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New Homes And Italian Food: A Winning Recipe For Williams Sonoma |

New Homes And Italian Food: A Winning Recipe For Williams Sonoma

Williams Sonoma (WSM) is a leader in the home furnishing industry offering a variety of home goods through 5 different brands including Williams Sonoma (high-end cookware and kitchen essentials), Pottery Barn (casual home accessories including brand extensions PB Kids and PBTeen), West Elm (furnishings targeted at young professionals), Rejuvenation (lighting and house parts), and Marks and Graham. (apparel, bags, jewelry). The breakdown of sales for each brand are shown below.

Pottery Barn makes up about 40% of the $5.1 billion in sales but Williams Sonoma and West Elm each had around $1 billion in revenue during FY 2016 to round out the big three brands. Rejuvenation and Marks Graham round out the other brands which have grown revenue at over 25% for 4 consecutive years.


What stands out about WSM is how successful they have been at using a multi-channel, multi-brand approach that many retailers have espoused, but few have been able to implement. Of the $5.1 billion in revenue generated in FY 2016, more than half was attributable to online sales, which has grown at an annualized rate of 26% since 2000. While the focus has been on the rise of Amazon and the demise of brick and mortar retail, WMS has quietly built an e-commerce business that generates over $2.6 billion in revenues with growth of 26% annualized since 2000.

The Multi-Channel Approach

The multi-channel approach seems to be the best strategy to leverage an existing physical footprint to enhance sales. For example, for online sales with direct delivery and exchange, retailers can only expect a net sale of 77% of the original transaction versus 107% for online sales with in-store pick up and return. (Shopping Center Association of America) This is due to the fact that purchases made online that are returned directly present no opportunity for the consumer to make additional purchases. With the option to pick up and return in-store, however, consumers are more likely to purchase additional items that, according to the data, result in net sales that are higher than the original purchase.

According to emarketer, a properly implemented multi-channel approach also leads to a higher percentage of offline sales that are influenced by online presence. Web-influenced offline sales have increased from 47% in 2013 to 62% in 2018.

Figure SEQ Figure * ARABIC 7 – Sales Forecasts and Web-Influenced Sales

The chart below also highlights that consumers prefer to shop in-store for furniture and homeware. The only category with a higher consumer preference to buy in-store was groceries.

Furnishings

So besides its very successful multi-channel strategy, WSM benefits from consumer preferences to buy in-store. And at least when it comes to furnishings, there may soon be a tailwind that drives revenue growth.

According to the National Association of Home Builders, new home buyers spend considerably more than existing home buyers with an average new home buyer spend of $4,245 spent on Furnishings and $3,037 spent on Appliances in 2015. Compared to spending by existing home buyers, the difference is striking. New home buyers spent 50% more than existing home buyers on appliances and home furnishings in 2015. But whether consumers bought a new or existing home, the impact on furnishing and appliance purchases is obvious – home sales are a big driver.

Source: NAHB

So the housing recovery has been a good catalyst for consumer purchases of furnishing and houseware but much of the housing recovery has been driven by existing home sales – but that is about to change.

New home sales have lagged economist expectations because there hasn’t been an enough product to sell. New housing construction has been slow to gain traction and recently lost some steam. As the chart below highlights, housing starts have slowed since the beginning of this year. Despite the recent decline, however, home builder optimism is extremely high and the recent pullback in new housing starts should be only a temporary blip in an ongoing expansion. This should lead to renewed sales of new homes followed by increasing sales of home furnishings.

Americans Love Italian Food

If furnishings aren’t enough to get consumers to shop at WSM stores, this morning Williams Sonoma announced a new product collaboration with Chef Giada De Laurentis, the host of Food Networks’s Giada at Home. The food collection makes it easier for customers to prepare her signature dishes using pasta sauces, seasonings, and rubs used for grilling, sautéing, and roasting. According to Giada,

Italians put a lot of love into the food they cook which is why I’m so excited to bring that same experience to people in a way that’s accessible to everyone, no matter where you are. In creating this line with Williams Sonoma, my goal was always to make life easier for people – busy moms like myself, people who want to put a home-cooked meal on the table for their families but don’t always have the time to do it from scratch

As my wife would say,

Sign me up

But wait, there’s more. The line also includes tools for preparing and serving pasta meals. Each tool is made of stainless steel with beechwood handles and Giada’s autograph – if you’re into that sort of thing. And here’s the kicker: None of it is available on Amazon (AMZN).

All the more reason for consumers to put down their phones, even if briefly, and visit a Williams Sonoma store to check out the new line. Who knows, if you go during one of their signature cooking classes, you might even get to give the new line a test run.

“Alexa, where is the nearest Williams Sonoma store?”

Investment Thesis

Williams Sonoma is the epitome of a multi-channel retailer and even with pressure on many brick and mortar retailers from the ascent of online sales, WSM has embraced the consumer shift to the web while leveraging its brick and mortar footprint to drive higher overall sales. With the launch of two additional brands and the double-digit growth of both its new brands, I believe the recent pullback in the stock presents a compelling buy opportunity.

Despite the threat of Amazon and other online retailers – which is a legitimate threat – the impact to WSM’s business model will be less severe than the market currently anticipates and immune to other factors that will affect retailers in other product categories or have not fully embraced a multi-channel approach.

At a recent PE of 13.7, an expected earnings growth rate of 6.5% and a payout ratio of under 45% that could lead to further increases in dividends, WSM has both the potential for income growth and price appreciation in the short to intermediate term.

The Bottom Line

WSM is the premier home furnishing retailer and its online presence combined with its physical footprint provide it with a competitive advantage – especially considering that consumers prefer to research and buy furniture at the store. The same cannot be said about many other products and I believe the market is inappropriately grouping WSM into those categories. I like the stock primarily for its dividend growth potential and any upside price appreciation is just icing on the cake.

Williams Sonoma is a position in the Strategic Income Growth Portfolio within the Large Cap Dividend Growth category.

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Disclaimer: Please note, this article is meant to identify an idea for further research and analysis and should not be taken as a recommendation to invest. It is intended only to provide information to interested parties. Readers should carefully consider their own investment objectives, risk tolerance, time horizon, tax situation, liquidity needs, and concentration levels, or contact their advisor to determine if any ideas presented here are appropriate for their unique circumstances.

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Disclosure: I am/we are long WSM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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