What Bulls And Bears Will Take Away From Williams-Sonoma's Q2 Results

Williams-Sonoma, Inc. WSM reported mixed Q2 results. While there are operational improvements at the company, industry-related headwinds continue, Deutsche Bank’s Mike Baker said in a report. He maintained a Market Perform rating on Workday, while raising the price target from $90 to $93.

Although Williams-Sonoma missed sales expectations, its EPS came in-line with estimates. The company reduced its guidance for Q3 and Q4, but the reduction was not “overly severe in our view,” analyst Baker commented.

Takeaways For The Bulls

Despite missing sales expectations, Williams-Sonoma was able to meet EPS estimates on the back of continued cost cutting. Moreover, supply chain improvements resulted in a lower gross margin contraction as compared to previous quarters.

Baker noted that this supports expectations of gross margins flattening out in the near term. He added, “This is also supported by the biggest decline in inventories in over six years.”

Although sales came in short, new businesses including international, Rejuvenation and Mark & Graham delivered strong performances, while West Elm “remains a true retailing bright spot,” the analyst commented.

Takeaways For The Bears

Operating margins contracted, with no expansion for the fifth straight quarter and expectations of a contraction for the year. “This is not dissimilar to margin trends across home goods retailing which will support fears of structural issues in the space due to increased competition,” Baker stated.

Williams-Sonoma’s EPS growth guidance reduction to low single digit at the midpoint raises concern over the company’s 3-year plan of double digit to mid teen growth, which management reiterated.

The analyst lowered the EPS estimates for 2016 and 2017 by $0.12 to $3.45 and by $0.20 to $3.68, respectively.

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