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SWOT Analysis: E-Commerce Will Make or Break Williams-Sonoma

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As investment guru, Bruce Greenwald, said in his book, Competition Demystified, "formulating effective strategy is central to business success." In light of strategy's importance in business, there is an old and simple business school approach to identifying the strategies that are most relevant to the company's competitive landscape: A SWOT analysis. The SWOT acronym stands for the company's internal Strengths and Weaknesses and the company's external Opportunities and Threats.

In this article I'll dissect Williams-Sonoma's (NYSE: WSM) competitive landscape using a SWOT analysis to gain a better understanding of the company's position in its respective competitive landscape.

What Does The Company Do?

A leader in home furnishings, Williams-Sonoma earns the majority of its revenue from high-end cookware, cooking utensils, kitchen decor, and gourmet food through the Williams-Sonoma brand; its Pottery Barn brand provides casual home accessories. Williams-Sonoma boasts a whopping 584 retail locations. Other brands under Williams-Sonoma include Pottery Barn Kids, PBteen, Rejuvenation, and West Elm.

A Williams-Sonoma SWOT Analysis

  • Williams-Sonoma is a clear leader in the $120 billion home furnishings market.
  • Williams-Sonoma's growing direct-to-customer division (primarily made up of e-commerce sales) earns twice the operating margins as its brick-and-mortar stores.
  • Management has proven their worth. Investors are on board with CEO Laura Alber and marketing chief Pat Connoly.
  • Williams Sonoma's brands are well-received with consumers. Despite tough comparisons from FQ3 2011, comparable brand revenue is up for all five of the company's brands in FQ3 2012 -- three of the brands reported double digit comparable brand revenue.
  • Williams-Sonoma is proving to execute its e-commerce expansion with precision; in FQ3 e-commerce net revenues were up 16.7% year-over-year, from 39% of revenue in FQ3 2011 to 42% of revenue in FQ3 2012.
  • To meet investor expectations, Williams-Sonoma will need more than sales growth, the majority of growth is going to need to come from improved efficiencies and increased e-commerce sales.
  • Operating margins for retail store revenue are only half of e-commerce margins.
  • Retail fixed costs are a large cost to the company. During the recession, weak demand resulted in fixed costs as a percentage of sales impacting the company's net operating margins so significantly that they shrunk to a paltry 1.5%.
  • Comparable brand revenue growth was lowest (1.3%) for the company's Williams-Sonoma brand, despite a weak comparison (.3%). 
  • International expansion is just beginning. This year Williams-Sonoma opened up its online store to 75 countries. Furthermore, Williams-Sonoma plans to ramp up its international expansion with retail expansion into international markets, beginning with Australia in 2013.
  • Management believes it can increase its more profitable e-commerce sales to more than half of revenue (currently at 42%).
  • An aggressive rebound in the housing market could spark upside to Williams-Sonoma's expected earnings in 2013 and 2014.
  • Since the majority of Williams-Sonoma's goods are small enough to be shipped, Amazon could use its size, experience, sizable mind share among consumers as the go-to, online retailer, and current customer relationships to steal market share from Williams-Sonoma.
  • Collectively, the Pottery Barn and Pottery Barn Kids brands represent over half of Williams-Sonoma's revenue. If brand perception ever declines, or if competitors launch solid alternatives, this could dramatically hurt the business.
  • The home-furnishings market is extremely competitive, with low barriers to entry.
  • If the premium priced Williams-Sonoma brand were ever tarnished, it would have a very large, negative impact on profitability.
<table> <tbody> <tr> <td>Company</td> <td>Price-to-Book</td> <td>Price-to-Sales</td> <td>FCF Yield</td> <td>Forward P/E</td> </tr> <tr> <td>Williams-Sonoma</td> <td> 3.7</td> <td> 1.14</td> <td> 4.7%</td> <td> 15.5 </td> </tr> <tr> <td><strong>Bed Bath & Beyond</strong> <span class="ticker" data-id="202916">(NASDAQ: <a href="http://caps.fool.com/Ticker/BBBY.aspx">BBBY</a>)</span></td> <td> 3.2</td> <td> 1.25</td> <td> 7.3%</td> <td> 10.9 </td> </tr> <tr> <td><strong>Pier 1 Imports</strong> <span class="ticker" data-id="204990">(NYSE: <a href="http://caps.fool.com/Ticker/PIR.aspx">PIR</a>)</span></td> <td> 4.4</td> <td> 1.30</td> <td> 5.1%</td> <td> 12.5</td> </tr> <tr> <td><strong>Ethan Allen Interiors</strong> <span class="ticker" data-id="203426">(NYSE: <a href="http://caps.fool.com/Ticker/ETH.aspx">ETH</a>)</span></td> <td> 2.4</td> <td> 1.06</td> <td> 1.7%</td> <td> 14.3</td> </tr> </tbody> </table>
Williams-Sonoma, with the highest forward P/E ratio among its competitors in the above chart, has high expectations from Wall Street. Even measured by free cash flow (FCF) yield,  which shows you what percentage of a company's share price is represented by the cold, hard cash it's churning out (the higher this percentage, the cheaper the stock), Williams-Sonoma is not cheap. Finally, measured by price-to-book and price-to-sales, the company trades in line with similar retailers. Overall, there isn't much room for error in Williams-Sonoma's stock price.

The Bottom Line

The company's strengths and opportunities point to a burgeoning e-commerce division and overall brand acceptance among consumers, especially considering an 8% year-over-year rise in comparable brand sales in the company's most recent quarter. But there is plenty of uncertainty looming over the company's future, evident by the company's weaknesses and threats.

Growth will not come easily; the majority of growth must come from improved efficiencies, growth in e-commerce sales, and international expansion -- all major strategic initiatives that could be tough to implement effectively. With most of the company's brands dependent on an upscale target market, brand perception is of the utmost importance; any merchandising misstep could adversely affect the perception of its small portfolio of brands and have very large negative consequences. While the resulting SWOT analysis and valuation-by-comparison might not merit selling the stock, buying would require a firm belief in the company's ability to perfectly execute a transition to stronger e-commerce sales.

DanielSparks has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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