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Motley Fool Issues Rare “All In” Buy Alert
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Shares of Williams-Sonoma (WSM -6.15%) were sinking Friday after a warning about its long-term growth prospects marred an otherwise strong quarterly report.
As of 12:48 p.m. ET, the stock was down by 7.2%.
At a time when nearly every home goods retailer is struggling, Wiliams-Sonoma reported strong fiscal third-quarter results after the close on Thursday, bucking the industry trend.
For the period, which ended Oct. 30, its comparable sales rose 8.1%, giving the company two-year comps growth of 25% and three-year comps growth of nearly 50%, showing that it has continued to build on the surge it experienced during the pandemic.
Overall revenue increased by 7% to $2.19 billion, beating analysts’ consensus estimates of $2.15 billion. The retailer, which also owns the Pottery Barn and West Elm chains, has closed 30 stores over the last year as part of its store rationalization program, which explains why its revenue growth was lower than its comparable sales growth.
Gross margin fell by 220 basis points to 41.5% due to higher freight, shipping, and occupancy costs, but the company gained 150 basis points of leverage on its selling, general, and administrative costs as it benefited from higher sales.
Operating income increased by 2% on an adjusted basis to $340 million, giving it an operating margin of 15.5%. However, adjusted earnings jumped 12% to $3.72 per share thanks to its aggressive share buyback program. That essentially matched the consensus estimate of $3.71 per share.
Management maintained its guidance for the current fiscal year, calling for revenue growth in the mid-to-high single-digit percentages, and for operating margins to stay relatively in line with where they were last year, which was 17.6%.
However, the company seemed to pull its guidance for fiscal 2024. After previously saying it intended to hit $10 billion in revenue and maintain operating margins around 17.6% that year, management said Thursday that it won’t reiterate or update the 2024 guidance due to macroeconomic uncertainty.
Though near-term headwinds don’t seem to be showing up in its numbers, the company seems concerned that a recession in 2023 could impact the business. Management plans to provide 2023 guidance in its next earnings report.
The stock now trades for a price-to-earnings ratio of less than 8. Even if earnings temporarily dip next year, this is a well-established high-margin brand in home furnishings. At the current share price, it looks like a smart bet to beat the market.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Williams-Sonoma. The Motley Fool has a disclosure policy.
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