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Why Williams-Sonoma Stock Soared 35% in March

Motley Fool - Fri Apr 5, 6:38AM CDT

Shares of Williams-Sonoma(NYSE: WSM) stock jumped 35% in March according to data provided by S&P Global Market Intelligence. It reported better-than-expected results for the 2023 fourth quarter, and management provided positive guidance for 2024.

A resilient business model

Williams-Sonoma sells kitchen items and housewares through its network of upscale brands, which includes the Williams-Sonoma name, Pottery Barn, and West Elm. These stores cater to an affluent clientele that's resilient during economic fluctuations and can afford to pay full prices.

That doesn't mean the company is immune to the impact of inflation. Although it managed better than other housewares companies initially, it's feeling the pressure right now. Fiscal fourth-quarter (ended Jan. 28) sales were down 6.8% from last year, and full-year sales were down 9.9%. However, because of the high full-price sales rate, gross margin expanded for both the quarter and the full year. Operating margin was a strong 20.1% in the fourth quarter, and earnings per share (EPS) rose from $5.35 last year to $5.53 this year. Williams-Sonoma had a strong close to the year.

Investors can get a little more color from the brand breakdown. Pottery Barn sales increased 5.8% year over year, and Pottery Barn Kids sales were up 4%. Williams-Sonoma sales were down 2.5%, while West Elm sales were down 10.7%. West Elm is the most geared toward mass-market shopping of all the brands, and that clientele is cutting down on expensive items right now.

Investors celebrated the results, which came in better than expected. Management had been guiding for a 10% to 12% sales decline in 2023. It came in on the higher end of its target operating margin of 16% to 16.5% with a 16.4% margin. Management is guiding for sales to stay about flat in 2024 and operating margin to expand to 16.5% to 16.8%.

Williams-Sonoma is a forever stock

Williams-Sonoma raised its dividend 26% to $1.13 quarterly, and it yields 1.46% at the current price, on par with the S&P 500 average.

Williams-Sonoma stock jumped on the report, but it was already climbing before that, and it's up more than 50% so far this year. At the current price, it trades at a price-to-earnings ratio of 21. That's much more expensive than it usually is, but still an objectively reasonable valuation. That could imply some downward movement at some point for the stock to get in line with historical levels, but long-term investors can be confident that Williams-Sonoma will create shareholder value.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Williams-Sonoma. 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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