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Williams-Sonoma Stock Just Soared. Should You Buy This Peer Retail Stock Before April?

Motley Fool - Sun Mar 17, 6:00AM CDT

Artificial intelligence (AI) stocks have soared over the past year, but they're not the only big winners out there.

In fact, Williams-Sonoma (NYSE: WSM), the high-end home furnishings retailer, is up a whopping 138% over the last year as the stock bounced off bear-market lows that pushed its valuation down to bargain prices. It's also managed well through a challenging environment in home furnishings retail, and it just rewarded investors with a monster dividend increase.

Williams-Sonoma stock soared as much as 20% on Wednesday as it announced a 26% quarterly-dividend increase to $1.13 per share, and the company beat estimates on the top and bottom lines. It also announced a new $1 billion share-repurchase authorization.

The results showed that Williams-Sonoma, which also owns Pottery Barn and West Elm, was capable of growing earnings even as revenue fell, and the company also expected the business to stabilize this year, calling for flat revenue growth in 2024. Over the long term, the company reaffirmed its guidance of mid-to-high, single-digit revenue growth and operating margin in the mid-to-high teens.

The results were impressive enough that they even lifted shares of one of Williams-Sonoma's closest peers, RH (NYSE: RH), the company formerly known as Restoration Hardware. Shares of RH were up as much as 8% on Wednesday afternoon, showing that investors think that Williams-Sonoma's update is a good sign for RH.

RH hasn't reported fourth-quarter earnings yet, but the results are expected to come out by the end of the month. Should you buy the home furnishings retail stock before earnings? Let's take a look at where RH stands today.

A green sofa in a minimally furnished living room.

Image source: Getty Images.

RH vs. Williams-Sonoma

It's easy to see why RH would benefit from Williams-Sonoma's strong results. The two companies have a lot of similarities, as both sell home furnishings and cater to a higher-end clientele. The two retail stocks also surged during the pandemic, since demand for new sofas and coffee tables rose as Americans bought second homes, and many started working from home.

Over the last year, however, the two stocks have bifurcated, as RH has underperformed the S&P 500, while Williams-Sonoma has more than doubled. The Pottery Barn parent has managed to retain most of the revenue and profits it made during the pandemic, surprising Wall Street. RH, on the other hand, has seen revenue and profits fall sharply after the pandemic spike.

There are differences between the two businesses. RH tilts more toward the luxury end of the home furnishings market and is less diversified than Williams-Sonoma, which also sells kitchenwares and has three distinct brands, as well as the kids-focused Pottery Barn Kids and Pottery Barn Teens banners.

Under CEO Gary Friedman, RH has also made a risky move into experience-based businesses like hotels, restaurants, and plane and yacht charters, as well as an upcoming streaming service focused on architecture and design. Friedman believes those moves will burnish the RH brand and extend it into new categories, driving increased furniture sales, but it will take time for it to deliver meaningful results.

Williams-Sonoma, on the other hand, seems more disciplined, committed to returning excess cash to shareholders and sticking with its strengths.

Should you buy RH before its earnings report?

RH seems to have a deeper hole to climb out of than Williams-Sonoma right now. Its revenue fell 14% to $751 million in its third-quarter earnings report, and it posted a loss in the quarter after double-digit profit margins in the quarter the year before.

Friedman hasn't been shy about blaming the company's struggles on macroconditions, including elevated interest rates, which he says have frozen the housing market. Additionally, he said the home furnishings market has become more promotional, which has pressured RH's gross margins. In that light, Williams-Sonoma's 480 basis-point improvement in gross margin could bode well for RH.

However, the housing market isn't going to turn on a dime, and interest rates haven't budged. Wednesday's gains in RH stock also mean expectations for the earnings report are higher now.

Over the next few years, RH looks like a good recovery candidate as interest rates should come down and the housing market recovers, but there's no need to rush into the stock. A double-digit, post-earnings surge in RH seems unlikely, since the retailer is still facing ample macroheadwinds. However, accumulating a few shares of the stock over time before interest rates come down is likely to pay off.

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Jeremy Bowman has positions in RH. The Motley Fool has positions in and recommends Williams-Sonoma. The Motley Fool recommends RH. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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