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Here's Why Williams-Sonoma (WSM) Stock is a Must Buy Now

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Williams-Sonoma, Inc.’s (WSM - Free Report) e-commerce channel, innovative efforts, investment in merchandising of brands and digital marketing have been driving the company’s performance. Notably, shares of Williams-Sonoma have gained 61.9% over the past year compared with its industry’s 57.9% rally.

The price performance was backed by a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in the trailing 12 quarters. Earnings estimates for fiscal 2020 and 2021 have moved 25.5% and 23.9% upward, respectively, over the past 30 days. This positive trend signifies bullish analysts’ sentiments and justifies the company’s Zacks Rank #1 (Strong Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Later last month, Williams-Sonoma reported third-quarter fiscal 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate by 68.4% and 13.5%, respectively. Earnings and revenues grew 150% and 22.3% year over year, respectively, courtesy of 24.4% comps growth backed by 49.3% notable acceleration in net comps growth of the e-commerce business.

Major Growth Drivers

Strong E-commerce Penetration: Williams-Sonoma, which shares industry space with RH (RH - Free Report) , At Home Group Inc. (HOME - Free Report) and Tempur Sealy International, Inc. (TPX - Free Report) , is one of the largest e-commerce retailers in the United States. The company has a history of driving market share gains, supported by strong e-commerce websites, direct mail catalogs and retail stores along with shipping fees received for the delivery of merchandise. Its innovative efforts have helped the company to drive e-commerce growth. E-commerce penetration accounted for 70% of total revenues for third-quarter fiscal 2020, buoyed by content-rich online experience and marketing strategies. Again, during the quarter, the company witnessed solid ecommerce sales growth of 49.3%. This highlights the digital-first nature of Williams-Sonoma’s business.

Solid Cost Control: Disciplined cost control, lower advertising and payroll, along with higher merchandise and occupancy leverage have been helping the company boost margins. Although higher shipping costs due to increased e-commerce sales have been weighing on margins, its focus on innovation, and marketing and digitalization techniques is proving profitable. Non-GAAP gross margin expanded 400 basis points (bps) in the fiscal third quarter backed by higher merchandise and occupancy leverage in the quarter. Non-GAAP selling, general and administrative expenses improved 410 bps and non-GAAP operating margin expanded 810 bps from the year-ago period in the quarter.

Superior ROE: Williams-Sonoma’s return on equity (ROE) is indicative of growth potential. The company’s ROE of 44.1% compares favorably with the industry average of 18.7%, implying that it is efficient in using its shareholders’ funds.

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