San Francisco-based Williams-Sonoma, Inc. (WSM) is the world’s largest digital-first, design-led and sustainable home improvement products retailer, with a $14.02 billion market cap. With the rising demand for home furnishings and related products as people get accustomed to remote lifestyles, WSM’s profit margins have increased significantly.

In its fiscal second quarter, ended August 1, WSM’s revenues increased 30.7% year-over-year to $1.95 billion. It surpassed a $1.81 billion consensus revenue estimate by 7.7%. Its EPS came in at $3.21, which was 23.5% higher than the Street’s $2.60 estimate. Its EBT and net income improved 80.6% and 82.90%, respectively, from the prior-year quarter to $323.14 million and $246.07 million.

Shares of WSM have gained 10.3% in price since the earnings report was released on August 25.

Here’s what could shape WSM’s performance in the near term:

Bolstering Shareholder Returns

On August 25, WSM increased its quarterly dividend by 20.3% to $0.71 per share. The company pays $2.84 as dividends annually, yielding 1.53% at  the current share price. Its 2.61% four-year average dividend yield is 42.5% higher than the 1.83% industry average.

On the same day, the company approved $1.25 billion for share repurchases. This is in addition to an  existing $560 million it has designated for share buybacks. WSM has repurchased shares worth $135 million in its  fiscal second quarter (ended August 1) and $450 million in 2021 (as of August 25).

These share buybacks reflect management’s confidence in WSM’s operations and business model and align with its aim of maximizing shareholder returns. Moreover, these share repurchases should increase EPS  for remaining shareholders.

ESG Commitments

WSM plans to achieve carbon neutrality in its internal operations by 2025. Also, the company has set a science-based target for emissions reduction across its entire value chain by 2030. In its annual sustainability report, WSM announced its latest target—having at least 75% of its product portfolio represent one or more of its ESG initiatives by 2030.

Given the rising popularity of ESG investing, particularly among younger generations, WSM’s commitment to reduce its carbon footprint and meet additional social and governance initiatives should attract investors.

Growth Strategy

WSM has been leveraging its three key differentiators—exclusive in-house design capabilities, digital-first channel strategy, and favorable macroeconomic backdrop to expand its market reach and improve its financials.

Regarding this, WSM President and CEO Laura Alber said, “The momentum we are seeing in our business and our winning positioning set us up to continue to take share in a fractured market. We do not see any evidence that growth trends are waning, and in fact, we see favorability in the macro environment as more people prioritize their homes and home décor. We believe we are at the intersection of a transformative change that will accelerate the growth of our industry, and our market share within the industry. In addition, our growth strategies are gaining traction faster than we predicted, and our key differentiators are further distancing us from our competition.”

Outlook

WSM expects the current macroeconomic tailwinds to continue in the coming months. As a result, it has raised its financial outlook for 2021. The company expects its revenue growth rate to be in the high teens to low twenties range, while its non-GAAP operating margin is expected to be between 16% - 17%. In addition, WSM expects to achieve its long-term goal of generating $10 billion in revenues in 2024, a year before its  original target. The company also expects its profit margins to improve over the next couple of years.

A $8.02 billion consensus revenue estimate for the current year indicates an 18.3% improvement year-over-year. Analysts expect WSM’s EPS to rise 43.4% from the same period last year to $12.96 in the current year. Also,  the company’s EPS is expected to increase at a 15.7% CAGR over the next five years. WSM has an impressive earnings surprise history; it topped Street EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Rosy Prospects

WSM has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

WSM has an A grade for Quality and a B for Momentum. Its 68.86% net income margin is 300.1% higher than the 17.21% industry average, justifying the Quality grade. In addition, the stock is currently trading above its 50-day and 200-day moving averages of $162.02 and $161.82, respectively, in sync with the Momentum grade.

Of the 64 stocks in the B-rated Home Improvement & Goods industry, WSM is ranked #20.

Beyond what we’ve stated above, we have rated WSM for Value, Growth, Sentiment, and Stability. Get all WSM ratings here.

Bottom Line

WSM is a leading company in the retail home improvement space, owning and operating several renowned brands like Williams Sonoma, Pottery Barn, West Elm, etc. Because the remote lifestyle is here to stay, WSM should witness stable growth in the coming quarters. In addition, the company’s dedicated capital allocation strategies to bolster shareholder returns and ESG commitments make it an ideal investment bet now.

How Does Williams-Sonoma (WSM) Stack Up Against its Peers?

While WSM has an overall B (Buy) rating, one  might want to consider looking at its peers HNI Corporation (HNI) and Mohawk Industries, Inc. (MHK), which have overall A ratings (Strong Buy).

WSM shares were trading at $181.62 per share on Wednesday morning, down $5.08 (-2.72%). Year-to-date, WSM has gained 80.36%, versus a 21.73% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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