Sales in Q4 2008 fell almost 27%, which would be enough to send many companies deep into the red. With WSM's relatively flexible cost structure, however, it managed to eek out a profit. With a drop in sales of that magnitude, one would ordinarily expect a battered gross margin and ballooning SG&A costs as a percentage of sales. The company has managed to cut its costs drastically however, showing a gross margin of 34% and SG&A costs as a percentage of sales only 1.5 points higher than last year (after backing out impairment charges).
Many of the company's cost cutting initiatives won't be seen until next year's results, however. As the company gets its cost structure in line with depressed demand (including by renegotiating certain of its operating leases), it expects be able to derive profits between $1 and $2 per share for 2009. Not a bad return when you consider the share price of $10 and the minimal downside risk considering WSM's balance sheet strength, with some select items shown below:
Cash: 150 million
Inventory: 570 million
Current Assets: 940 million
Debt: 24 million
Market Cap: 1.1 billion
Disclosure: Author has a long position in WSM
5 comments:
their products are expensive compared to Ikea and other places.. humm
also, total debt seems to be over 700 million. humm, am I missing anything here?? I often am =))
thanks for your great articles everyday, I can't help but going to your site everyday
-008
Hi 008, thanks for the kind words about the site.
What's your source on that debt figure? Their 10-K shows total debt of around $24 million. Be careful not to confuse total liabilities with total debt, in case that's what happened.
I'm looking at the total liabilities number from their press release... hummmm.....
I have a feeling that debt is the same as liabilities when it comes to book value/net net calculation... I could be very well wrong though....
-008
Hi 008,
Yes in a liquidation situation, all liabilities must be paid off so in that respect debt and liabilities should be treated the same. From a return on capital point of view for a going concern, however, they should be treated very differently as debt represents a claim against future earnings. Interesting topic, perhaps for a future blog post! ;)
look forward to your future blog in the area of debt and liability discussion =)
008
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