Unlike just about every other retailer, Williams-Sonoma (NYSE:WSM) thinks that the end of the year might be good. Instead of worrying about an overly promotional environment, the company is looking forward to a holiday season full of good sales across its brands. Not to be outdone, Restoration Hardware (NYSE:RH) also looks to be set up for a strong holiday season. The company has had an incredibly strong year, and there's no reason to think that it will have to stoop to deep discounting to get customers in over the holidays. For once, investors seem to have the choice between two solid companies.
Williams-Sonoma's third quarter
Yesterday, Williams-Sonoma reported a strong third quarter, with comparable sales growing at all of the company's brands. The biggest winner was, again, West Elm, and the furniture brand generated a 22% increase in comparable sales. The company believes that total sales at West Elm will top $500 million this year, and that the brand has room to grow sales to over $1 billion.
While West Elm had the largest growth, all of the company's brands did well and, combined, comparable sales grew by 8.2%. The strong overall growth pushed the stock up 8%, and set the business up for a strong end of the year.
Restoration Hardware holds up its end
While Williams-Sonoma has had a strong run this year, Restoration Hardware hasn't exactly been slacking -- the stock is up 118% so far this year. The company benefits from having around a 35% gross margin, which is in line with Williams-Sonoma's margin.
Restoration Hardware has set itself up, not just as a home decor store, but as an aspirational brand. The company has combined that allure with an increase in home prices, which has driven customers back into fix-up mode around the house. Comparable store sales have risen over 30%, year to date, and the holidays should offer another nice bump.
The catalog model
One of the things that sets both Williams-Sonoma and Restoration Hardware apart is the companies' heavy use of traditional catalog sales. Restoration Hardware's catalog is timed to arrive in homes just as seasons change, and right in line with in-store promotions. That means that the catalogs act as both a sales channel and an advertising mechanism.
Williams-Sonoma has recently reworked its catalogs in order to make them both more appealing, and more like a contemporary magazine. Direct-to-customer sales, both online and catalog, account for close to half of the company's sales.
In its quarterly earnings call, Williams-Sonoma again talked about the margin management that strong direct channel allows for. The company's high direct-to-customer margin -- 23% operating margin compared to 8.8% overall -- means that it can use that channel to promote pricing that drives customers into the stores, taking the margin hit online while effectively getting free advertising. The same is true for Restoration Hardware.
The end of the year is looking excellent for both companies, and continued house price growth should help boost this sector. For Williams-Sonoma, investors should look for a bigger push at the company's own brand stores, which had the lowest comparable sales growth of the brands. Restoration Hardware is doing great, and all investors should look out for is better managed costs. The company is doing fine right now, and there's every reason to think that it can do even better.