WSM | Setting Up As a Nice Short

Another blowout quarter for a company tied to the home. WSM put up $2.56 vs the consensus of $1.53. Comped an impressive 24% -- more than doubling the Street’s estimate (10%). Comps driven by e-comm, which comped 49% while stores were -11%. Web sales were 70% of total vs 57% last year, showing that the companies with sophisticated e-comm businesses are in the pole position to outperform (note the stark contrast to TJX/ROST that don’t have the online infrastructure to perform when people avoid physical stores). What I liked most about the quarter was the broad-based strength across all concepts. Williams-Sonoma was up 30%, Pottery Barn +24% and West Elm +22%. Gross margin beat by a wide margin…with GM coming in at an even 40% vs 36% last year (and estimates of 36.5%). Inventories ended the quarter -11% vs last year while deferred revenue was +18% and margins are on fire – really can’t expect a better set-up than that. Repurchased $109mm in stock in the quarter and raised the dividend 10% to $0.53. So all in, this was the perfect quarter, and yet the stock is only up 5% pre-market. That tells me that the trade long-side is getting pretty thin. Unlike RH, which I think has the brand, the management, and the plan to deliver long-term results even after we get through the pandemic, I think that the bulk of WSM’s results are simply due to the positive environment for home stocks. Earlier this week we went short HD and LOW, as comps and gross margin trends are simply not sustainable, and the increase in SG&A due to higher wages is permanent. After this print, it’s likely that 2020 estimates will come in close to $7.00, while next year WSM will be lucky to earn $6.00 – and the stock is currently trading at 17.5x that number. We’re looking at a 15x multiple on peak ‘20 earnings. That’s about as rich a multiple as we can justify for WSM. It’s delivering because of two factors – Home exposure, and a huge e-comm business. Can’t straight line these trends/themes into ’21. Under no circumstances would we be buying into the stock at current levels. WSM sits on our Short Bias list. If the stock rips after this print, this is a candidate for a Best Idea Short.