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Credit Suisse downgraded shares of Williams-Sonoma, Inc. (NYSE:WSM) Thursday, citing a trio of concerns. The rising cost of doing business in the sector could put more incremental pressure on the company's margins than is reflected in estimates and the stock, analyst Seth Sigman said.
The firm downgraded Williams-Sonoma from Neutral to Underperform and reaffirmed its $44 price target.
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Outlining the risks, Sigman said:
1. Higher e-commerce Spend
Higher investments in marketing and e-commerce suggest that Williams-Sonoma has significantly lower organic search results compared to competitors. The company's mere 2 percent click share could keep spending elevated in an effort to combat weak organic search results, Sigman said.
2. Lower Shipping Revenue
Dragged by lower shipping revenue, Williams-Sonoma's merchandise margins have inflected negatively, the analyst said. Margins weakened in the first half of 2017, although an improvement is expected in the second half.
Against this backdrop, Sigman said discounting and lower shipping revenue could become more significant headwinds for the retailer. The trend of inventories rising at a faster rate than sales is a significant risk entering the holiday period.
Credit Suisse estimates that Williams-Sonoma makes about 3-5 percent of sales from shipping and delivery fees — but the firm doesn't think the business makes an EBIT profit.
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3. WSM's Sales Underperformance Vs. Industry
Though Williams-Sonoma's sales growth has been positive compared to competitors that have seen comp declines, Credit Suisse said it's concerned about WSM brands underperforming the mid-single digit growth of the industry.
The company's performance has remained concentrated, with West Elm and smaller brands driving most growth, according ot Credit Suisse.
Why Downgrade Now?
Williams-Sonoma is up 18 percent since its Aug. 22 low, which has occurred four other times in the past two years, only to reverse, Sigman said. Some risk exists for the retailer in the competitive fourth quarter period, with the guidance currently discounting a significant operating margin improvement against recent periods, according to Credit Suisse.
"There is upside potential from lower tax rates as seen in the past, but unless combined with a better sales/margin balance, we don't think the stock will get credit," Sigman said.
Below-consensus Estimates Unchanged
The firm said it estimates 2017 earnings per share of $3.45 and a 2018 EPS of $3.58, suggesting 1 percent and 4 percent year-over-year growth, respectively. The consensus estimates model earnings of $3.59 per share for 2017 and $3.83 for 2018.
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Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.