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Is Williams-Sonoma Getting To A Good Place?

Posted: Sep 03, 2009 11:22 AM by Greg Sushinsky

Tickers in this Article: JEN, KIRK, BBBY, PIR, WSM

Home furnishings specialty retailer Williams-Sonoma (NYSE:WSM) had a mixed second quarter, with profits essentially flat while revenue was down, but Wall Street is encouraged by the company's direction and its outlook for the rest of the year and beyond. Potential investors might want to take a look at what's going on with the company.

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The Background for Earnings
The home décor area has been beaten down, having the doubly bad mojo of being both retail and something to do with the home, so the consumer has pretty much fled. There has even been the bizarre development of product recall for dangerous window shades. While product recalls are usually associated with autos or machinery, this shows how the home furnishing field has had a cloud over it.

Williams-Sonoma's revenue was off 18% for the quarter, while its net income was flat if charges are included, 5 cents per share if the charges are excluded. Still, the lower sales and revenues are part of the dreary picture of the retail home furnishing scene, as others in the industry show, yet there are still pockets of profitability.

Pier One Imports (NYSE:PIR) isn't one of them, however. This company that seems to post only negative numbers saw its problems extend, but some other competitors have fought through the tough earnings scene with more success. Bed, Bath & Beyond (NYSE:BBBY), the leader in the home décor field, has posted solid earnings throughout this recession and looks like it'll come out of this economic downturn ready to further cement its dominant position and shine.

A couple of much smaller companies, Kirkland Industries (Nasdaq:KIRK) and Jennifer Convertibles (NYSE:JEN), have done well and look to continue to do so. Kirkland, which sells art, lamps and other such furnishings, squeezed out a second quarter profit on flat revenue, and gave a very encouraging overall report for its outlook for the year. Jennifer Convertibles, which has Ashley Furniture Stores, will be opening a couple of new ones in the New York City metro area. While this may seem like a minor development, positive profit forecasts and expansion, however slight, are good signs.

Williams-Sonoma Overview
The flat quarter on declining revenues for Williams-Sonoma is not their norm, even for this recession, as their year-over-year income has remained profitable. The stocks of the home furnishing companies have also been lifted recently, so investors - or at least traders - see something in the group they like. Value investors should be careful, though, as even the earnings loser, Pier One, has found buyers for its stock. Although some value investors have happily picked up Williams-Sonoma stock, feeling it's been crushed in comparison to its long term prospects, other observers suggest that Williams-Sonoma shares, having already risen with this group, are now too pricey.

Profits Unleashed?
Goldman Sachs' analyst Matthew Fassler wrote highly positive comments on Williams-Sonoma, suggesting its profit potential is being "unleashed." The company has continued tight cost controls, and has cautiously cited an improved sales trend, while analysts see a much more robust 2010. Of course, analysts' estimates should always be heavily scrutinized, but the home furnishing area is one where when consumers return, there should be some pent-up demand for refurbishing home décor along with a more favorable climate for Williams-Sonoma's high-end kitchenware and other such items.

The Bottom Line
Williams-Sonoma, like Bed, Bath & Beyond, is a retailer that should be around for the long haul, so watch the sales trends carefully and pick a favorable price entry point on the stock, if you want to invest in this long-term star specialty retailer. (For more, read Top 4 Things That Determine A Home's Value.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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