Why Is Williams-Sonoma (WSM) Down 4.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Williams-Sonoma (WSM). Shares have lost about 4.8% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Williams-Sonoma due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Williams-Sonoma (WSM) Q2 Earnings Beat on E-commerce Sales

Williams-Sonoma Inc. reported better-than-expected second-quarter fiscal 2020 results, courtesy of accelerated e-commerce growth.

Earnings & Revenues

Non-GAAP adjusted earnings of $1.80 per share surpassed the Zacks Consensus Estimate of 99 cents by 81.8%. The figure also increased from 87 cents per share a year ago.

Revenues of $1,490.8 million beat the consensus mark of $1,426 million by 4.5% and grew 8.8% year over year. The better-than-expected revenues were driven by 46% notable acceleration in net comps growth of the e-commerce business, which includes purchases made through the company’s omnichannel services such as curbside pickup and shipping from stores. E-commerce penetration reached an all-time high of almost 76% of total revenues, buoyed by content-rich online experience and marketing strategies.

Comps increased 10.5%, higher than 2.6% growth in the fiscal first quarter and 6.5% in the year-ago period. Comps in Williams Sonoma increased an impressive 29.4% against 1.1% decline registered in the prior-year quarter. Comps in the Pottery Barn brand grew 8.1% compared with 4.2% growth in the prior-year quarter. Pottery Barn Kids and Teen’s comps rose 4.8% compared with 3.7% growth in the year-ago quarter. The West Elm brand’s comps rose 7% versus 17.5% growth in the year-ago quarter.

Operating Highlights

Non-GAAP gross margin was 37%, up 160 basis points (bps) from the year-ago period. The upside was primarily caused by higher merchandise and occupancy leverage in the quarter.

Non-GAAP selling, general and administrative expenses accounted for 23.9% of net revenues compared with 28.9% in the year-ago quarter, reflecting an improvement of 460 bps. The upside was driven by advertising leverage owing to gradual shift in advertising spend from catalog to more efficient digital initiatives. The company also generated solid returns from advertising investments due to strength of the multi-channel model. Furthermore, non-GAAP operating margin nearly doubled from the year-ago period to 13.1% for the quarter.

Financials

Williams-Sonoma reported cash and cash equivalents of $947.8 million as of Aug 2, 2020 compared with $432.2 million on Feb 2, 2020. Recently, it also improved financial flexibility by adding $0.5 billion of liquidity through the $300-million term loan extension to January 2022 and addition of a $200-million, 364-day unsecured revolving credit facility.

Notably, the company generated more than $216 million in operating cash flow for first-half fiscal 2020.

It also declared quarterly cash dividend of 48 cents per common share, reflecting strong commitment to return value to shareholders.

Fiscal 2020 Guidance Suspended

Given unpredictability stemming from the coronavirus outbreak, it did not provide its full-year guidance.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 34.07% due to these changes.

VGM Scores

At this time, Williams-Sonoma has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Williams-Sonoma has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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