The Bottom Is In For Williams-Sonoma But Wait to Buy It

Williams-Sonoma Rockets Higher On Results, Outlook 

Shares of Williams-Sonoma NYSE: WSM rocketed higher following the Q4 earnings report but don’t buy into the move just yet. While the results confirm the underlying thesis in the stock the pop in prices is as much to do with short-covering as anything else. The short-interest was running well above 11% coming into the report and it is likely many of those bears are closing their positions now if they aren’t getting margin calls. The takeaway is that this is a great company with a long road of growth ahead of it and price action will more than likely move lower again before it moves higher. 

Williams-Sonoma Has Mixed Quarter 

Williams-Sonoma had a mixed quarter in relation to the analyst's expectations but that is where the bad news ends. The company topped off a record-setting year with a record-setting quarter pulling in $2.5 billion in the 4th quarter. The revenue missed the Marketbeat.com consensus by about 330 basis points which is not what we want to see but the 9.2% gain over last year’s double-digit advance is impressive. On a comp level, systemwide comp sales are up 10.8% and are led by West Elm. Comps at West Elm are up 18.3% while Pottery Barn is up 16.2% and the core Williams-Sonoma label is up 4.5% on top of last year’s 26.2% comp and the two-year comp is even better. Systemwide comps are up 39% in the two-year stack and are on pace for continued growth in 2022. 

Moving down to the income portion of the report, the details get even better. The company reported margin expansion at both the gross and operating levels due to higher merchandise margin and volume-related operating leverage. The gross margin widened by 290 basis points and the operating margin by 310 basis points to leave earnings, both adjusted and GAAP, well above the consensus figures despite the revenue weakness. On the bottom line, the company reported $5.42 in adjusted EPS for a gain of 37% over last year and beat the consensus by $0.60.  

Williams-Sonoma Hikes Dividend 10% 

We were not surprised to see Williams-Sonoma increase its dividend and we won’t be surprised again next year when it happens for the 13th consecutive year. Not only is the company on track to grow again in F2022 but the dividend health and balance sheet are very attractive as well. The new payout is still only 25% of the Marketbeat.com consensus for earnings and that consensus is below our expectation for actual results. As for the balance sheet, it’s a fortress so no red flags there. 

The Technical Outlook: Williams-Sonoma Pops, Gains Capped 

Shares of Williams-Sonoma popped more than 10% at the open creating a gap but the gap has been mostly filled in the time since. The risk for the market now is resistance at the $165 level that may be amplified by short-sellers repositioning for another dip in price action. Assuming the market cannot get back above $165 we see price action retesting for support at or near the short-term moving average, possibly below it, and then moving sideways until there is more clarity in the economic outlook. Longer-term, Williams-Sonoma is on track for growth and dividend growth so are expecting to see new all-time highs within the next few earnings reporting cycles.