The housing sector remains a favored play amongst investors and Williams-Sonoma, Inc. (NYSE:WSM)’s latest results highlight the attraction of the sector. The company is firing on all cylinders and benefiting from a number of growth drivers that are helping to push its stock to all-time highs. Is now the time to pile in or to start to take profits?
I last looked at the stock in a previous article. The salient points raised then related to the necessity for the company to expand its online activities and international expansion programs. Both are needed in order to allow the stock to grow into its evaluation.
With a price-to-earnings ratio of around 20 times, it was hardly cheap. The company was stepping up capital expenditures this year to a range around $200 million to $220 million. All expansion programs come with risk, and there are no guarantees that international markets will take to its products as well as they do in the U.S.
The good news is that, if the latest set of results are an accurate precursor to future events, I think that the company is slowly de-risking these fears. Here are its key profit growth drivers, as previously discussed by the company.
- Overseas expansion with an immediate focus on Australia and the Middle East
- Investing in expanding West Elm and Pottery Barn
- Expanding its e-commerce facilities and direct-to-consumer (DtC) offerings in general
- Supply chain investments in order to drive multi-channel sales and margin expansion
- Continue to offer differentiated products in order to remain competitively relevant against online competition
One thing that is clear from these expansion plans is that all these measures are integrated into one coherent plan. Williams-Sonoma, Inc. (NYSE:WSM) is one of the most integrated multi-channel distributors in the U.S., and as it expands internationally that approach is being taken there as well.
The Australian expansion is working very well so far. Management describes itself as being “literally overwhelmed” by the response rates in its retail stores and e-commerce sites. It is currently planning on opening a new West Elm store in Melbourne, Australia, and moving in to London as well. Of course, the company needs these launches to go well because it needs to counteract the effects of short-term margin contraction that occur when investing in new sites. I would read the new store plans as a marker that the expansion plans are going well.
Moreover, the investments in e-commerce and multi-channel sales efforts are also working well. For example, the company managed to achieve a credible 1.9% growth with the core Williams-Sonoma, Inc. (NYSE:WSM) brand in comparable-brand revenues. The brand hasn’t been growing in a while and it’s not a big part of the expansion programs as a result, but the improvements were cited as a consequence of more efficient e-marketing activities. To put this into context, total company revenues grew 8.6%, with debt to cash up 11.9% (including high-teen growth in e-commerce), while retail channel growth was only up 5.8%.
