Mike Baker, Deutsche Bank (Hold; $62 PT)
WSM reported brand comps of 5.7%, approximately in line with Thomson consensus of 5.8%, but a slowdown from the 10% range over the past two quarters and the slowest comp in 5 qtrs. We believe the promotional environment was worse than expected heading into the quarter, and in responding to this environment to take share, the average ticket - especially on high-priced outdoor furniture - was negatively impacted. WSM also had supply disruptions from Vietnam, which had a significant impact on the PB Teen brand, which comped down 1% vs +12% last quarter.
Denise Chai, Bank of America Merrill Lynch (Buy; $82 PT)
WSM traded down over 10% in the aftermarket after reporting 2Q earnings which exceeded the high end of guidance and met our expectations. We think the stock is overreacting to 1) a lower GM (although EBIT margin was +26bp) caused by a more promotional environment and occupancy deleverage for global retail and domestic distribution and 2) lack of a guidance raise for the first time in several years. We view this as an attractive opportunity in a high-quality retailer with unrivalled e-commerce leadership and reiterate our $82 PO (22x 2015 P/E).
Kate McShane, Citigroup (Buy; $76 PT)
With WSM trading at ~21x next year's earnings, the market had built up high expectations for what had become a consistent beat and raise story. While today's comp miss was surprising, we think the market should take note that Q2's 5.7% comp was the lowest comp in over two years and was adversely affected by timing of shipment deliveries. The other two major components of the disappointment were the 79 bps of GM% decline and the lack of higher sales and EPS guidance. What seems to be overlooked is the 26 bps of op margin improvement, which we think speaks to the effectiveness of management to preserve profitability mid-quarter. All in, our long term view of the company hasn't changed and the sell-off today ($66.35 after hours) presents a buying opportunity on a reset to more reasonable expectations.
We remain bullish on WSM's international story and are excited by the global expansion of the brand into Australia (4 more stores open tomorrow) and a franchise partner in the Philippines. We think that, much like a branded apparel company, WSM's relevance will increase as consumers become more aware of the various concepts globally. In addition, the global expansion sets the company up well for future cost leverage (occupancy, corporate, advertising) but the company is also becoming more global in its supply chain as it in-sources overseas agents which should drive margin lift next year.