Morgan Stanley Skeptical On Williams-Sonoma, Lowers Price Target

• Shares of Williams-Sonoma, Inc. WSM have declined 24.49 percent over the last three months, with the share price falling close to its 52-week low.
• Morgan Stanley’s Simeon Gutman has maintained an Equal-Weight rating on the company, while lowering the price target from $87 to $73.
• Gutman believes that despite the lowered consensus forecasts, the Q3 results were unlikely to be adequate to reverse the decline in the share price.

Analyst Simeon Gutman mentioned that although the Q3 earnings were higher than expected, with improvement in some of the metrics, “it was not a high quality beat.”

Williams-Sonoma benefited from an $11 million decline in corporate expenses and a lower tax rate during Q3. “While throughput improved, it stemmed from lower expenses, as gross margin contracted ~110 bps on top of 80 bps last year, a 45 bps sequential deceleration on 2-year stacks,” the Morgan Stanley report said.

Gutman believes investors had been hoping for gross margin stabilization, following the port disruption in 1H. Also, the retail environment has been “choppy” in general, while becoming more promotional.

Williams-Sonoma’s Q4 guidance implies that the business “may not be immune to these challenges.” Competition is increasing in the home furnishing segment, with more entrants in both the online and in-store space.

However, Gutman expects Williams-Sonoma’s “unique brand and merchandising capabilities should enable the company to continue to outpace industry growth.”