Williams-Sonoma: Safe at Home?


By Eric Wahlgren Thank Queer Eye for the Straight Guy and other home decorating shows for giving Americans a domestic inferiority complex. Increasing numbers of consumers are finally doing something about that nagging feeling that their homes are dumps: They're shelling out for housewares like never before. It's part of the nesting trend that began to take hold after the September 11 terrorist attacks, which increased Americans' appreciation for the safety and comfort of home.

Although plenty of publicly traded retailers have benefited from all this spending on everything from French frying pans to white fluffy sofas, upscale Williams-Sonoma (WSM) seems to have been one of the prime beneficiaries. In fact, Queer Eye's "Design Doctor" Thom Filicia has taken the straight guys on the show to the company's Pottery Barn stores for shopping sprees, helping spur the blurring of lines between advertising and entertainment.

That's just fine with Williams-Sonoma, which has seen its shares jump 57%, to a recent closing price of $32, vs. a 44% rise in the Standard & Poor's 500 index over the past 12 months. "The more nesting Americans do, the better off Williams-Sonoma is in the long run," says Claire Gallacher, a research analyst at independent equity research firm Caris & Co. in San Francisco.

NOT JUST STORES. It's not just buzz lifting the San Francisco-based outfit's stock. Williams-Sonoma also is delivering in the earnings department. When fiscal 2003 results are reported March 18, the Street expects profits to show an increase of as much as 26%, to $1.31 a share, on revenue of $2.76 billion, a 16.9% hike. Like the $99 Peugeot automatic pepper mills it sells, Williams-Sonoma stock is no bargain. Shares trade at about 24.6 times 2004 earnings, vs. the 21.7 price-to-earnings multiple for the retail-goods industry, according to First Call/Thomson Financial. A Williams-Sonoma spokeswoman said the company is in a quiet period before the release of its fourth-quarter results and could not comment for this story.

Yet though the stock is not expected to match last year's gains in 2004, several analysts believe it will continue to outperform the broader market. The premium price is worth it, they argue, because of the outfit's many strengths. Among them, Williams-Sonoma has market share of nearly 6%, impressive in the superfragmented home furnishings industry, Gallacher says. What's more, the Williams-Sonoma stores, which peddle high-end culinary gear and specialty foods, and casual-furnishings chain Pottery Barn, have "really phenomenal" brand equity, Gallacher adds.

"The potential for market-share gains and top-line growth is nearly unlimited," Gallacher says. She rates the stock above average -- her second-highest rating -- and has a $38 target price, which suggests a potential for appreciation of about 19% in the next 12 months. (Gallacher has no ties to the company, nor does her firm.)

What Gallacher likes is the so-called multichannel strategy. It boasts some 516 brick-and-mortar stores under its main brands, which include not only Williams-Sonoma and Pottery Barn, but Pottery Barn Kids, Hold Everything, which sells organizational products, and West Elm, a new housewares and furnishings line with an urban flair. About a third of overall sales come from direct-to-consumer Internet and catalog operations, with many of the brands having stand-alone catalogs and Web sites. "They are very unique in retailing, in that they have lots of avenues for growth," Gallacher says. "A lot of retailers are much simpler and rely mainly just on retail."

BUDDING BRANDS. And despite its sophisticated business model, Williams-Sonoma takes a go-slow approach when launching new concepts, Gallacher adds. For instance, management first gauged the likely response from its mailings of Pottery Barn Kids catalog of children's furnishings in 1999 before opening actual retail outlets a year later. There are now 77 Pottery Barn Kids stores across the U.S. Notes Gallacher: "They make sure they have the customer base before they make the investment in the stores."

Joan Storms, a research analyst with Wedbush Morgan Securities in Los Angeles, rates Williams-Sonoma a buy on the basis of a number of initiatives "that, to my mind, are going to make it more of a growth story," Storms says. She cites West Elm as one of the bright new ventures. The first West Elm store opened in Brooklyn, N.Y.'s trendy Dumbo (Down Under the Manhattan Bridge) neighborhood in late 2003. What started as a product line for city dwellers "has a broader appeal," says Storms, especially since its price points are a little less uppity than some of the other brands. Williams-Sonoma has plans to expand West Elm in 2004. (Storms and her firm have no ties to the company.)

Also promising, Storms says, is the PBteen concept, which is currently a catalog business of Pottery Barn products made for adolescents, such as "cargo pattern" duvet covers and "surfboard" beds. "They are the first home-interior company to really go after this market in a big way," Storms says. Meantime, there are plans to create a home-furnishings brand called Williams-Sonoma Home, and Storms predicts that, eventually, stores under this name will also open for business. "We think this brand also has very strong brand-extension potential," Storms says.

HERE, THERE, EVERYWHERE. The initiatives could put Williams-Sonoma on the fast track, Storms says, and she thinks the stock has the potential to hit $43 -- 34% above current levels -- in 12 months. Overall, analysts forecast Williams-Sonoma will turn in another solid performance in fiscal 2004. Profits are seen rising 18%, to $1.53 a share, on 14% higher revenues of $3.1 billion, according to First Call. "They are the dominant player in the upper-level home group area, but they have the potential to be a major player in the more mid-level area," Storms says. "They are also capturing different demographics with kids and teens."

Not all analysts are as upbeat. Yogeesh Wagle, an equity analyst with Standard & Poor's, has a hold rating on Williams-Sonoma. Wagle likes the company, calling its diversified business model -- stores, Web sites, and catalogs -- less risky than some of its peers.

He believes, however, that the stock is fully valued, as the growth potential of some of its new concepts, such as West Elm and PBteen, are not totally proven. "It remains to be seen whether they can generate the same kind of brand identity and success as their other products," says Wagle, who has no ties to the company, although other units of S&P may. "Right now, I don't see that much more upside."

Indeed, even the enthusiastic Storms notes that Williams-Sonoma could have trouble executing on its many new concepts. "There are a lot balls in the air," she says. But Williams-Sonoma has hired "a lot of extremely talented people" to lead the initiatives, she says, and the company is "not just inventing things overnight."

EAGER READERS. One other concern: If the U.S. economic recovery lags or fails to generate jobs, consumers could think twice about springing for, let's say, the "sculptural votive" candleholder that Pottery Barn sells for $129. "If consumers start putting money in the bank," Gallacher says, "there's a risk."

There's no doubt Williams-Sonoma has already become something of an institution in home decorating. As Storms notes, the monthly circulation of its catalogs -- estimated at 12 million -- is more than double the combined circulation of all the "home shelter" magazines, including Dwell and Elle D?or.

Although the stock in the near term likely will not match the growth of the past 12 months, analysts believe it's likely to remain a market leader in the home decorating segment for the long term. Those looking to add a solid retail stock to their investments may want to consider furnishing their portfolios with a little Williams-Sonoma. Wahlgren covers the markets for BusinessWeek Online in New York


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