Trends in the later stages of Q1 accelerated significantly for Williams-Sonoma (WSM) as a surge in digital channels helped drive a +2.6% comp sales gain. Top-line momentum has continued into May. Commentary from the call suggests to us upper income consumers remain well positioned despite broader macro uncertainty.
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Yesterday PM WSM posted comps that beat across each segment including positive comps in its eponymous William Sonoma brand. Operating margins of 11.6% met Cons and adj. EPS of $2.13 beat Cons of $2.05. WSM noted strong comps QTD until 3/11 and solid MSD comps in e-comm since then but withheld guidance for 2020. WSM shares +23%.
With concerns over the Coronavirus spreading, we think US Retailers will likely be viewed as near-term relative safe-haven stocks given limited direct exposure to China. However, should the virus spread into a pandemic, especially in China, we see a greater impact to US retailers from indirect supply chain exposure or US GDP growth.
To help gear up for 2020 we analyzed 2019 performance, identified 10 key themes into 2020, analyzed post Q3 earnings reaction, and analyzed the key issue facing each stock under coverage into 2020.
WSM reported Q3 2019 results on Nov. 21st. Consolidated comps of 5.5% beat consensus of 5.1% and our 5%. At the brand level, Pottery Barn came in better than expected, but West Elm, Williams-Sonoma, and PB Kids each missed consensus slightly. EPS of $1.02 beat consensus of $1.01 and met our estimate. WSM narrowed the low end of its comp, revenue and EPS guides for the full year, but we note that prior consensus had been positioned towards the high end of prior guide.
Two weeks ago, we assumed broader coverage of Hardlines and Internet Retail and issued four deep dive reports including a downgrade of LOW to Peer Perform and reiterated HD, BBY, and W at Outperform. We also assumed coverage of AMZN, ULTA, WSM, RH, TSCO, and SHW (see our 1-page tear sheets here). Finally, we utilized the broader coverage as an opportunity to reposition our legacy auto part retail coverage and downgrade AAP to Underperform and upgraded ORLY to Outperform.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
2Q19 Promo Rating: “Flat;” 1Q19 Rating: “Flat.” Our 2Q19 Promo Score was slightly worse than 1Q19, with a score of 36 out of 100 (versus 37 out of 100 in 1Q19).
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