NEW YORK (TheStreet) -- Williams-Sonoma (WSM) shares tumbled 11% to $66.70 in premarket trading on Wednesday following the home furnishing and cookware brand's disappointing forward guidance for the third quarter.
Williams-Sonoma's second-quarter profit of 53 cents a share met analysts' expectations but sales were slightly softer at $1.04 billion vs. $1.05 billion expected by analysts for the period ended Aug. 3. Direct-to-consumer sales represented half of total revenue for the quarter. In the same period last year, Williams-Sonoma earned 49 cents a share on $982 million in revenue.
Comparable sales for Williams-Sonoma's brands were mixed. The company had overall comp sales growth of 5.7% in the period vs. 8.4% growth last year; analysts expected growth of 6.2% in the second quarter, according to Consensus Metrix. Pottery Barn sales rose 4.4% in the second quarter compared to 9.9% last year and consensus expectations of 6%. West Elm had same-store sales growth of 16.7% vs. 12.8% expected by analysts.
Williams-Sonoma forecast third-quarter earnings to range between 58 cents a share and 63 cents a share compared with earnings of 66 cents a share expected by analysts. The company maintained its full-year profit guidance of $3.07 to $3.17 a share.
Here's what Wall Street analysts are saying on Thursday.
Brian Nagel, Oppenheimer (Perform; $68 PT)
We view the essentially in-line Q2 (July) results and updated FY14 (Jan. 2015) guidance that Williams-Sonoma announced last night (8/27) as mixed. WSM continues to outperform most others in Home Retail and rank among the best operators in Consumer. Unfortunately, investors had come to expect and discount perfection at the chain, and trends in Q2 (July) weakened enough to undermine these views. WSM is no longer immune to mounting competitive pressures in the sector. We are concerned somewhat that Street estimates and management guidance could prove optimistic in an aggressively promotional holiday 2014.
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.
TheStreet Ratings team rates WILLIAMS-SONOMA INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate WILLIAMS-SONOMA INC (WSM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 0.6%. Since the same quarter one year prior, revenues slightly increased by 9.7%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
- WILLIAMS-SONOMA INC has improved earnings per share by 20.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, WILLIAMS-SONOMA INC increased its bottom line by earning $2.85 versus $2.56 in the prior year. This year, the market expects an improvement in earnings ($3.20 versus $2.85).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Specialty Retail industry average. The net income increased by 17.0% when compared to the same quarter one year prior, going from $39.47 million to $46.16 million.
- 41.78% is the gross profit margin for WILLIAMS-SONOMA INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 4.73% trails the industry average.
- Compared to where it was 12 months ago, this stock has enjoyed a nice rise of 25.80% which was in line with the performance of the S&P 500 Index. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: WSM Ratings Report
--Written by Laurie Kulikowski in New York.