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Williams-Sonoma Banks on Digital Innovations, Costs High

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Strong e-commerce growth, as well as focus on innovation, marketing and digitalization have been driving Williams-Sonoma, Inc.’s (WSM - Free Report) performance over the past few quarters. This multi-channel specialty retailer’s shares have gained 35.9% year to date compared with the industry’s 5.6% growth. The price performance was backed by robust earnings surprise history of the company, having surpassed the Zacks Consensus Estimate in all the trailing four quarters, with the average being 8.5%.



 

A Look at Fiscal Second-Quarter Results

Williams-Sonoma reported better-than-expected results in the second quarter of fiscal 2018, given broad-based strength across all its brands, with Pottery Barn brand recording a steady year-over-year improvement. Adjusted earnings grew 26.2% from the year-ago level on 6.1% growth in net revenues. Comps growth of 4.6% was supported mainly by 9.5% improvement in West Elm, and robust performance of PB Teens and Kids.

Meanwhile, healthy gross margin expansion (up 130 basis points) was fueled by higher selling margins, offsetting shipping cost pressures. Better inventory management enabled streamlined promotions, boosting merchandise margins across all its brands.

Let’s focus on the factors that make Williams-Sonoma a stock to hold on to for attractive returns.

Key Growth Drivers

Williams-Sonoma, one of the largest e-commerce retailers in the United States, has a history of driving market share gains, supported by strong e-commerce growth. This segment generates nearly 54% of the company’s revenues and regularly posts strong operating margins. Also, the company’s investment in merchandising of its brands, efficient catalog circulations and digital marketing boost its e-commerce revenues. It registered 5.5% and 10.1% revenue growth in its e-commerce channel in 2017 and the first six months of fiscal 2018, respectively.

Product innovation plays a huge role in the company’s success. Keeping in mind the changing preference of consumers, Williams-Sonoma collaborates with celebrated brands and designers to offer exclusive designs on home furnishings products. Meanwhile, the company has been reworking on its marketing strategy, placing more emphasis on digital targeted marketing and investing in store remodeling.

During the quarter, it significantly improved digital customer experience through content creation. Its second-quarter fiscal 2018 digital customer growth accelerated in double digits, the fastest pace in more than two years. Additionally, the improved level of comps in the recent years is being aided by continued adoption of “The Key” loyalty program, resulting in increased cross-shopping among the company’s brands. On technology front, Williams-Sonoma continues to make strong progress through its integration of Outward.

Concerns

As Williams-Sonoma derives substantial revenues from efficient catalog circulation and digital marketing, it is affected by costs associated with continued investments in e-commerce. Despite solid comps growth in fiscal second quarter, spending on digital advertising is putting pressure on SG&A, a trend we expect to persist given evidence of strong returns on this spending. Non-GAAP SG&A expenses were 29.7% of net revenues or $378.6 million in the second quarter, reflecting an increase of 130 basis points year over year.

Zacks Rank & Stocks to Consider

Williams-Sonoma currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Retail-Wholesale sector are Urban Outfitters, Inc. (URBN - Free Report) , Boot Barn Holdings, Inc. (BOOT - Free Report) and RH (RH - Free Report) . While Urban Outfitters and Boot Barn sport a Zacks Rank #1 (Strong Buy), RH carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Urban Outfitters’ earnings are expected to grow 59.3% in 2018.

Boot Barn’s earnings for the current year are expected to increase 64.3%.

RH’s earnings are expected to grow 118.4% in fiscal 2018.

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