What’s Driving Williams-Sonoma’s Stock To New Heights?

by Trefis Team
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After serving up a healthy 125% rise since the March 23 lows of this year, at the current price of around $84 per share we believe Williams-Sonoma stock (NYSE: WSM) has reached its near term potential. Williams-Sonoma’s stock has rallied from $37 to $84 off the recent bottom compared to the S&P which moved 42% over the same time period. A surge in demand for home category products including kitchen appliances and cooking accessories, work-from-home furniture, and outdoor entertainment, as well as a strong Q1 2020 (ending March) results, has led to the stock beating the overall market. Moreover, Williams-Sonoma stock is up 75% from levels seen in early 2018, over two years ago. While WSM stock has recovered and is more than 10% ahead of the figure it was at in February before the drop due to the coronavirus outbreak becoming a pandemic, the stock seems to be fully valued as of now.

Some of the stock price rise of the last 2 years is justified by the roughly 11% growth seen in Williams-Sonoma’s revenues from $5.3 billion in 2017 to $5.9 billion in 2019. This, combined with a 1.2x jump in net income margin from 4.9% in 2017 to 6% in 2019, and a 9% reduction in share count due to stock repurchases worth $640 million, helped earnings per share swell 51%.

Finally, Williams-Sonoma’s P/E ratio remained constant around 16x over 2017-2019. While the company’s P/E has now increased to 18x, it seems to be fairly valued when the current P/E is compared to levels seen in the past years- P/E of 16x over 2017-2019. The stock seems to be fully valued for now and is unlikely to see significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard ‘Why Williams- Sonoma Stock moved 74%?’ provides the key numbers behind our thinking, and we explain more below.

How Is Coronavirus Impacting Williams-Sonoma’s Stock?

The global spread of coronavirus has affected industrial and economic activity across the world. However, the company’s business has remained resistant to the outbreak of coronavirus. Williams-Sonoma’s Q1 2020 (ending March) results clearly highlighted the resilience of the company’s business model, with the company’s revenue remaining flat at $1.24 billion while delivering a positive comparable growth of 2.6%. The company derives roughly half of its sales from its e-commerce platform, and as people transition toward online shopping in the lockdown, this trend has helped the company’s business. Additionally, the company continues to enjoy a strong clientele, who have sufficient funds and savings to spend on the house décor and renovation. To sum things up, William-Sonoma’s business has remained largely unaffected from the outbreak of coronavirus and is likely to remain upbeat for at least the next couple of quarters as more people spend on their homes to make them adaptable to the new work from home culture.

Moreover, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations, which should further support the company’s growth. Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture and complements our analyses of Coronavirus impact on a diverse set of Williams-Sonoma’s multinational peers.

While Williams-Sonoma is doing well, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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