Williams-Sonoma: Lock In Big Trading Gains, Let Profit Run

seekingalpha01:21

Williams-Sonoma stock is surging due to strong Q3 earnings, impressive margins, and better-than-expected guidance, making it a prime candidate for a house position following the author's rapid-return ...

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(NYSE:WSM) is surging today. We will discuss why and what we see going forward. For now, we are recommending moving to a house position if you took our trade that we laid out in August. This was a public trade, similar to those we lay out at our trading service, BAD BEAT Investing. Just as a reminder, this was the play we laid out:  The Play Target entry 1: $130-$132 (25% of position) Target entry 2: $120-$121 (30% of position) Target entry 3: $113-$115 (45% of position) Stop loss: $85 Target Exit: $175 Options consideration: We think there are a number of options approaches that work here; however, such guidance is reserved for BAD BEAT members.  So, today we have hit our target exit on this trade, and we think you back out the principal plus 30% of the profit and let the rest of it run for ever and ever, collecting all future dividends, spinoffs, etc. Now, we still see an upside here because the numbers in the just-reported earnings were phenomenal, and we love the guidance. Data by YCharts Discussion Now, this company has had a very interesting run for the last few years. Recall, Williams-Sonoma had always been a bit of a niche retailer. It is not selling the highest of higher-end merchandise, but also isn't an average big box store type name either. It falls in between a bit. With the pandemic, the offerings took off as the company has great offerings for both the home and the office. While the demand faded a bit post-pandemic, the company shifted and managed to continue to grow exceptionally. The forward look is still positive thanks to better-than-expected guidance on margins, despite a small revenue decline. Williams-Sonoma saw income of $1.96 per diluted share. This was a strong beat of $0.19 versus consensus and rose from $1.83 a year ago. Revenue and Comparable Sales The earnings beat actually came with a small revenue beat. But sales were down from last year, as expected. Sales in Q3 came in at $1.80 billion and just surpassed consensus estimates by $20 million. But they were still down 2.7% from a year ago. Now, the action may surprise you given that there are negative comps, but the thing is, while sales do matter, profit matters more. And that is why the stock is surging. That comes with a strong guide, which we will touch on shortly. Now, comparable sales are a key figure. This stock is one we suggested that we bend one of our rules on, which is to avoid retailers with declining comps. In this case, the margin and earnings power were too good to ignore. Still, comparable sales were down 2.9% in total, but E-commerce remains strong. Looking segment by segment, we saw declines in most, except Pottery Barn Kids/Teen. We saw West Elm comps decline 3.5%, but better than the 22.4% decline a year ago. We saw Pottery Barn comps down 7.5% but was also better than down 16.6% a year ago. And Pottery Barn Kids and Teens were strong, seeing 3.8% comp growth versus a decline of 6.9% a year ago. The flagship Williams-Sonoma brands were basically flat (-0.1%). So, while comps are down, they are trending better, but also, the profit power is so strong. Margins Gross margin came in at a whopping 46.7%, which is outstanding in retail. This was up 230 basis points from last year and up 50 basis points from the sequential quarter. This solid margin improvement was driven by higher merchandise margins up 130 basis points as well as supply chain efficiencies that added 100 basis points. Further, occupancy costs were $195 million, down -2.7% versus a year ago. Further, it was a $2 million decline sequentially. So, better than expected sales, expanding margins, and better EPS. All of this led to another guidance increase. Guidance Increase The company hiked fiscal 2024 guidance to reflect higher net revenue trends and higher operating margin expectations. While revenues will still decline, they will do so in the range of -3.0% to -1.5% with comps in the range of -4.5% to -3.0% in fiscal 2024, both far better than guidance at the year of the year. Operating margin is now seen between 18.4% to 18.8% The company also indicated that it expects mid-to-high single-digit annual net revenue growth going forward with an operating margin in the mid-to-high teens. On top of this, a new buyback is here, announced in September, and the company retired a ton of shares in Q3. Great Balance Sheet, Shareholder Friendly We like keeping a house position here because Williams-Sonoma still has a strong balance sheet. Williams-Sonoma had a strong liquidity position of $827 billion in cash, including approximately $246 million in operating cash flow resulting from strong performance. What is more, there is no long-term debt here, though there are lease liabilities. That is a win. The company is also very shareholder-friendly. In the quarter, the company was able to repurchase an additional $533 million in shares. The company is also a serial dividend raiser, so expect more of these in the future. At these prices, the yield is a moderate 1.3%, but this is a dividend growth name, and we love owning stocks like that for the long term. Final Thoughts On WSM Stock The growth in profit power is impressive, and the valuation is fair, too. As for fiscal 2024 EPS, we see this metric coming in at $8.10 to $8.50 on this margin guide, depending on the degree of sales. This puts the stock at just 21X FWD EPS, which is incredibly attractive in our opinion, and still below the current market multiple.  Given this successful rapid-return trade and the shareholder-friendly nature of the company, this is a perfect candidate to move to a house position like we do at BAD BEAT Investing.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485128619"}