WSM | Cat Out of the Bag, But Still Expensive

Takeaway: Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

HOME FURNISHINGS BLACK BOOK

Slide Deck: CLICK HERE

Video Replay: CLICK HERE

 

Here's a quick summary of where we stand on WSM, as well as links to our 90 page Home Furnishings Black Book and video presentation.

 

WSM  |    Cat Out of the Bag, But Still Expensive  - wsm chart1

 

CONCLUSION: There’s nothing structurally broken here (nothing major, at least). This is a good company with a portfolio of above-average quality brands. But growth is absolutely slowing here – not just cyclically, but also secularly. This should half the EPS growth rate into the mid-single digits (without an acquisition), and take down WSM’s industry leading returns. At a 15x multiple, we wouldn’t care, especially given that the company just rightsized the upcoming quarter’s expectations last week. But at almost 22x earnings when we’re looking for growth of 8%, we simply think this is too rich.

 

What We Like:

a) The core Williams-Sonoma brand is extremely defendable.

b) West Elm scores very well on our consumer surveys. It’s like a down market RH – and there’s a market for that.

c) DTC stands at 50.5% of total, which is the highest in all of retail except for pure play e-tailers like Amazon and Wayfair. d) WSM has a demonstrated history of buying back stock.

What We Don’t Like:

a) The core brand only accounts for 21% of sales.

b) West Elm should have 87 stores by the end of the year. We think there are only about 120 markets in the US that make sense for WE.

c) WSM is not ‘channel agnostic’. It is set up in a way where Retail competes against DTC for the same sales dollar. It works for now, but we don’t like it.

d) When net income growth reverts down to the 7-8% range, the company is likely to cut its repo activity in half unless it levers up to support it.

e) Ultimately, we think that the balance sheet will be put to use to make an acquisition – a late-cycle move to get growth going. We’re actually not against this at all for WSM assuming the deal is right, which is odd for us to say.    

 

WSM  |    Cat Out of the Bag, But Still Expensive  - WSM chart2 


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