Williams-Sonoma (NYSE: WSM)
QVI Research Report | Updated Coverage | February 2023
Summary
Despite the significant short interest and other headwinds, the shares of home furnishing retail stalwart Williams-Sonoma squeezed a three-bagger return for the bulls since QVI initiated coverage in 2018.
The stock’s averaged combined yields on earnings, free cash flow, and dividends were trouncing the 10-Year Treasury benchmark.
As we allegedly approach the most predicted recession in recent memory, the company’s fundamentals, valuation, risks, and upside remain compelling, although potential downside catalysts are noteworthy.
Nonetheless, Williams-Sonoma is a quality retail enterprise whose current stock price appears reasonable, if not a bargain.
Premium subscribers: When referencing this research report, remember to access your Quality Value Investing Glossary Of Investing Terms And Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the intraday market on January 30, 2023, and intended for illustration only.
Williams-Sonoma Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Williams-Sonoma, Inc. (NYSE:WSM) is a dividend-paying mid-cap stock in the homefurnishing retail industry of the consumer discretionary sector. WSM was added to the QVI Expanded Portfolio on March 23, 2018, with a buy rating at a split and dividend-adjusted $44.25 a share.
Williams-Sonoma, Inc. operates as an omnichannel specialty retailer of various products for the home. The company markets its products through e-commerce websites, direct-mail catalogs, and retail stores. It operates 544 stores, including 502 stores in 41 states, Washington, D.C., and Puerto Rico; 20 stores in Canada; 19 stores in Australia; 3 stores in the United Kingdom; and 139 franchised stores, as well as e-commerce websites in various countries in the Middle East, the Philippines, Mexico, South Korea, and India. Williams-Sonoma, Inc. was founded in 1956 and is headquartered in San Francisco, California, USA.
QVI’s value proposition elevator pitch for Williams-Sonoma:
Despite the negative market-timer sentiment, Williams-Sonoma's high-quality brand and growing omnichannel storefronts remain a favorite among an affluent and loyal customer base.
Performance vs. Sector and Market
The chart below illustrates WSM’s performance against the Consumer Discretionary Select Sector SPDR Fund ETF (NYSE:XLY) and the SPDR S&P 500 ETF Trust (NYSE:SPY) since QVI’s initial coverage of Williams-Sonoma in March 2018.
For example, WSM has significantly outperformed the total returns of its sector and the broader market during the coverage timeframe.
WSM Total Returns vs. XLY and SPY
Williams-Sonoma Inc. (WSM) Total Return: +186.40%
Consumer Discret Sel Sect SPDR ETF (XLY) Total Return: +55.04%
SPDR S&P 500 ETF Trust (SPY) Total Return: +70.65%
Since March 23, 2018Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, members should visit Williams-Sonoma’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the U.S. Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Williams-Sonoma: Bullish.
WSM Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
WSM’s earnings yield traded well above the floor at 12.60%, as demonstrated in the below chart. In addition, at 9.20%, WSM’s free cash flow yield was also above the targeted threshold.
As inverse valuation multiples, the earnings and free cash flow yields suggest that WSM trades at a discount. QVI will further explore valuation multiples later in this report.
Dividend Yield
Williams-Sonoma offers a moderate forward dividend yield of 2.39%, supported by a conservative 18.47% payout ratio, thus indicating a safe, well-covered dividend with room for annual raises.
WSM yielded 7.01% from an annual payout of $3.12 on a split- and dividend-adjusted cost basis of $44.25 per share on March 23, 2018, the date of QVI’s initial stock coverage. Thus, QVI’s yield-on-cost basis was 462 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 3.55% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for WSM was 8.06% or +451 bps above the 10-Year and 9.60% or +605 bps above the Treasury yield when using the March 2018 yield-on-cost basis.
QVI’s shareholder yields rating for WSM: Bullish.
WSM Shareholder Yields
Williams-Sonoma Inc (WSM) Price: $130.48
Williams-Sonoma Inc (WSM) Earnings Yield: 12.60%
Williams-Sonoma Inc (WSM) Free Cash Flow Yield: 9.20%
Williams-Sonoma Inc Dividend Yield: 2.39%
One-Year TrailingWilliams-Sonoma Fundamentals
QVI Research Report’s fundamentals section measures the performance strength of the company’s senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the below chart, Williams-Sonoma had positive three-year annualized single-digit revenue growth of 8.25%, underperforming the 12.17% median growth for the consumer discretionary sector.
Williams-Sonoma had a trailing three-year double-digit net profit margin of 13.48%, almost tripling the sector’s median net margin of 5.18%.
Returns on Equity and Invested Capital
Williams-Sonoma’s management was producing a trailing three-year return on equity or ROE of 81.56%, far above the targeted threshold and trouncing the sector’s median ROE of 12.93%.
Stock buyback programs often elevate ROE. For example, as part of its fiscal year and quarterly earnings release in March 2022, the company’s board of directors announced a $1.5 billion share repurchase authorization program.
At 34.07%, Williams-Sonoma’s three-year return on invested capital, or ROIC, far exceeds the threshold and embarrasses the sector’s median ROIC of 6.46%, indicating that its senior executives are outstanding capital allocators.
Williams-Sonoma’s ROIC also comfortably covers its otherwise high trailing weighted average cost of capital or WACC of 12.10%. (Source of WACC: GuruFocus).
Positive revenue growth in an inflationary bear market, a sector-beating double-digit net profit margin, and highly attractive equity and capital returns indicate quality management performance in Golden Gate City.
QVI’s fundamentals rating for Williams-Sonoma: Bullish.
WSM Returns on Management
Williams-Sonoma Inc (WSM) Revenue Growth (Annual YoY): 8.25%
Williams-Sonoma Inc (WSM) Profit Margin: 13.48%
Williams-Sonoma Inc (WSM) Return on Equity: 81.56%
Williams-Sonoma Inc (WSM) Return on Invested Capital: 34.07%
Three-Year TrailingNext, QVI dives into the valuation multiples, downside risks, potential catalysts, and overall investment thesis of Williams-Sonoma (WSM). Let’s dig further after reading the required disclosures and disclaimers.
Disclosure: I/we have no beneficial ownership in the shares of WSM and have no intention of initiating a position in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Substack paid subscriptions). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.