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Williams-Sonoma (WSM) Earnings Top, Revenues Lag in Q3

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Williams-Sonoma Inc.’s (WSM - Free Report) third-quarter fiscal 2016 adjusted earnings (excluding one-time items) of 79 cents per share beat the Zacks Consensus Estimate of 77 cents by 2.6%. Earnings were at the high end of the company’s guided range and also increased 2.6% on a year-over-year basis.

Net revenue of nearly $1.24 billion missed the Zacks Consensus Estimate of $1.26 billion by over 1%. Net sales rose 1.1% year over year driven by double-digit revenue growth at West Elm, its newer businesses and international company owned businesses. The strong revenue growth was partially offset by weakness in the Pottery Barn brands.

Comparable Brand Revenues

Comparable brand revenues decreased 0.4% in the quarter, significantly lower than the 4.5% increase recorded in the prior-year quarter. All the brands, except West Elm, reported soft comparable brand revenues.
 
Williams-Sonoma brand’s comparable brand revenues were up 0.1%, less than 1.2% growth in the prior-year quarter. The core business remains healthy including cookware, bakeware and cutlery in spite of softness in electrics.

Pottery Barn’s comparable brand revenues were down 4.6% as against a 2% increase in the prior-year quarter, which management believes is due to the challenging retail environment.

Pottery Barn Kids’ comparable brand revenues decreased 1%, compared to 4.7% growth in the year-ago quarter, thanks to softness in the textiles category.

West Elm’s comparable brand revenues increased 12% compared with the 15.7% rise in the prior-year quarter, as the brand delivered strong performance in furniture and lighting business.

PBteen’s comparable brand revenues decreased 10.9% as against 0.9% in the year-ago quarter, owing to weakness in the core furniture and textile businesses.

Segment Details

E-commerce (formerly Direct Store Delivery) : The segment reported net revenue of $649 million in the third quarter of 2016, up 3.3% year over year, driven by strength in West Elm, Williams-Sonoma and Rejuvenation. The segment contributed 52.1% to revenues in the third quarter of 2016.

Retail: The segment reported net revenue of $597 million in the reported quarter, down 1.2% year over year. Strong growth across West Elm, international company owned businesses and Rejuvenation was offset by the decline in the Pottery Barn brands.

Margin Details

Adjusted operating margin was 8.9% in the quarter, down 10 basis points from the year-earlier quarter.

As a percentage of revenues, adjusted selling, general and administrative (SG&A) expenses were 27.9% or $347 million in the quarter.

Financials

Williams-Sonoma has cash and cash equivalents of $75.4 million as on Oct. 30, 2016 compared to $72.3 million as on Nov. 1, 2015.

Cash returned to stockholders totaled $72 million, comprising $39 million of stock repurchases and $33 million of dividends.

Q4 Outlook

Williams-Sonoma expects fourth-quarter 2016 diluted earnings per share in the band of $1.45 to $1.55.

The company expects net revenue for the quarter in the range of $1.6 billion to $1.7 billion. Comparable brand revenues are expected to increase in the range of negative 1% to 4%.

2016 Outlook
 
Williams-Sonoma has lowered the high end of the 2016 guidance. The company expects 2016 earnings per share in the range of $3.35–$3.45, compared to the prior expectation of $3.35–$3.55.

Net revenue is projected in the range $5.1–$5.2 billion.

Comparable brand revenues are likely to grow in the 1%–2% range, lower than the prior expectation of 1%–4%. The company expects adjusted operating margin in the range of 9.4%–9.6%. Income tax rate is projected between 37% and 38%.

WILLIAMS-SONOMA Price, Consensus and EPS Surprise
 

 

Williams-Sonoma carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked stocks in the Retail-Wholesale sector include Domino's Pizza, Inc. (DPZ - Free Report) , McDonald's Corp. (MCD - Free Report) and Papa John's International Inc. (PZZA - Free Report) .

Domino's Pizza sports a Zacks Rank #1 (Strong Buy) and is expected to witness a 22.8% increase in full-year 2016 earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's carries a Zacks Rank #2 (Buy) and is likely to see a 14.1% rise in full-year 2016 earnings.

Papa John's – a Zacks Rank #2 stock – is expected to witness a 19.9% increase in full-year 2016 earnings.

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