Wednesday, January 7, 2009

Williams-Sonoma: 'Homing' In On Value

Williams-Sonoma (WSM) has been thrashed by the market. As a retailer of specialty home products, it has seen revenue declines on the order of 20% from last year thanks to the deflating housing bubble. The stock, however, has been beaten down by over 80% from its high at the height of the boom. With a price to book value under 1 and a P/E of 6, this stock appears to offer value at its current price.

The company has earned an average of $1.75 per share annually in the last four years, while the stock trades at just $8.31. While we may not see earnings return to those levels for some time, depending on the length and magnitude of this downturn, there are several reasons to believe the company can survive and be profitable in the coming years.

First of all, its debt to equity ratio sits at just 2%. While the company does have operating lease commitments, many of them expire in the next 1-3 years, giving the company the flexibility to either close cash negative stores, or negotiate costs downward.

Furthermore, the company's sales channels are not limited to retail locations. Almost half of WSM's revenue comes from catalogue sales. Since such sales require less in the way of assets, it is much easier to scale down costs in this business as compared to the bricks and mortar model employed by most retailers. Costs of a variable nature (rather than fixed) can be a tremendous strength when the economy is contracting.

The company also has a wide array of brands and store concepts, including Pottery Barn and West Elm, in addition to the Williams-Sonoma brands. This diversity reduces the risk that one brand or store concept that goes out of fashion will permanently impair the company.

While there is no current end in sight for the housing industry drought (which we've expored most recently by looking at inventory numbers), WSM looks like a stock that can outlast the downturn, and represents a great value opportunity for those with a long-term outlook.

Disclosure: None


Anonymous said...

Isn't looking at the past 4 years, a period of consumer and construction exuberance, a bad idea since they sell mostly consumer furniture goods?

Saj Karsan said...

Hi Anon,

You are correct, using only the last four years most likely overstates the earnings power of this type of company. However, this type of boom bust cycle is common in this industry (as we saw here), therefore we may be able to expect this to occur again in several years.