Williams-Sonoma's ‘Solid’ First Quarter Fails to Draw Upgrades

(Bloomberg) -- Williams-Sonoma Inc. jumped as much as 16% Friday -- the most in nine months -- after the home goods retailer’s first-quarter results topped estimates, led by strength in the company’s West Elm brand. Analysts called the quarter “respectable,” “solid” and “well executed.”

Still, analysts were hesitant to raise their ratings as competition in the space remains intense and the threat of new tariffs looms large, though sell-siders do acknowledge Williams-Sonoma has navigated the Trump Administration’s third stage of tariffs well.

Short interest in the stock is high at 24% of float, up from a 52-week low of 20% back in March after the company’s last earnings report, according to Markit data.

Guggenheim, Steven Forbes

“A solid start to 2019 -- broad-based expense control drives meaningful EBIT beat.”

“Since these savings are coming from a variety of sources -- advertising, employment, and general expenses -- combined with the ongoing margin gains associated with occupancy leverage, our conviction in the company’s ability to deliver on its EBIT margin outlook is increasing.”

Stays with neutral rating given the stock price jump and pressure on industry valuations from tariff threats.

RBC Capital Markets, Scot Ciccarelli

“Solid 1Q print, but remain concerned over competitive pressures and EBIT growth.”

Even though valuation is “modest,” competition remains a major concern. “We continue to believe that competitive pricing headwinds will persist and remain concerned that
delivery fees of up to $399 will continue to be gradually competed away.”

RBC estimates that the shipping-related revenue stream accounts for 50%+ of the company’s EBIT. “WSM faces sizable earnings risk over the next several years if this fee stream erodes.” Rates sector perform, price target $61 from $60.

Loop Capital, Anthony Chukumba

“We believe the fact management raised its F2019 diluted EPS guidance demonstrates a high degree of confidence the company’s favorable recent trends will continue.”

“That said, we would have been more encouraged by a top-line growth-driven earnings beat as opposed to a cost-control-driven one. “There was nothing in Williams-Sonoma’s F1Q 2019 results that dramatically changes our long-term fundamental outlook.”

Awaits a “more attractive entry point.” Rates hold; price target $58.

Bloomberg Intelligence, Seema Shah

“West Elm will remain the linchpin of Williams-Sonoma’s long-term strategy.”

“While gross margin fell, the 10-bp slide was only a slight deceleration that buffered SG&A dollar growth and buoyed operating margin to 6%.”

“Still, the company may sacrifice margin to lift traffic, considering Pottery Barn’s surprising 1.5% same-store sales gain vs. expectations of a 30-bp slide.”

“The 25% tariff was also embedded into fiscal 2019 guidance, muting additional short-term pressures.”

Telsey Advisory Group, Cristina Fernandez

“The operating margin expansion of 76 bps was surprising—we had been modeling down 30 bps—as the company cut costs ahead of the tariff increase.”

“We commend Williams-Sonoma for taking an aggressive approach to mitigating the 25% tariff by shifting sourcing to other countries, negotiating with vendors, selectively increasing prices, and cutting costs.”

Still, “the looming threat of List 4 tariffs and a slowing housing market likely keep the stock range bound.” Rates market perform.

Credit Suisse, Seth Sigman

“The quarter was well executed overall, in a difficult retail environment.”

“Looking past guidance and expectations, sustainability is still our concern. Gross margin was weaker against one of the easier comparisons of the year, with shipping continuing to offset other savings.”

“It’s also difficult to envision flat SG&A being sustainable given the competitive challenges, keeping us cautious on the margin outlook.” Rates underperform, price target $50.

BofAML, Curtis Nagle

“1Q comes in ahead but large adjustments continue and year could get tougher.”

“Earnings continue to benefit from large one-time adjustments that make EPS look stronger than it would otherwise appear.”

“We continue to see multiple internal and external headwinds to earnings.” Rates underperform.

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk, Steven Fromm

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