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Williams-Sonoma Inc. (WSM - Snapshot Report) has been consistently delivering positive earnings surprises for the past four years. Keeping with this trend, this specialty retailer of home products reported solid fiscal first-quarter 2012 earnings that beat the Zacks Consensus Estimate by 6.3% on a 5.4% increase in same-store sales. The company’s continued investments in its long-term strategic growth initiatives should boost results going forward.

This Zacks #2 Rank (Buy) is also focused on enhancing shareholder value through share repurchases, and has a solid 2.5% dividend yield.

Fiscal 2012 First-Quarter Results

On May 22, Williams-Sonoma reported fiscal first-quarter 2012 earnings per share of 34 cents, beating the Zacks Consensus Estimate of 32 cents. This represented a 13% rise over the previous year.

Net revenues rose 6.1% to $818 million, driven by a 5.4% increase in same-store sales. The West Elm brand witnessed a 22.1% increase in same-store sales while the Pottery Barn brand rose 9.1%. This more than offset the decline in its other brands, including the Williams-Sonoma brand (down 3.2%), Pottery Barn Kids (down 0.8%) and PBteen (down 6.0%).

Meanwhile, operating income increased 6% as the operating margin held steady at 6.9%.

Management provided encouraging guidance in its fiscal 2012 first-quarter press release. The company expects to earn between $2.42 and $2.49 in 2012 on 4%-6% revenue growth.

Estimates on the Rise

In the last 60 days, the Zacks Consensus Estimate for fiscal 2012 has moved up 1.6% to $2.49, representing 11.2% growth over 2011. The fiscal 2013 estimate is currently $2.76, up 1.5% in the last 60 days and implying year-over-year growth of 10.8%.

Strong Dividend

In addition to steady growth, Williams-Sonoma pays a solid dividend. Since 2006, the company has increased its dividend 6 times at a compound annual rate of 14%. Currently, it pays a quarterly dividend of 22 cents that yields a solid 2.5%, while the payout ratio comes to 35.0%. The average five-year yield stands at 2.9%.

Reasonable Valuation

Valuation looks reasonable for this specialty retailer with shares trading at 14.5x 12-month forward earnings, on par with its peer group average. However, on a price-to-book basis, shares are currently trading at 2.95x, a 50.5% premium to the peer group average of 1.96x.

Nevertheless, the stock also looks attractive given a trailing 12-month ROE of 19.4%, which is higher than the peer group average of 14.4%. The company’s long-term estimated earnings per share growth rate also remain strong at 13.1%.

Chart Shows Promise

The stock proves attractive for investors on grounds of encouraging earnings growth forecasts, a history of positive earnings surprises and the ability to sustain dividend increases. At a glance, the price and consensus chart shows that the stock price line is clearly below the fiscal 2012 and 2013 earnings estimate lines, indicating that the stock is still undervalued.

Moreover, the historical trends demonstrate that the stock has followed the growth in earnings estimates since the start of 2010. This suggests that if the earnings estimates move further up, the stock price is likely to follow along.

Closing Comments

With a solid start to fiscal 2012 and its growth strategies in place, Williams-Sonoma remains fully poised to deliver strong earnings growth through the rest of the year. The opening trends in the second quarter point to incredibly positive customer response to the company’s core and seasonal merchandise assortments, which are likely to continue going forward.

Founded in 1956 and headquartered in San Francisco, California, Williams-Sonoma is a specialty retailer of high-quality products for the home. The company sells its products under seven brands, each representing a distinct merchandise strategy. It deals in cookware, furniture including modern and luxury, kid’s furniture, wedding registry, bridal registry, baby registry, girls’ and boys’ bedding, room decor, decorative accessories, lighting and hardware. The company’s brands include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm, Williams-Sonoma Home and Rejuvenation. The company has 575 stores throughout North America.


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