There is seemingly no end to the number of retailers catering to home merchandising these days -- Target
Before an investment decision can be made, we want to find out as much as possible about the respective company, and one of the best sources of information is the quarterly earnings conference call. Join me as I sit down with bullish-minded Bodhi Zappa and "I never found a stock that I couldn't short" Frank Schofield to investigate the latest call from Williams-Sonoma. We'll be paying special attention to the retailer's direct-to-customer initiatives to determine whether it passes the "look" test.
Bodhi: And by "the look test," Jeremy, I assume you're referring to the phrase we often hear around NFL draft season, in which some college players make a strong first impression on coaches while being weighed, measured, and tested in combines and individual workouts? So in the case of Williams-Sonoma, we might identify its direct-to-customer initiatives and see a burgeoning Internet biz that grew revenues by 31% to $201 million versus the year-ago period and declare without hesitation that its multichannel efforts are passing "the look test."
Jeremy: A fine example, but it should be noted that the "look" test won't tell us whether an initiative or new concept is a gamer -- what Dick Vitale likes to call a PTP'er (prime-time player). Only prolonged evaluation that comes from time on the field can tell us that. In the case that you raised, however, we might be compelled to throw a yellow flag on the play. Thirty-plus percent growth sounds nice, but according to management's remarks, currently, its direct-to-customer initiates are falling below management's expectations as a result of "higher-than-expected backorders" and "cannibalization" in their retail markets.
Hank: I'll provide another example, Bodhi. By "look test," Jeremy is referring to your USC Trojans and their former quarterback Matt Leinart, who looked pretty, but the gamer on the field was QB Vince Young representing my Texas Longhorns. Similarly, Williams-Sonoma's plan to launch an e-commerce website in the third quarter may "look" the part of a player (as it will feature the "full range" of the company's merchandise assortment presented in such a manner to aid customers in visualizing how the products "can be integrated in their homes"), but only time will tell if it's able to step up to the plate as a major contributor for the company.
Bodhi: All I have to say is USC won two National Championships in three years with Heisman Trophy quarterback Matt Leinart. As far as the company's direct-to-customer biz, I think it's safe to say this initiative is, and will continue to be, a prime-time player for Williams-Sonoma. Consider this: Despite the infancy of these developments, and with some of the headaches that come with new ventures, such as supply-chain bottlenecks for one, direct-to-customer net revenues grew 11.4% to $360 million, lapping the performance of its flagship Williams-Sonoma stores that only increased sales by 5%.
Jeremy: You guys are stuck in the past -- it will be my Ohio State Buckeyes that bring in the polished hardware this upcoming season with Troy Smith and Ted Ginn leading the way.
[Bodhi and Hank pause, look at each other, and suddenly let out raucous laughs.]
We'll see who's laughing. But seriously, I think Bodhi raises a valid point. Right now, and likely for some time in the future, the greatest growth will come through its multichannel efforts. Even in the midst of the supply-chain kinks that need to be worked out, its direct-to-customer efforts are already paying off dividends in multiple ways. For instance, its emerging brands, which include West Elm, Williams-Sonoma Home, and PBteen managed to increase revenues by 37.8%. This increase was primarily attributed to new store openings, "improved catalog response," and heavier "traffic in e-commerce." The latter two represent the two-pronged approach of its direct-to-customer push.
Hank: Williams-Sonoma is going to have to continue tackling its supply chain and warehouse management situation, improving the flow of inventory, before it can expect its multichannel retailing approach to be a success. To their credit, it appears management has made this a point of emphasis for 2006. Virtually every one of its key operational initiatives are related in one way or another to merchandise management, including improving the "overall operational efficiency of the furniture delivery process" to "sourcing and supply chain customization" for its emerging brands.
Bodhi: Are my ears failing me? Hank, did I just hear you say something positive? Here are a few more for you: From its flagship brand to emerging concepts, in every category we can see the footprint of its multichannel efforts. The Williams-Sonoma website increased traffic by 23%, Pottery Barn's website by 14%, and Pottery Barn Kids by over 29%.
Jeremy: Across the board, Williams-Sonoma is seeing double-digit increases in customer traffic to the websites, a positive indicator for where home furnishing retailing is going in the future. It's good to see that management is on top of this important trend, spending considerable time in its conference call explaining the current progress as it implements the multichannel retailing initiatives. As the company continues to fine-tune merchandise and inventory management systems, both the top line and profit margins should benefit from its direct-to-customer efforts. In the coming quarters, the company will seek to increase its e-commerce biz by employing more "electronic direct marketing" and expanding upon its "paid search initiatives."
Its direct-to-customer is certainly passing "the look test," and all indicators suggest it will also be a prime-time player for Williams-Sonoma.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned.