Williams-Sonoma Isn't Worth Your Attention Until It Hits $40

Last week Williams-Sonoma  (WSM)  reported a lackluster third quarter and guided to a lousy fourth quarter. In the last one-year period, the shares are down 18%. Don't get burned by Williams-Sonoma.

Williams-Sonoma, which currently trades around $55, reported third-quarter earnings of 78 cents per share, 1 cent better than the consensus estimate. Revenue rose 1.1% to $1.25 billion versus the $1.26 billion estimate.

Same-store sales were especially weak. The company said comparable-store sales decreased 0.4% compared to 4.5% in the third quarter last year. Analysts were expecting comps of 1.4%.

I found Pottery Barn results especially disappointing. Pottery Barn represents about 43% of total revenue and comps declined 4.6%. That was especially disappointing considered comps declined 4.9% in the second quarter. Pottery Barn Kids comps fell 10%.

Ecommerce revenue increased 3.3% to $649 million. E-commerce generated 52% of total company sales, up from 51% in the year earlier quarter. Operating margin was 8.8%, down 20 basis points. Inventories fell 3.5% to $1.06 billion.

Management cut fourth-quarter and full-year guidance. Williams-Sonoma sees fourth-quarter earnings between $1.45 and $1.55 per share. For the year, analysts are forecasting earnings of $3.46 on a 1.2% to 1.5% comp.

Shares of Williams-Sonoma have been weak all year. The stock is down nearly 7% and after the third quarter report it doesn't look like the stock can go higher any time soon.

In fact, in my opinion, I think Williams-Sonoma is worth only $40 per share. Analysts are looking for fiscal 2017 earnings of $3.74, up 4% -- which looks high. To hit that estimate, comps would have to return to the 4%-5% range and that doesn't seem realistic right now.

If you assume 1% comps, earnings would be flat between 2016 and 2017. Under that scenario, revenue would be lucky to grow 2%. In other words, WSM would most likely report earnings of $3.35 in 2016 and $3.36 next year.

That kind of earnings "growth" is only worth 11 to 12 times forward estimates, hence my $40 target. 

No positions in any stocks mentioned.

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