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Here's Why Williams-Sonoma (WSM) Stock is Worth Buying Now

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Williams-Sonoma, Inc. (WSM - Free Report) has been riding high courtesy of expanding selling margins and occupancy leverage as well as digital-first nature of growth.

Shares of this multi-channel specialty retailer of premium quality home products have climbed more than 67% so far this year, faring better than the Zacks Retail - Home Furnishings industry’s 46.6% rally. Continuous enhancement of the e-commerce channel, optimization of supply chain and disciplined cost control are expected to drive growth.

Earnings estimates for the fiscal second quarter, third quarter and full-year 2021 have edged up 16.1%, 9.8% and 20.8%, respectively, over the past 30 days. This trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #2 (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 (Strong Buy) stocks here.

It also has a solid earnings surprise history. Williams-Sonoma’s earnings surpassed the Zacks Consensus Estimate in seven of the trailing 14 quarters.

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Stellar Fiscal Q1 Performance

Williams-Sonoma’s outstanding quarterly results demonstrate strong execution, with comps accelerating to 40.4% and EPS tripling year over year to $2.93. Strength was broad based, with all brands accelerating sequentially. Bath renovation (up 50%) was noteworthy at Pottery Barn, Outdoor (up 140%) gave a boost to West Elm and Williams-Sonoma Home (up 40%) aided the Williams Sonoma brand.

Disciplined cost control along with higher merchandise and occupancy leverage helped it attain gross margin and SG&A improvement of 850 basis points (bps) and 100 bps, respectively. Selling margins expanded for two consecutive quarters, increasing more than 440 bps year over year and 310 bps from the fiscal fourth quarter, which can be attributed to higher merchandise margins and ship cost leverage, reflecting greater mix of retail sales versus last year.

Also, occupancy leverage was 410 bps for the quarter, driven by higher sales. The company has been working on initiatives to optimize its retail fleet by either renegotiating rent or closing less profitable stores. This has enabled it to reduce occupancy dollar growth and deliver the occupancy leverage. The company closed a total of net 33 stores in fiscal 2020 and expects to close 25% of the total retail fleet in the next five years.

Upbeat View

It is optimistic about business strength, and anticipates recovery in retail traffic as well as inventory levels during fiscal 2021.

For fiscal 2021, Williams-Sonoma now expects revenues to witness low double-digit to mid-teen net revenue growth versus mid-to-high single-digit improvement expected earlier. It also expects operating margin expansion on a year-over-year basis.

Focus on E-commerce

Williams-Sonoma — which shares space with RH (RH - Free Report) , Ethan Allen Interiors Inc. (ETH - Free Report) and Tempur Sealy International, Inc. (TPX - Free Report) in the same industry — is one of the largest e-commerce retailers in the United States and has historically been one of the most profitable e-commerce companies. It is observing higher-than-expected e-commerce traffic and very strong demand from the e-commerce business in Canada. 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.

E-commerce penetration accounted for more than 65% of total revenues for first-quarter fiscal 2021, buoyed by content-rich online experience and marketing strategies. The company remains on track to invest $200-$250 million in the business in fiscal 2021, prioritizing on technology and supply chain initiatives that primarily support e-commerce growth. This highlighted the digital-first nature of Williams-Sonoma’s business.

It is one of the leading on-pure-play digital retailers in home furnishing and among the top 25 retailers in the United States across all industries. The company’s initiatives in e-commerce and real estate optimization strategies have been driving its channel mix shift. Williams-Sonoma had been acquiring new customers in digital channels throughout fiscal 2020. The digital-first channel strategy will drive profitable market share gains, thereby accelerating its path to attain $10 billion of revenues and 15% operating margins in the next five years.

Solid Growth Expectation

Given strong performance, its prospects remain solid, as is evident from the expected earnings growth rate for fiscal 2021, which is pegged at 28%. The Zacks Consensus Estimate for fiscal 2021 revenues indicate an increase of 12.7% from a year ago.

Superior ROE

Williams-Sonoma has a very strong return on equity (ROE) that is indicative of its growth potential. The company’s ROE currently stands at 60.8%. This compares favorably with ROE of 32.8% for the industry it belongs to. This indicates efficiency in using shareholders’ funds and its ability to generate profits with minimum capital usage.

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