Some Silver Linings For Williams-Sonoma Offered By Baird

Williams-Sonoma, Inc. (NYSE: WSM) reported in-line EPS for Q2, while lowering its FY16 guidance by 3.5 percent at the midpoint, driven by a softer retail environment.

Baird’s Peter S. Benedict maintained an Outperform rating on the company, while lowering the price target from $68 to $61.

Disappointing Results & Guidance

“While the guidance reset reinforces concerns around the revenue/margin trajectory at WSM, expectations were low, and there were some silver linings in the print,” Benedict mentioned.

Sales declined during the quarter, missing expectations, although improvements in shipping and fulfillment related costs and tight expense control led to in-line EPS of $0.58.

Top line trend also slowed during the quarter, with comps slowing to 0.6 percent, from the 4.5 percent in Q1, driven by all brands decelerating from the Q1 levels.

“Management noted a softer overall retail environment and a more cautious consumer, though an increasingly competitive/promotional sector backdrop is difficult to dismiss,” Benedict stated.

Going forward, management intends to focus on customer acquisition and revitalizing sales through product differentiation, along with new and innovative digital marketing strategies and a better retail experience.

Although gross margin declined 66 bps, Benedict noted that the decline was driven largely by occupancy deleverage and higher franchise revenues.

Some Silver Linings

“Selling margins were actually up slightly, reflecting ongoing benefits from sourcing initiatives and improvements in shipping/fulfillment-related costs stemming from supply chain/inventory initiatives,” the analyst said.

In addition, better regionalization, SKU rationalization and new inventory systems and tools led to improved customer service metrics and lower costs, trends that the analyst believes are sustainable.

In addition, “the response to recent store remodels has been strong, and management noted continued opportunities to "optimize" the store fleet,” Benedict added.

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