What's So Good About This Retailer?
Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Williams-Sonoma (NYSE: WSM), the high-end home goods store operator, hit a new 52-week high Friday as it is currently trading at $45.19, above its previous 52-week high of $44.52 with 529,380 shares traded. Average volume has been 1.5 million shares over the past 30 days. So, it is very difficult to think about buying a stock in this situation. However, the risk with buying WSM at current price levels could be well worth it. One question might arise in investors’ mind that, why they will invest their hard-earned money in WSM? The reason behind it is that, in the first place, the company is conservatively managed and has a strong balance sheet followed by reasonable valuation measures. Secondly, the high-end American consumer retail company is growing by expanding overseas and acquiring other companies. This helps to create greater economies of scale for its proven operating model and brands. And last but not the least, for the foreseeable future; Williams-Sonoma will benefit from the expected demographic and housing trends in the U.S. and Canada. The company also took advantage of the strong housing market cycle following the 2001 recession and expanded its store base, nearly doubling its leased square footage in five years.
The San Francisco based company has a great vision for its expansion. The company estimates that about $4 billion will be generated from sales this year. More clearly, the sales will be 8% higher than the sales of 2011. The company is not going to increase its operating margin, although the turnover is increasing. The operating margin will be within a close range to its 2011 margin of about 10%. So, it is very much clear that, the kitchenware seller is able to grow profitably without incurring additional debt by financing growth with its cash flow. We can take a look at Bed Bath & Beyond (NASDAQ: BBBY), Wal-Mart Stores (NYSE: WMT), and Amazon.com (NASDAQ: AMZN) having operating margins of 16.6%, 5.9%, and 1.2% respectively. This helps WSM to acquire a position in the middle, where it can provide good quality products at reasonable prices.
In terms of valuation, the shares trade at a price to tangible book value ratio of about 3.6, this is lower than that of Bed Bath & Beyond, Wal-Mart, and Amazon.com of 4.2, 5, and 23.2, respectively. At a price to earnings ratio, the company trades at about 17.3 times its 2012 estimated earnings, slightly higher than that of Bed Bath & Beyond (14.8) and Wal-Mart (15), but significantly lower than Amazon.com (334). So, it is very clear that WSM has a value that is within an acceptable range, although direct comparison is quite difficult.
The company has no debt and is repurchasing shares, which are in addition to solid profit margins, and decent valuation. This year, at the end of July, it had $63 million left in its most current share buyback plan. For an annual yield of about 2%, the company pays a quarterly dividend of $0.22 per share. Wal-Mart has an annual dividend yield of 2.2% but, Bed Bath & Beyond and Amazon.com do not pay a dividend. BBBY and AMZN are similar with WSM as they have no debt, while WMT has about $41 million of long-term debt or about 17% of its market capitalization of $248 billion. So from the overall point of view, Williams-Sonoma has rock-solid fundamentals and a stock that is reasonably valued, and pays a dividend of 2% which is very good for a company that is, planning to get its size doubled in a period of 10 years.
The high-end home furnishings retailer has signed a lease for approximately 22,000 square feet of retail space to house four of its brands - Williams-Sonoma, Pottery Barn, Pottery Barn Kids, and West Elm - at Sydney's newly constructed Exchange Building at Bondi Junction because, Australia has enjoyed a strong economic growth in the past decade, and its GDP is currently ranked 13th in the world by size. These will be the first retail locations outside of North America to be owned and operated by Williams-Sonoma. Currently, Pottery Barn, Pottery Barn Kids, and West Elm have generated over $1 billion in revenue per year. In addition, the company is increasingly developing its own products at its Williams-Sonoma stores, which are more unique, meet more specific customer needs, and also have higher margins. The firm also introduced three new concepts, and was early in developing a leading e-commerce business, all while carving out an impressive niche in the home furnishings market.
Williams-Sonoma acquired Rejuvenation Inc., one of Portland's signature independent companies for $25 million at the end of last year. The company will keep its name and brand, and will retain significant autonomy under the Williams-Sonoma banner. WSM considers Rejuvenation to be "a beautiful little gem of a brand." As Williams-Sonoma platform is easily scalable, so if there are similar but larger acquisition in future years it will not be a surprise.
The company divides its business into direct-to-consumer (DTC), and retail segments, with DTC accounting for 44% of total revenues. The DTC business is conducted through a family of web sites, and printed catalogs. WSM is ahead of BBBY and WMT in online sales. So, BBBY is constantly mailing 20% off coupons, and WMT is expanding its business in the food. AMZN, on the other hand, does not have a brick and mortar presence, which are essential for many of the product categories that Williams-Sonoma is selling. The kitchenware seller has a clear advantage by offering a superior customer experience both in its stores and online.
Economists are increasingly becoming optimistic that the housing market is recovering, and that house remodeling is on the rise. This rising trend will benefit WSM a lot. As I said earlier that, the San Francisco based company has a great vision for its expansion, which is to double its size in 10 years. An annual return of 7% plus dividend will be there in the investors’ hand if investment in the stock also gets doubled at the same time. Compared to its peers, WSM’s stock is valued well, although risk factors exist. There are risks coming from continuing economic weakness, competitors, and strategic mistakes. But, Williams-Sonoma has repositioned its business to drive profitable sales and believes it ultimately can return margins to (or beyond) historical levels. I believe ongoing upgrades to merchandising, distribution, and technology infrastructure will strengthen the firm's competitive position, particularly as the macro pressures abate in the coming years. However, Williams-Sonoma has powerful internal as well as external tailwinds, which should continue to reward its stockholders beyond the current share price.
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abirk has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, Bed Bath & Beyond, and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.