In the business of stocks, you are always searching for an analogue, something that can be used to clarify and strengthen your critical thinking so you can be divorced from emotion and become more thoughtful about stock picking.
In retail, Williams-Sonoma (WSM) is that retailer.
Last night, Williams-Sonoma reported what is pretty much the perfect quarter in a moment filled with excellent reports -- so many that it is easier to say which ones didn't explode to the upside -- JC Penney (JCP) and L Brands (LB) , both of which seem caught in a time warp that feels very death-rattle-like, especially in the case of L Brands, which cut numbers again and is seeing its core franchises, Victoria's Secret and, now, Pink, fade into darkness.
But now, back to our analogue.
We know that retail has had a series of unrelenting challenges over the past few years -- a strapped consumer, raw costs, Amazon (AMZN) , and now the President with his tariff-obsession with China. Intellectually, it seems too much for retail, which was supposed to wilt under these pressures. AMZN is an Action Alerts Plus holding.
When I look at the short positions -- the bets against retail -- they are crowded, meaning they have way too many people betting against them, for all of the reasons just mentioned.
Few have more shorts in their name than Williams-Sonoma. Why not? Strike one: it sells furniture, a dead category for ages. Two, it can't compete with Amazon on the scale that the Seattle giant offers. Three, it has tremendous freight costs, which we know has been a principal cause of shortfalls. Four, it has heavy mall presence in an era where, while not dying, the mall isn't exactly thriving either, unless you are of the strip variety, which is definitely not Williams-Sonoma. And five, a huge percentage of the world's furniture is made in China and the president is about to put on a 25% tariff on imports of that furniture.
That, theoretically, is way too much for Williams-Sonoma and its management team led by Laura Alber.
The company delivered stellar numbers on the top and bottom line, with accelerating growth and fantastic comps across all its many brands -- from Pottery Barn to West Elm to flagship Williams-Sonoma, at least on a two-year stacked basis.
Fifty-three percent of the company's business is online -- and it is by far its most lucrative channel, by some more than three times more lucrative because it is so well-honed and isn't hampered by brick and mortar costs. The web just makes it so much cheaper to do business.
As Alber said, and it isn't blowing smoke: "our powerful, multi-channel, multi-brand platform, together with our strong execution of our strategic initiatives in digital leadership, product innovation and operational excellence are having a positive impact on all parts of our business."
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The tariffs? Fifteen percent of the cost of goods sold would be subject to the $200 billion in tariffs currently proposed. Sounds bad? Wait: "we are aggressively working to mitigate the potential impact of these tariffs on our financial results while maintaining our customer value proposition." That includes moving production out of China -- because the company has a multi-country supply chain. The loser won't be the American consumer. It will be China.
Finally, the big drawback with furniture is visualization. My wife had a tiff with a West Elm manager when she wasn't allowed to take a chair 440 yards to our home in Summit, New Jersey to see what it would look like. She decided not to buy the table and chairs, a thousand-dollar-plus ticket lost. Now she would just visualize it using WSM's artificial intelligence techniques.
Brick and mortar? They are using the good stores as showrooms, the bad ones are being closed aggressively. Why have an unprofitable store in this day in age? Finally, they have added a robust loyalty campaign across all their myriad brands, which is producing 3x the sales from customers who adopt it.
In short, every objection answered in this analogue. Shorts won't like it; longs? I bet they take some of their considerable profits and shop there.