Image: Williams-Sonoma is facing revenue pressure, but free cash flow trends are robust. Image Source: Williams-Sonoma
By Brian Nelson, CFA
On March 13, Williams-Sonoma (WSM) surprised the Street to the upside with better-than-expected fourth quarter results, a huge dividend increase, and the launch of an incremental $1 billion in share repurchases. We expect to raise our fair value estimate as a result of the good news. Though the firm’s sales continue to face pressure due to a weakened housing market, its cash-based sources of intrinsic value are robust, and shares yield 1.6% on a forward estimated basis.
The omni-channel specialty retailer for home goods that sports brands such as the Pottery Barn, West Elm as well as its namesake faced total revenue pressure in the fourth quarter of 7.1%, but better operating margin performance to the tune of a 90 basis-point year-over-year increase helped to mitigate the pace of decline (-2.5%) in operating income in the quarter. Its operating margin was a robust 20.1% in the quarter, well above targeted ranges. Diluted earnings per share increased to $5.44 from $5.28 in the quarter thanks heavily to buybacks.
Total comparable store sales fell 6.8% in the quarter as its West Elm brand experienced a 15.3% decline, while Pottery Barn also faced sales pressure of 9.6%. Its Williams Sonoma brand, however, bucked the trend to register same store sales growth of 1.6% in the quarter. All three levels were better than the full-year numbers, implying improvement across the board. On a firm-wide basis, the company reported a 4-year stacked comp of 29.1% for the fourth quarter, so while near-term pressures persist, the company has navigated the slowing housing market quite well the past few years.
At the end of the quarter, Williams-Sonoma had ~$1.26 billion in cash and cash equivalents, up materially from $367.3 million at the end of last year’s quarter. Though the specialty retailer has material long-term operating leases, its considerable improvement in net cash was welcome. Cash flow from operations improved to $1.68 billion in the fiscal year, up from $1.05 billion in the year-ago period, while capital spending fell on a year-over-year basis, driving material free cash flow improvement.
The cash-flow performance was good enough for Williams-Sonoma to raise its dividend 26% and launch a new $1 billion stock buyback program. For the fiscal year ended January 28, 2024, the firm’s free cash flow generation was ~$1.49 billion, which compares to $232.5 million in cash dividends in the period, showcasing considerable coverage of the payout with respect to free cash flow. For a retailer, Williams-Sonoma’s cash-flow characteristics are quite robust, in our view.
We like Williams-Sonoma’s niche in home furnishings, and while revenue pressure continues, the firm’s long-term growth goals of mid- to high-single digit revenue growth with a 15% operating margin floor remain achievable, in our view. For fiscal 2024, management is targeting revenue in the range of -3% to 3%, with comps in the range of -4.5% to 1.5% and an operating margin in the range of 16.5%-16.8% (was 16.1% in fiscal 2023). The company is one we’re watching closely for addition to the Dividend Growth Newsletter portfolio.
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Tickerized for WSM, ETSY, W, RH, LOVE, FND, LZB, ETD, ARHS
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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