Investors are hanging up their aprons on housewares retailer Williams-Sonoma (WSM), and I think the firm's goose is cooked. The stock was down some 6% at last check today and off about 36% since August.
WSM reported yesterday after the bell that it missed fiscal-fourth-quarter earnings expectations, guiding the current quarter lower as well. Management cut guidance for fiscal first-quarter earnings to $0.48-$0.52 per share vs. analysts' $0.55 consensus estimate. Executives also reduced revenue guidance for the full fiscal year to $5.2 billion from a previously estimated $5.3 billion.
Read Real Money chartist Bruce Kamich's analysis of WSM here.
The weaker outlook came after Williams-Sonoma reported just $1.52 in earnings per share in its latest quarter, or $0.06 below analyst forecasts. Revenues rose 2.9% to $1.59 billion, but that was below the $1.62 billion consensus that analysts had expected.
On the plus side, WSM did authorize a new $500 million stock-repurchase program that it plans to execute over the next three years. That's on top of a previously announced $750 million repurchase plan. Management also boosted the stock's dividend 6% to $0.37 a share.
But Williams-Sonoma faces a number of challenges in my opinion, including:
Ugliness at Williams-Sonoma Stores
WSM's flagship Williams-Sonoma chain is under fire. The unit's comps rose just 0.9% in the latest quarter, down from 2.8% during the same period last year. Revenues likewise grew a mere 1% vs. 3.8% a year earlier.
Williams-Sonoma stores basically had a lousy holiday season, which really hurt the company.
Cracks in Pottery Barn
WSM's Pottery Barn subsidiary is a mess. Same-store sales declined 2% in the latest period ¿ the chain's first first fourth-quarter pullback since 2009.
The division's PBteen stores are an even bigger disaster. Comps there plunged 12.2%, while revenues fell 2.7% to $254 million. PBteen's revenues grew 5.7% during the same period last year ¿ so again, the unit's 2015 holiday season was a huge disappointment.
WSM's margins are under pressure. Gross margin for the fiscal year as a whole came in at 37.1%, down from 38.3% a year earlier. Operating margin likewise fell to 9.8% compared to 10.7% in fiscal 2014.
WSM's customers are increasingly buying online, and that's crushing margins. Fulfillment and shipping expenses are consuming profits as e-commerce surpasses 50% of the firm's total revenues.
Williams-Sonoma reported yesterday that e-commerce revenue grew 6.4% during fiscal 2015 to hit $2.5 billion. That was 51% of WSM's total sales.
As an aside, don't you think WSM's e-commerce growth is pretty slow for a company with so many great brands? What's up with that?
WSM's inventories are out of whack. Inventories jumped 10.2% during fiscal 2015 to $978 million, but total revenues only rose 3.7%.
That can't be good for future margins. Watch for aggressive discounting going forward.
The Bottom Line
The only real bright spot to come out of yesterday's report was William-Sonoma's West Elm chain. That unit's fiscal 2015 revenues rose 14.8% to $821 million.
But that aside, it's hard to feel positive about Williams-Sonoma even though WSM is a well-managed company with strong brands.
Revenue is expected to be up about 3.5% this fiscal year and could rise 1% or 2% the year after that if nothing changes. Analysts also expect a consensus $3.48 EPS during the current fiscal year -- a 3.6% rise from last year.
The bottom line: Although WSM's shares have fallen sharply, I'm reluctant to buy into a company with so many challenges. At least three of its brands aren't growing as fast as they should, while margins are getting squeezed and it looks like WSM has too much inventory. For now, I'd recommend avoiding the stock.