Williams-Sonoma: Uncertain Near-Term Demand Trend

Core Viewpoint - The underlying demand trend for Williams-Sonoma, Inc. (NYSE:WSM) remains uncertain, leaning towards a negative outlook due to 2Q24 performance and macroeconomic data [3][11]. Company Overview - Williams-Sonoma, Inc. is a home furniture retailer operating key brands such as Williams-Sonoma, Pottery Barn, West Elm, and Pottery Barn Kids, with sales split between 34% retail and 66% e-commerce as of 2Q24, and operates 521 stores, generating 96% of revenue from the United States [4]. Earnings Results Update - In 2Q24, WSM reported a revenue decline of 4% year-over-year to approximately $1.8 billion, with comparable sales down 3.3%. Gross margin improved by 550 basis points to 46.2%, but SG&A as a percentage of sales increased by 390 basis points. EBIT grew by 6.8% year-over-year, resulting in an EPS increase of 11.4% to $1.74. Management has lowered FY24 revenue growth guidance to a range of -4% to -1.5% [5]. Demand Trend Is Uncertain - Current macro conditions indicate an uncertain demand environment for WSM, with mortgage rates potentially decreasing, which could boost home purchases and furniture demand. However, consumers are currently reducing discretionary spending, and confidence in the macro outlook remains low [6][7]. Gross Margin Has A Good Outlook - The outlook for gross margin expansion appears positive, driven by lower input costs, a strategy to sell products at full price, and supply chain efficiencies. These factors contributed to the 550 basis points expansion in the latest quarter [8][9]. Valuation Is Really Expensive - Despite a solid gross margin outlook, the current negative sales trend limits potential EPS growth. WSM is trading at a forward P/E of 16x, near its all-time high of 20x, while historically trading between 5x to 11x. The market seems to be pricing in expectations for a strong near-term recovery, which may not materialize [10]. Conclusion - The neutral view on WSM stems from prevailing macroeconomic conditions and recent sales declines, indicating an uncertain near-term demand outlook. While gross margin prospects are positive, the current valuation appears overly optimistic, risking a significant downward revision if expectations do not materialize [11].