The retail sector is struggling in 2023, and Williams-Sonoma (NYSE: WSM) is not immune. Shifting consumer habits and a general pullback in spending on discretionary items are taking a toll on the business. However, Williams-Sonoma is among the highest-quality retail stocks and a resilient name for income investors. It doesn't hurt that WSM stock trades at a price like last year's fashions.

Because of its history, position and outlook, Williams-Sonoma is also a good target for buy-and-hold investors with some time until retirement and a penchant for compounding their dividends. The combination of sound management, long-term growth, dividend distribution, distribution growth and share repurchases will deliver. 

Williams-Sonoma is well-positioned in retail 

Williams-Sonoma is well-positioned in retail due to its brands and omni-channel presence. A solid player in eCommerce long before the COVID-19 pandemic, the company has only solidified its position since. The company's brands include its flagship Williams-Sonoma, Pottery Barn, Pottery Barn Kids and West Elm. Each brand benefits from foot, catalog, and digital sales channels. 

Williams-Sonoma's target clients are also more likely to spend on discretionary items, being more affluent and discerning than average consumers. A sign of this is in the Q3 results, which came in mixed. The critical detail is that a downturn in spending was offset by wider margins and bottom-line strength attributed in part to full-price selling. 

Williams-Sonoma targets 5% to 9% annual revenue growth

Williams-Sonoma is struggling in 2023, with Q3 revenue down 15% compared to the prior year. The caveat is that the 15% decline is less than the growth seen before and during the pandemic and has revenue running 35% above the 2018 pace. Growth is expected to return next fiscal year and will be compounded by wider margins. The company reported a record Q3 operating margin of 17% and expects strength to continue. Margin widened on the combined impact of full-price selling, lower cost and expenses and may improve further. However, the company only expects a 15% average operating margin over the long term. 

Williams-Sonoma is a value for dividend investors 

Williams-Sonoma is a deep-value among retailers. The company trades at only 11.5X its earnings while paying a solid 2.15% yield. Other high-quality retail stocks with healthy dividends and a history of distribution growth trade in a range of 17X to 35X. This group includes Target (NYSE: TGT), Walmart (NYSE: WMT), Costco (NYSE: COST), TJX Companies (NYSE: TJX), Home Depot (NYSE: HD) and Lowe's (NYSE: LOW).

The Williams-Sonoma dividend is extremely healthy. The company pays less than 25% of its earnings consensus and consistently outperforms the bottom line, so coverage is good. Because the balance sheet is a fortress with no corporate debt and ample cash, there is no fear of distribution cuts or suspensions. Other details of note include the company has increased the payout for 18 years, is on track to continue annual increases and should easily make it past the Dividend Aristocrat mark. Dividends are compounded by share repurchases, which have the share count down 4% in 2023 and 18% since 2020. 

The analysts undervalue Williams-Sonoma 

There are a substantial number of analysts with ratings on Williams-Sonoma, and they are undervaluing the market. However, their activity in the 2nd half of 2023 is positive and helping to lift the market with upgrades and price target increases. The consensus rating is up to Hold from Reduce, with a rising price target compared to the prior quarter. The most recent targets have the stock trading above the consensus of $143, and the high target of $180 offers some upside. The Q3 results and guidance should extend the trend of rising price targets and help to lead the market higher. 

The technical outlook is good. The market peaked during the pandemic and has since corrected and put in a solid bottom. Now, the market is moving higher within a trading range and may retest the top within months. The post-Q3-release action is very bullish, with a 5% gain, a large green candle for the week, and a new high, all confirmed by the indicators. The MACD and stochastic align with a trend-following signal that should take the market back to the top of the range.