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Williams-Sonoma: Not Your Traditional Retailer |

Williams-Sonoma: Not Your Traditional Retailer

Introduction

William-Sonoma, Inc. (WSM) is a multi-channel specialty retailer of high quality products for the home. They operate through many brands, including Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, PBteen, Rejuvenation, and Mark and Graham.

Williams-Sonoma is a brand selling products for the kitchen and home. The products include: cookware, tools, electronics, cutlery, tabletop, outdoor, furniture, and cookbooks. The Pottery Barn is a home furnishings brand that offers furniture, bedding, bathroom accessories, rugs, curtains, lighting, and decorative accessories. The Pottery Barn Kids segment sells products for nurseries, bedrooms, and play spaces, and the PBteen segment provides furniture, bedding, lighting, and decorative accents for teen bedrooms, dorm rooms, study spaces, and lounges. Rejuvenation is a brand selling high-quality lighting, hardware, furniture, and home decor that is inspired by history. And their final segment is Mark and Graham that sells men’s and women’s accessories, small leather goods, jewelry, key item apparel, paper, home decor, and seasonal items.


Business Model Analysis

The company’s business model is split pretty evenly between retail store sales and e-commerce sales. The retail store sales accounted for 48% of revenues for 2016 and e-commerce online sales accounted for 52% of revenues for 2016. The company operates 627 total company-owned stores. with 583 of them in the United States, 24 stores in Canada, 19 stores in Australia and 1 store in the United Kingdom. The company also has multi-year franchise agreements with 78 stores with 36 stores in Mexico along with an e-commerce website, 33 stores in the Middle East, 5 stores in the Philippines, and 4 stores in South Korea, with plans to open 30+ new stores in South Korea in the next 10 years. As well as plans to set up their e-commerce site in 2018.

Image Source: Investor Presentation Williams-Sonoma September 2017

Financials

The company has a current market capitalization of $4.3B. The company has $91M in cash and cash equivalents and no long-term debt, but still has other liabilities they are responsible for. The company reported full-year revenue for 2016 of around $5B, as well as net income of $305M and EPS of $3.41. The revenues of 2017 for the first three quarters is around $3.6B and net income of $164M. The company also had EPS of $1.90. The operating margin for 2016 was at 9.23% and free cash flow of around $280M. The company has a significant short interest with 24% of the float currently short on the stock. The management has kept a balanced capital allocation between rewarding shareholders and investing in the future of the business. They seem well positioned to take care of opportunities that present themselves in the future.

Management

The CEO of the company is Laura J. Alber and she has been in that position since 2010. She is a large shareholder in the company herself and the total ownership of all insiders of company is around 9%. This aligns the shareholders with the management of the company so that they all want the same thing with the success of the business. The return on equity for the company is 26.5%, so the management has been doing a good job of creating equity for shareholders. It is great to see management of a public company focused on the growth of the business for the benefit of the shareholders. Management has bought back $151M in stock repurchases in 2016 as well as paid out $133.5M in dividends in 2016. These decisions are returning money to shareholders and making the available shares more valuable.

Growth/Valuation

The company’s current growth is mostly focused in the United States, but they have been targeting international growth. The United States market for furniture is around $100B, but the market outside of the United States is around $500B. Williams-Sonoma has grown their global revenues from 3% to 6% of total revenue from 2010-2016. They have two different models of their business growth with company-owned stores and franchised stores. They use the different models in several other countries that they have expanded into. The company-owned model is in effect in Canada where they operate 24 stores and in Australia where they operate 19 stores. And 1 store in the United Kingdom that they operate.

Image Source: Investor Presentation Williams-Sonoma September 2017

The franchised store model has operations in Mexico where there are 36 stores as well as their e-commerce operations. And in South Korea, there are 4 stores with plans to open 30+ new stores in the next 10 years. South Korea is going to open the e-commerce part of the business in 2018 as well. The Middle East has a total of 33 stores that are operated. And a total of 5 stores that are operating in the Philippines.

The company also has great growth opportunities with their West Elm brand. The segment had revenues of $972M in 2016 and has plans of opening 10 new stores in 2017. The segment also has started West Elms Workspace for the sale of commercial office furniture. The West Elms Hotels segment is going to build relations with partners to construct properties in specific markets with contract and hospitality initiatives.

Image Source: Investor Presentation Williams-Sonoma September 2017

Conclusion

The company has many segments that are experiencing significant growth in their markets. There are many catalysts that could help the company to experience amazing growth opportunities. When some of these opportunities are realized, and the stock starts to respond with an increased share price, I believe that the high short interest will cause a short squeeze in the stock. This could happen at any time and will reward those shareholders that are willing to wait. Double-digit growth in some of the smaller segments and continued growth in core brands as well as expansion of the global footprint has this company positioned to do great things. With all of this potential, the company is going to grow much faster than the segments that they operate in. This company has been thrown out with all the other retailers, but their model does not fit the same mold as those that have been struggling. They are finding a way to navigate around the problems of traditional retailers and I believe that the strategy that they have developed will pay off for them.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WSM over the next 72 hours.

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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