closing price on Friday.
The analyst cited the company's strong balance sheet, differentiated product assortment, and celebrity collaborations as reasons to be bullish.
To be clear, the uncertainty related to tariffs and their overall impact on the broader economy might weigh on Williams-Sonoma in the short term. That said, the company continues to tap a vast opportunity in the home and kitchen wares market, and its stellar track record suggests the best is yet to come.
