The Street Isn't Giving Up On Williams-Sonoma, But Tariffs Are A Concern

Retailer Williams-Sonoma, Inc. WSM reported second-quarter results Wednesday that came in better than expected on the top and bottom lines, but shares dipped lower by more than 8%.

Here's how the Street reacted.

The Analysts

Wedbush analyst Seth Basham maintained a Neutral rating on Williams-Sonoma's stock with an unchanged $63 price target.

Raymond James analyst Bobby Griffin maintained a Market Perform rating.

KeyBanc Capital Markets analyst Bradley Thomas maintained at Sector Weight.

Wedbush: Top-Line, Comp Strength

The standout takeaway from Williams-Sonoma's second-quarter print was the 6.5% comp growth, Basham said in a Thursday note. By segment, the West Elm brand showed increasing momentum, with comps up 17.5%, while the Pottery Barn brand looks to have "turned the corner," with comp growth of 4.2%, the analyst said. 

Encouragingly, expense leverage more than offset gross margin pressure from shipping expenses, tariffs and a business mix toward franchisees, he said.

Excluding these pressures, product gross margin would have risen — which suggests management isn't "buying the comp through promotions," Basham said. 

Looking forward, the company faces a stable macro environment and solid momentum across its business, along with "very achievable" guidance, the analyst said.

Yet tariff-related concerns should keep investors on the sidelines for now, he said. 

Raymond James: Margins Should Be Higher

Williams-Sonoma showed adjusted operating income growth of 8.9% year-over-year to $94 million in the second quarter, while margins expanded by 10 basis points, Griffin said in a Thursday note.

Since the company's non-GAAP results exclude all Outward expenses, the company's gross margin expansion should have been strong, especially on 6.4% comp growth, the analyst said. 

A shortfall in margins expansion poses the question of what would occur if comps decelerate from future potential tariffs, he said. 

"We still believe the current China tariff environment creates too much uncertainty within the residential furniture industry for new purchases of WSM." 

KeyBanc: EPS Growth Ahead

Williams-Sonoma lifted its full-year 2019 EPS guidance by 5 cents per share to a range of $4.60 to $4.80, while comparable brand growth is expected to be up 1% versus a prior guide of 3% to 6%, Thomas said in a Wednesday note. 

The guidance now factors in the potential impact from tariffs and implies EPS could have been guided higher otherwise, the analyst said. 

The retailer has other opportunities to drive earnings growth through top-line execution and a disciplined expense control, he said. 

But at the same time, margin expansion could be hard to generate given heightened competition from traditional brick-and-mortar and online retailers who push deeper into home furnishing, Thomas said. 

"While recent execution has been encouraging, we believe investor sentiment may remain negatively biased due to competitive dynamics, tariff exposure, cyclical risk, and slower trends in the housing market."

Williams-Sonoma shares were down 6.69% at $64.18 at the time of publication Thursday. 

Benzinga's Take: Have you been to a Williams-Sonoma store lately and noticed the high prices? Long-term success requires deep investments in price, which will slow down earnings growth and command a lower valuation multiple expansion.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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