Once they achieve a certain level of success and market share, many companies are tempted to stop innovating. And of course, we all know what seems to inevitably follow -- the company loses touch with the consumer and stocks goods that nobody wants, sales and earnings fall, and sometimes the company goes out of business entirely.
Well, that doesn't seem to be happening at Williams-Sonoma (NYSE:WSM). While the company continues to produce double-digit earnings growth, management also continues to build and refine the business in an attempt to keep that growth coming.
Sales in the first quarter grew by more than 12% as the company saw 13% growth in retail net revenue and nearly 12% growth in direct-to-customer sales. Total store square footage increased by more than 11%, and consolidated same-store sales grew 5%. With good expense control, Williams-Sonoma managed to improve the operating margin, and operating income grew over 25%.
As has been the case for a while, the individual brand performance was mixed. The flagship Williams-Sonoma brand saw same-store sales decline by half a percent, while Pottery Barn and Pottery Barn Kids grew by 6.1% and 10%, respectively. The Hold Everything brand saw a nearly 17% decline in comp-store sales, and same-store sales at the outlets grew more than 19%.
Direct-selling efforts have long been an important part of the business model, and this quarter was no different. All brands finished positive, but the performance of the catalog business was below management expectations. On a more positive note, Internet sales were up 36% and made up nearly half of all direct-to-customer revenue.
In addition to refining the marketing approach, the company is continuing a slow and steady rollout of the West Elm furniture concept. Management is also focusing on improving order fulfillment -- about $0.01 of earnings was accelerated from the second quarter into this quarter by virtue of better-than-expected fulfillment.
Inventory is another area of management focus. Inventories climbed 23% for the quarter -- normally a warning sign in the retail trade. Management, though, views this as a deliberate attempt to improve its in-stock merchandise position and improve the customer experience, while also reducing shipping and fulfillment costs. It all sounds good and reasonable, but investors will need to keep an eye on margins and inventory, just to make sure this plan works as advertised.
Williams-Sonoma is still a high-quality retailer and a high-quality retailing stock. Although I don't see the shares as an absolute bargain, they do seem to be attractive on a basis relative to other specialty retailers. Good growth, strong brands, and a management seemingly committed to improvement and shareholder value should continue to give Williams-Sonoma a leg up on the competition.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
