WSM | 50% of Growth Slowing?

Takeaway: We don’t think WSM is a short. But with 50% of growth appearing to slow materially, we wouldn’t touch WSM ahead of the print on either side.

Despite a 35% draw down from peak-to-tough, a less than impressive performance in the ‘junk rebound rally’ we’re seen over the past six weeks, AND a generally positive predisposition toward the name longer-term, we simply can’t get excited about WSM over the near-term.


Yes, there are a few positive factors – let’s get those out of the way.


1) The RH blowup earlier this quarter was much less about macro and more about execution hiccups/burps/projectile vomiting associated with launching new concepts. The promotional fears are real, but we’d argue that’s what drove the negative bifurcation in performance between the home furnishings names and the broader retail index starting in mid-November.


2) Numbers printed out of LZB, PIR, KIRK, and ETH have looked better than feared – pretty much across the board. Granted, this is not the most appropriate sample (though RH is not either), but the average PM probably throws them all in the same bucket – for better or worse. 


3) WSM is lapping its own set of executional headwinds caused by the West Coast port delays in 1H15 which cost the company $30-$40mm on the top line and 50bps+ of margin in each of the first two quarters of 2015. Normalized product flow should allow the company to recapture a large portion of that, at least on the margin side. We’d really argue that its own complex operational structure (between e-commerce and B&M) simply could not handle the stress of an event like a Port Strike (why are there fewer than five companies in all of retail that repeatedly talked about this, despite the fact that everyone sources from the same place?). Nonetheless, an easy comp is an easy comp.


While all that matters, the unfortunate reality is that the growth story and stock drivers for WSM are almost entirely hinged on the West Elm concept. That might sound strange given the fact that the brand is only 17% of sales but a) it’s the only concept in the portfolio of brands actually growing square footage, and b) West Elm has accounted for ~50% of incremental growth for the better part of two years, which is evidenced by the first chart below.  We think that’s potentially at risk.


We triangulate several sources for every company each quarter to gauge the online sales curve vs a year ago. These sources have tracked West Elm well in the past. They’re the same sources that are suggesting to us that 50% of growth might have meaningfully decelerated, as outlined in the second chart below. The quarter might still be fine, as the Street is looking for just 4% EPS growth. But in 1Q expectations accelerate to 14%, which might lead WSM to an underwhelming guide.  Does the Street know this with short interest at a 5-year high and 10.5% of the float? Probably. But we’re not suggesting that this is a great short here. We’re simply saying that despite our temptations, our process tells us that this is absolutely not a buy before the event.


WSM | 50% of Growth Slowing? - 3 16 2016 Chart1 WSM growth

WSM | 50% of Growth Slowing? - 3 16 2016 Chart2

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more