Estimates have been rising for retailer Williams-Sonoma, Inc. ( WSM - Snapshot Report ) after the company delivered better than expected results for the third quarter of 2011. Same-store sales rose 7% in the quarter, driven by a whopping 27% surge in its West Elm division.

It is a Zacks #2 Rank (Buy) stock.

The company also has a solid balance sheet and generates strong free cash flow, which has allowed it to buyback stock and raise its dividend. It currently yields 1.7%.

Valuation is reasonable too, with shares sporting a PEG ratio of 1.0.

Higher-End Still Strong

Despite low consumer confidence and a squeezing of the middle class, higher-end retail has been exceptionally strong over the last several months, and Williams-Sonoma has been no exception.

Along with the Willams-Sonoma brand, the company operates Pottery Barn and West Elm. It is headquartered in San Francisco, California and has 589 stores throughout North America.

Third Quarter Results

The company reported better than expected results for the third quarter of 2011 on November 17. Earnings per share came in at $0.41, beating the Zacks Consensus Estimate by 3 cents. It was a 17% increase over the same quarter in 2010.

Net revenues rose 6% to $867 million, ahead of the Zacks Consensus Estimate of $856 million. This was driven by a stellar 7.3% increase in same-store sales for the quarter. The company's West Elm brand led the way with a remarkable 27.0% increase in same-store sales while the Pottery Barn division saw a 7.0% increase.

Gross profit expanded 10 basis points to 38.3% of net revenues as the company leveraged its fixed occupancy expenses. Meanwhile, selling, general and administrative expenses declined from 30.9% to 30.4% of net revenues.

These factors led to a 60 basis point improvement in the operating margin to 7.9%.

Outlook

CEO Laura Alber stated in the third quarter release that the company is encouraged by the positive consumer response to its seasonal and holiday merchandise assortments as it enters the all-important fourth quarter. Analysts revised their earnings estimates higher for both 2011 and 2012 off the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2011 increased to $2.26, at the upper end of management's guidance. This represents 16% EPS growth over 2010. The 2012 consensus estimate rose to $2.53, corresponding with 12% EPS growth.

As you can see in the company's Price & Consensus chart, consensus estimates have been steadily rising over the last several months as the company continues to outperform expectations:

Returning Value to Shareholders

William-Sonoma has a strong balance sheet and generates solid free cash flow, which has allowed it to return value to shareholders through stock buybacks and dividends.

In the third quarter, the company spent approximately $31 million repurchasing 963,700 shares of its common stock. It also pays a dividend that yields 1.7%.

Since it began paying a dividend in 2006, Williams-Sonoma has increased it 5 times at a compound annual growth rate of 11%.

Reasonable Valuation

The valuation picture looks reasonable for WSM. Shares trade at 15.8x 12-month forward earnings, in-line with the industry average, and a discount to its 10-year median of 19.3x.

Its PEG ratio is 1.0 based on a 5-year EPS growth rate of 15.3%.

The Bottom Line

With strong growth prospects, rising earnings estimates, shareholder-friendly management and reasonable valuation, Williams-Sonoma offers plenty to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.