I didn't think the company was cooking up much of anything. Turns out I was right! The stock churned around for six months between $43 and $45. But the shares were able to launch a major assault last March into the high $50s. With the stock around $57, does WSM have more room to run?
Toward the end of March, Williams-Sonoma was able to rally after it beat the Street estimate by $0.05. Investors ignored the fact that $0.04 of the beat came from a one-time tax rebate and that management reduced first quarter guidance. The stock rose on the news.
WSM also announced it would launch a $750 million stock buyback and increase the dividend by 41%. Then, in May, the company beat the consensus estimate by $0.05 (using more earnings management) and promptly reduced second quarter guidance.
If you take the mid-point of management's fiscal 2014 guidance, and work backward, the third quarter and the fourth quarter will come in significantly weaker than last year. For example, the third quarter is expected to grow revenue just 6.8% year-over-year and the fourth quarter is likely to grow just 2.3%. Last year, those quarters grew 8.9% and 10.9%, respectively.
When you total it up, WSM is expected to grow revenue just 5.8% for the year. Last year, the company managed to grow 8.65%. Gross margins are expected to be flat and earnings per share, including a bunch of one-time items, are expected to increase 8.5%. Revenue estimates for next year (FY15) are no better. Analysts expect a 6.4% increase. And earnings per share are up simply because of stock buybacks. That's no way to run a retailer.
If you look out to next year, earnings per share are expected to be $3.20. In the past, investors have only been willing to pay 18 to 19x forward earnings for Williams-Sonoma. That means the stock probably gets to $60 (perhaps you could stretch it to the low $60s). With the run the stock has had, do you really want to try to capture three points of upside? To me, there's not much room to run.