Williams-Sonoma Delivers As Promised, Sees Challenges Ahead

By Markets Fool.com

Image source: Williams-Sonoma.

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Williams-Sonoma(NYSE: WSM)reported fiscal-second-quarter 2016 results Wednesday after the market closed, and the home furnishing specialist appears to have held up relatively well despite operating in an increasingly difficult retail environment. Let's take a closer look, then, at how Williams-Sonoma capped the first half of its year.

Williams-Sonoma results: The raw numbers

Metric

Q2 2016 Actuals

Q1 2015 Actuals

Growth (YOY)

Revenue

$1.159 billion

$1.127 billion

2.8%

Net income

$51.8 million

$53.7 million

(3.5%)

Earnings per diluted share

$0.58

$0.58

0%

Data source: Williams-Sonoma.

What happened with Williams-Sonoma this quarter?

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  • Both revenue and earnings came within Williams-Sonoma's guidance rangesprovided last quarter,which called for revenue of $1.145 billion to $1.175 billion and adjusted diluted EPS of $0.54 to $0.60.
  • Revenue growth was driven by a 5.2% increase in e-commerce sales, to $600 million, representing 51.7% of total sales, and 0.4% growth in retail sales, to $559 million.
  • Comparable-brand revenue growth was 0.6% -- below guidance for comps growth of 1% to 4%, including
    • a 4.8% year-over-year decline in comparable-brand sales at Pottery Barn.
    • flat comps at Williams-Sonoma.
    • 15.8% growth at West Elm.
    • 0.1% growth at Pottery Barn Kids.
    • a 5.2% comps decline at PBteen.
  • The company repurchased 665,517 shares of common stock for roughly $36 million, or an average of $53.38 per share.
  • $486 million remains under Williams-Sonoma's current repurchase authorization.
  • Gross margin fell 70 basis points year over year, to 35.4%.
  • Operating margin fell 20 basis points year over year, to 7.2%.
  • Selling, general, and administrative expenses increased by $4 million, to $327 million, but fell as a percentage of revenue to 28.2%, compared with 28.7% of revenue in last year's second quarter.
  • Inventories declined 6.6% year over year, to $963 million.

What management had to say

Williams-Sonoma CEO Laura Alber stated:

Our second quarter results reflect the strength of our portfolio of brands, our balanced multi-channel model, our successful growth initiatives and a relentless focus on operational improvements. We saw substantial improvements across all of our supply chain and inventory initiatives which helped elevate our customer service levels, reduce costs and drive down merchandise inventories.

Despite this encouraging performance, however, Alber also warned:

[T]he overall retail environment has softened and we are being impacted by a more cautious consumer. As a result, we have revised our outlook for the remainder of the year to reflect this change in trend. We remain focused on what we can control to drive growth and continuous improvements in our operations, including strengthening and growing our brands, further differentiating our product offering, innovating our marketing and digital strategies and enhancing the retail experience.

Looking forward

As things stand, for the current quarter, Williams-Sonoma expects revenue of $1.235 billion to $1.285 billion, comparable-brand revenue growth of 0% to 4%, and diluted earnings per share of $0.75 to $0.80.

And for the full fiscal year 2016, Williams-Sonoma reduced its guidance to call for revenue of $5.075 billion to $5.225 billion (down from $5.15 billion to $5.25 billion previously), comparable-brand revenue growth of 1% to 4% (down from 3% to 6%), and adjusted diluted EPS of $3.35 to $3.55 (down from previous guidance for EPS of $3.50 to $3.65).

In the end, it's hard to fault Williams-Sonoma management for their prudence, and investors should be encouraged the company continues to make progress against its strategic initiatives. So while the market may not look kindly upon its guidance reduction, Williams-Sonoma's long-term story appears to remain firmly intact.

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Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.