Williams-Sonoma (NYSE:WSM) Falls 6% After Earnings Shocker

Buy-The-Rumor And Sell The News On Williams-Sonoma

Williams-Sonoma (NYSE:WSM) reported earnings on Wednesday after the bell and beat the consensus estimates on all counts. The company delivered better than expected comp sales across all brands with most delivering an acceleration over the previous quarter and year. The strength was driven by a robust increase in eCommerce sales and yet shares are down nearly -6.0% in premarket trading. The reason is simple, after seeing so many other retailers deliver solid performance in the 2nd quarter the expectations were very high Williams-Sonoma would too, and it did.

Williams-Sonoma Beats Consensus On All Metrics

To say that Williams-Sonoma beat consensus on all metrics is a little misleading because of one thing. We already knew the analyst’s estimates for earnings in the 2nd quarter were too low. That is the number one theme of the 2^nd quarter reporting cycle, and the analyst have done little in the way of revisions even for such late-reporting companies like Williams-Sonoma. That said, revenue growth of 8.8% is only about 130 basis points above target which is a smaller margin other retailers produced.

The bottom line results are more exciting but still weren’t enough to spark an uptick in price action. The GAAP and Adj EPS both beat by about $0.80 or 80% due to an increase in margins. Gross margins increased on improved merchandise margins, a development that is expected to stick in the coming quarters.

The company saw strength in all brands but the eCommerce/Omni-channel results are what I want to focus on. The company saw its eCommerce sales jump 46% on a YOY basis to account for more than 75% of revenue. That's a big deal because Williams-Sonoma and its brands like Pottery Barn and Pottery Barn Kids were already mostly eCommerce to begin with.

Williams-Sonoma Accelerates Strategic Plans

What we have here is another classic case of buy-the-rumor and sell-the-news. What we need to keep in mind is that this company reported an acceleration of growth, not deceleration, and provided a very encouraging outlook for the future. Because of the changes in shopper habits driven by the pandemic and the company’s success in the eCommerce channels, it is accelerating the shift to digital that was already underway (I think I’ve heard that elsewhere?). What that means is a fundamental shift in the way the company does business and, in this case at least, an outlook for mid to high-single-digit revenue growth over the long-term.

“We delivered an exceptional second quarter with net comp growth of 10.5% and demand comp growth of almost 19%, operating margin expansion to nearly double that of last year, and record earnings growth of over 100%. E-commerce again drove our results growing 46% in the quarter, and our stores performed better-than-expected, improving throughout the quarter as we re-opened. In a time when home is more important than ever, we have taken this opportunity to push our longer-term plans,” said Laura Alber, President and CEO.

Williams-Sonoma Is A Dividend-Grower

Williams-Sonoma is a dividend-payer with a history of distribution increases investors should take note of. The company ended that streak this year due to the pandemic like so many others have done but, unlike many others, Williams-Sonoma is in a position to resume that trend very soon.

The 2Q report included the 3rd quarter dividend declaration of $0.48, a payout-ratio of 28% GAAP earnings, and the balance sheet is a fortress. The company has more than $11 per share in cash and equivalents, very little long-term debt, and ample unencumbered free-cash-flow (not to mention an outlook for earnings growth). Even if there is no distribution increase, today’s sell-off has the yield above 2.0%.

The Technical Outlook: Williams-Sonoma Is A Buy

Today’s sell-off has the shares down more than -5.0% in pre-market trading but there are two factors to consider before you get bearish. The first is that the results are great and the outlook is too. The market may have been a little disappointed but not enough to reverse price action and create a bear market. If anything today’s price action is profit-taking in a growth stock after rising more than 200% in five months.

The second is that short-interest was fairly high going into the report. At 7.25% it isn’t so high as to cause concern but it is high enough to add downward momentum to what is otherwise a healthy market reaction to the news. When prices start moving higher again that short-interest will help fuel the rally.

Price action may continue to show some weakness in the near-term but I suspect support will show itself soon. On an intraday basis, a touch to the short-term moving average may be enough to spark some buying and/or short-covering. Once support begins to show itself I suspect price action will move back to the $100 level quickly and then extend this rally over the next 6 to 12 months.