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How Hot Is Williams-Sonoma, Inc.?

By Daniel Jones – Mar 18, 2014 at 10:00AM

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After reporting earnings and revenue that beat analyst expectations, is Williams-Sonoma still a strong buy or should investors consider jumping into Bed Bath & Beyond, or Restoration Hardware instead?

Source: © BrokenSphere / Wikimedia Commons. 

March 13, 2014 was a great day to be a shareholder of Williams-Sonoma (WSM -1.02%). After reporting earnings for the fourth quarter a day earlier, shares of the specialty retailer rose 10% to close at $64.74 after touching a record-high of $65.87 in mid-day trading. Now with shares of the company at a lofty price, should you consider scaling back or is the business still one to own for the long-term?

Earnings were strong!
For the quarter, Williams-Sonoma reported revenue of $1.47 billion. Although this is only 4% higher than the $1.41 billion the company earned the same quarter a year earlier, it beat out the $1.43 billion forecasted by analysts. In its earnings release, management attributes the rise in sales to a comparable rise in brand revenue of 10.4%, driven largely by a 14.6% jump in its Pottery Barn operations and an 18.3% increase in its West Elm brand.

While the company's retail revenue declined 1.7% (partially due to an extra week of operations in 2012 compared to last year), its direct-to-consumer revenue rose 11.5% from $633.5 million to $706.4 million. At that level, the company's retail operations declined from 55% of sales to about 52%, while its online revenue rose from 45% of sales to 48%.

In terms of profits, the company did even better. In spite of its net income coming in virtually unchanged, the 3% reduction in its shares outstanding allowed the business to report earnings per share of $1.38. This is 3% higher than the $1.34 Williams-Sonoma reported a year ago, and slightly higher than the $1.35 analysts anticipated.

How does Williams-Sonoma stack up against other specialty retailers?
From 2009 through 2012, Williams-Sonoma demonstrated a reasonable revenue growth rate of 30% from $3.1 billion to $4 billion. At first glance, this may seem good when compared to larger retailers like Wal-Mart or Target, but when it's placed next to other small specialty retailers like Bed Bath & Beyond (BBBY 3.78%) and Restoration Hardware (RH -0.70%), the numbers are striking.

Source: Wikimedia Commons. 

Over the same timeframe, Bed Bath & Beyond saw its revenue rise 39% from $7.8 billion to $10.9 billion. In its most recent annual report, the company attributed its rise in revenue to acquisitions like World Market as well as to rising (though decelerating) comparable-store-sales growth.

Source: Wikimedia Commons. 

Restoration Hardware did far better than either company. During the past four years, the company saw its sales leap 91% from $625.7 million to $1.2 billion. Just as in the case of Bed Bath & Beyond, Restoration Hardware attributed its jump in revenue to an increase in comparable store sales, but also said that higher direct sales played a significant role in the company's growth.

While Williams-Sonoma comes in last place compared to its peers in terms of top-line growth, the company excelled in profits. During the four-year time horizon, the business enjoyed a 232% increase in its net income from $77.4 million to $256.7 million as lower costs stemming from greater buying power helped propel earnings upward.

Bed Bath & Beyond also performed well over the four-year period, as demonstrated by its 73% rise in profits from $600 million to $1 billion. In juxtaposition, Restoration Hardware was the worst of the bunch, with its net loss of $28.7 million narrowing slightly to a loss of $12.8 million.

Foolish takeaway
Based on the data provided, it looks as though Williams-Sonoma has had a great run and that its momentum should continue. Whether or not this will continue into the future is something you will have to watch closely, but the company's prospects are attractive. Admittedly, the business will probably never see the same kind of revenue growth boasted by Bed Bath & Beyond or Restoration Hardware, but its increase in earnings should level the playing field.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond and Williams-Sonoma. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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