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Williams-Sonoma (WSM) Stock Dips 3% Despite Q2 Earnings Beat

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Williams-Sonoma Inc.’s (WSM - Free Report) shares dropped 3.1% on Aug 28 in the after-hour trading session, following second-quarter fiscal 2019 results. Not only the company posted better-than-expected results in the quarter under review, but also it lifted its fiscal 2019 earnings and revenues guidance, given strong business trend. However, a decline in comps at the namesake brand and lower gross margin might have hurt investors’ sentiments.

Nonetheless, West Elm — its biggest growth opportunity — continues to accelerate with renewed strength in Pottery Barn brands. Also, cross-brand initiatives such as The Key and Business-to-Business are expected to become important growth opportunities.

Non-GAAP earnings of 87 cents per share surpassed the Zacks Consensus Estimate of 83 cents by 4.8%. The figure also grew 13% year over year.

Moreover, revenues of $1,371 million beat the consensus mark of $1,308 million by 4.8% and grew 7.5% year over year.

Comps increased 6.5% in the fiscal second quarter compared with 3.5% growth in the preceding quarter and 4.6% in the year-ago period.

The West Elm brand’s comps grew 17.5% compared with 9.5% growth in the prior-year quarter. Pottery Barn and Pottery Barn Kids and Teen grew 4.2% and 3.7% versus 2% and 5.7% in the prior-year quarter, respectively. Notably, emerging brands Rejuvenation and Mark and Graham registered almost 9% growth from its international operations. However, the Williams Sonoma brand’s comps declined 1.1% in the quarter against 1.6% comps growth registered in the year-ago period.

Williams-Sonoma, Inc. Price and EPS Surprise

 

Williams-Sonoma, Inc. Price and EPS Surprise

Williams-Sonoma, Inc. price-eps-surprise | Williams-Sonoma, Inc. Quote

Operating Highlights

Non-GAAP gross margin was 35.4%, down 110 basis points (bps) from second-quarter fiscal 2018. The downside was mainly due to higher shipping costs, primarily driven by a greater mix of furniture sales, impact of the implementation of List 3 China tariffs, and the growing share of business from franchise and trade. This was partly offset by benefits from strong occupancy leverage.

Non-GAAP selling, general and administrative expenses accounted for 28.5% of net revenues compared with 30.6% in the year-ago quarter, reflecting a decrease of 120 bps. This led to a 10-bps expansion of non-GAAP operating margin to 6.9% year over year in the quarter.

Financials

Williams-Sonoma reported cash and cash equivalents of $120.5 million as of Aug 4, 2019 compared with $339 million on Feb 3, 2019.

During the fiscal second quarter, the company invested $41 million in the business, and returned almost $77 million to its stockholders through dividends and share repurchases. Notably, the company paid $39 million worth of dividends and repurchased about $39 million shares.

Fiscal 2019 Guidance Lifted

Given solid fiscal first-half results, the company now expects non-GAAP earnings per share in the band of $4.60-$4.80, up from prior expectation of $4.55-$4.75.

Net revenues are projected in the range of $5,740-$5,900 billion compared with $5.670-$5.840 billion expected earlier. Comps are likely to grow 3-6% year over year versus 2-5% prior expectation. Non-GAAP operating margin is expected to be in line with the fiscal 2018 level.

The company expects to close 25 stores and bring the total store count to 600 by the end of the year.

Long-Term View Reaffirmed

Total net revenues are expected to grow in mid-to-high single digits. Non-GAAP operating income is likely to be in line with revenue growth, thereby driving operating margin stability. The company expects above-industry average ROIC in the long term.

Zacks Rank & Other Key Picks

Currently, Williams-Sonoma carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the Retail-Wholesale sector include RH (RH - Free Report) , Tempur Sealy International, Inc. (TPX - Free Report) and Target Corporation (TGT - Free Report) . While RH sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

RH, Tempur Sealy and Target’s earnings are expected to grow 10.7%, 17.9% and 13.7%, respectively, in the current year.

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