Williams-Sonoma Beats on Earnings, Ups View - Analyst Blog

Williams-Sonoma, Inc. WSM, a well-known specialty retailer of home products, reported adjusted earnings (excluding one-time items) of 48 cents per share in the first quarter of 2014, beating the Zacks Consensus Estimate of 44 cents per share by 9.09%, owing to better-than-expected sales.

Earnings exceeded the company's expected range of 41 cents to 44 cents in the quarter. Earnings increased 17.1% from the comparable prior-year quarter level of 41 cents on the back of solid top-line growth.

Quarter Highlights

Net revenue of $974 million in the first quarter of 2014 beat the Zacks Consensus Estimate of $943 million by 3.3%. Net revenue exceeded the company's expected range of $920 million to $940 million by a wide margin. Net revenue grew 9.7% year over year, driven by a double-digit increase in comparable brand revenues.

Comparable brand revenues (including retail comparable store sales, direct-to-customer sales, and other adjustments like shipping fees, sales returns and other discounts associated with current period sales) grew 10.0% compared with a 7.2% increase in the prior-year quarter, owing to strong sales growth in all the brands, excluding PBteen.  Comparable brand revenue also exceeded the company's expected range of 4% to 6% increase.

The company believes that product innovation, personalized service and strong marketing and execution across all the brands resulted in better-than-expected results in the first quarter of 2014.  

The company's net revenue comprises direct-to-customer net revenue and retail net revenue. Direct-to-customers net revenue is generated from sales through e-commerce websites, catalogs and shipping fees. Retail net revenue is generated from sales in retail stores and shipping fees for home delivery of products.

During the first quarter of 2014, direct-to-customer net revenue was $491 million, up 17.2% due to solid sales, particularly in brands such as Pottery Barn, West Elm, Williams-Sonoma and Pottery Barn Kids. Direct-to-customer net revenue accounted for 50% of the company's total revenue in the quarter.  

Retail net revenue in the first quarter of 2014 rose 3.1% to $483 million on the back of solid business in West Elm and Pottery Barn.

Selling, general and administrative (SG&A) expenses increased 8.8% from the prior-year quarter to $294.1 million. In addition, as a percentage of revenues, adjusted SG&A was up 10 basis points (bps) to 30.2% in the quarter due to higher employment cost.

During first quarter 2014, the company repurchased 840,761 shares of its common stock worth $53 million. As of May 4, 2014, the company had $458 million worth of shares remaining under its $750 million stock repurchase program announced in Mar 2013.

Outlook

For the second quarter of 2014, the company expects net revenue in the range of $1.02 billion to $1.04 billion, compared to $982 million in the prior year quarter. Comparable brand revenues are expected to increase in the range of 4% to 6%. Earnings per share are expected to be in the range of 49 cents to 52 cents in the quarter, compared to 49 cents in the prior year quarter.

For fiscal 2014, Williams-Sonoma raised its adjusted earnings per share expectation to $3.07 – $3.17 from the prior range of $3.05 to $3.15. The company also expects net revenue in the range of $4.65 billion to $4.73 billion, higher than the prior expectation of $4.63 billion to $4.71 billion. Comparable brand revenues are expected to grow in the range of 5% to 7%.

Williams-Sonoma carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Investors interested in the service sector can consider stocks like Restoration Hardware Holdings, Inc. RH, which holds a Zacks Rank #2 (Buy).