This Retailer is Too Erratic to Buy at this Price

By Bobby Shethia - August 6, 2012 | Tickers: AMZN, BBBY, WSM | 0 Comments

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Williams-Sonoma(NYSE: WSM), retailer of higher-end home furnishings operates five retail chains, Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and the recently added Rejuvenation, earning 56% of revenues from retail stores and the rest from website and catalog sales.

Williams-Sonoma’s strengths

Williams-Sonoma went through two terrible years in 2008 (year ended Jan 2009) and 2009, (year ended Jan 2010), with revenues dropping from a peak of $3.9 Bn in fiscal 2007 to $3.1 Bn in fiscal 2009 and income dropping like a stone from $196 MM in 2007 to $30 MM in 2008 before rebounding to $77 MM in 2009.

Williams-Sonoma’s management blamed the financial crisis and ensuing recession for the poor performance and to its credit pulled the company up by its bootstraps to a respectable $3.7 Bn in revenues and $237 MM in profits by 2011.

Williams-Sonoma has always had a stronger internet presence than its competitors Bed Bath and Beyond (NASDAQ: BBBY) and Pier 1 Imports, because of its catalog sales, making internet buying an easier transition for its customers. During the years 2008 to 2011, website sales also helped keep margins better, and earnings grew faster than revenues. Continuing that trend, direct (website + catalog) sales contributed 46% of revenues in the first quarter of 2012 (April 2012) as compared to 44% in 2011.

Williams-Sonoma’s strategy of keeping its five brands separate allows it to sell at several price points, without ruining the flagship upscale Pottery Barn brand; it also keeps revenues stable when some brands are not doing well.  For example, West Elm, their brand targeting cheap chic Target grew from 12 stores in 2005 to 37 in 2011.

Williams-Sonoma’s weaknesses

Williams-Sonoma has stopped growing in the last five years. After revenues peaked at $3.9 Bn in 2007, it managed to get revenues back to only $3.7 Bn in 2011. During the same period, Bed Bath & Beyond grew sales from $7 Bn to $9.5 Bn.

Since 2005, Williams-Sonoma has grown its store total from 570 to 576. Within this, West Elm grew from 12 to 37 stores – flagship store growth was non existent. In fact, after experimenting with Williams-Sonoma Home, management decided that this strategy was not paying off and decided to close it down.

Comparable store sales (stores open at least a year) were all over the map, increasing 5% in '05 and 3% in '06 and '07, but sinking 17% and 5% in '08 and '09 before rebounding 10% and 4% in 2010 and 2011.

This worries me – If you are not opening new stores and not getting consistent growth from existing stores, direct sales seems to be the only arrow left in the quiver. While direct (website + catalog) sales has been a saving grace, it too has not grown – sales actually fell from $1.68 Bn in 2007 to $1.63 Bn in 2011. Within this category, website sales did grow, but by cannibalizing catalog sales. Its share of total revenue stagnated from 42% to 44%.

Upscale retailers such as Williams-Sonoma, which usually tops customer satisfaction surveys, should not be so prone to economic cycles, and with a large catalog following it should have been able to eke out more revenues from its loyal customers.

Besides website competition such as Amazon’s (NASDAQ: AMZN) Casa.com Williams-Sonoma’s other big competitors are Crate and Barrel and Restoration Hardware, which too manage to give upscale customers a great in store experience.

For now, Williams-Sonoma is keeping net income growing by more efficient warehousing, fulfillment, reducing catalog advertising and waste. Q1-2012 revenues did grow 6%, but net income declined 4% and operating margins fell 11% due to higher discounting – hardly a vote of confidence. Williams-Sonoma needs to come up with a better, more comprehensive strategy to grow its business for investors to buy at a forward price earnings multiple of 14.

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