This Home Furnishings Company Is A Bit Too Pricey

Matthew 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) is one of the leading retailers of high-quality goods for the home, with well-known brands such as Williams-Sonoma, Pottery Barn, and West Elm.  Since bottoming out at $4.35 in 2009, when pretty much all of retail was in a free-fall, the stock has rebounded and more, and is currently trading around $47, higher than it ever was before the crash.  My only problem is that now the stock may be getting a little too expensive, and I’m not so sure that the company’s earnings growth warrants its high valuation.

Williams-Sonoma sells its products both through its retail stores (56% of sales) as well as its direct-mail catalogs (44% of sales).  Williams-Sonoma stores offer mainly culinary equipment, such as cookware, cutlery, glassware, and specialty foods.  Pottery Barn offers mostly home furnishings as well as bed and bath products.  West Elm sells furniture, decorative items, and lighting accessories.

The company competes with other retail chains such as Bed, Bath, and Beyond (NASDAQ: BBBY) and Pier 1 Imports (NYSE: PIR), as well as with larger discount retailers such as Target (NYSE: TGT), which I believe is actually the biggest threat to all three of the other retailers mentioned.

Bed, Bath, and Beyond sells a very broad range of domestic merchandise such as bed linens and bath items, as well as basic housewares and home furnishings.  The company operates around 1,000 stores, and expects to grow to around 1,300 stores in the U.S. and has just begun expanding to Canada.  One thing I love about Bed, Bath, and Beyond as an investment is their excellent balance sheet, with about $1.8 billion in cash and no debt.

Pier 1 specializes in imported decorative home furnishings and gifts, and operates over 1,000 stores in the U.S. and Canada.  Pier 1’s stock has undergone one of the best post-crisis rebounds in history, trading as low as 10 cents per share as recently as 2010, pretty far from its current level of around $22.50.  In other words, if you were to have invested $1,000 in Pier 1 at the right time, it would be worth around $225,000 currently!  I’m not crazy about Pier 1 as an investment right now however, with its lofty 23.5 P/E ratio, not to mention the fact that it is not as cash-rich as the other companies profiled here.

Target and the other giants like it are the ones to really be scared of.  I chose Target in particular because they have made the most effort of the giant discount retailers to sell stylish products to attempt to compete with high-end retailers such as Williams-Sonoma.  Target is actually the number four furniture retailer in the country by sales volume, and their furniture sales are climbing steadily every year. 

While I think that Williams-Sonoma is a great company, it is simply too expensive right now.  The stock trades for 19.7 TTM earnings, a significant premium to peers.  For comparison, Bed, Bath, and Beyond has a P/E ratio of just 13, with nice growth projections.  Bed, Bath, and Beyond is projected to grow its earnings at an annual average of 9.7%, more than justifying its multiple.

Speaking of growth, consensus estimates call for Williams-Sonoma to grow its earnings by an average of 12% annually going forward.  While I agree that consumer spending is on an uptrend, I’m not sure that consumers are quite ready to splurge on luxury items, especially when stores like Target offer fashionable alternatives for much lower prices. 

One thing that the company does have working in its favor, however, is its excellent balance sheet, which has over half a billion dollars in cash and no debt.  The company also pays a decent dividend of just under 2% annually, which it has a good history of increasing.

As far as products go, I like Williams-Sonoma the best out of the companies mentioned here.  They have quality merchandise and very competent leadership who have developed a good strategy.  However, the stock looks a bit too expensive, especially when there are very attractively valued alternatives out there.  With a bit of a pullback though, Williams-Sonoma could be a good long-term play on retail indeed.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends 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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