WSM | Macro Will Be A Problem

A good quarter for WSM. Solid headline beat of $3.50 vs $2.90 and management reiterating its full year guide (however wide) of mid to high SD growth and margins relatively inline with last year.  That could be about a 20% range in EPS, especially with varying buyback levels.  Still, the company put up nice numbers, a big help came from the young B2B business which was up 53% in the Q with $250mm in demand, suggesting it added ~$140mm in sales, or 60% of the growth this Q.  Perhaps this is a business that sees better demand trends in 2022 (hotels re/opening with travel returning, construction having some pent up demand from supply chain, perhaps its slowdown lags) than the decidedly negative outlook for the consumer.  We’re likely headed for a recession, housing data is just at the start of the multi month negative report trend after the massive rise in rates, the consumer is being squeezed by inflation and data suggests shoppers are levering up via credit cards to keep consuming.  Granted the biggest negative impact as of 1Q has been on the low to mid end, while WSM’s customer base, which skews a bit above that, has been hanging in better from a demand perspective (that's seen in other categories as well).  But as the housing and labor environment get worse, so will home demand.  The company acknowledged a slight slowdown in recent weeks.  That demand pressure will continue, and WSM will step up the promotional cadence to protect share.  That means rapid margin pressure and earnings declines.  WSM is on our short bias list.  We think its margin levels are not sustainable in this slowing demand environment and that earnings expectations are headed lower, though the company is plugging a lot of stock buyback to drive some EPS upside, with a record $500mm+ in buyback this Q.  WSM makes a good hedge to our Best Idea Long RH, which has significant growth drivers from US share gains and its coming international launch, while WSM is unlikely to see 2021 EBIT levels for 3-5 years if ever.