This Retailer’s Latest Earnings Show Why It’s a Must-Own Stock

Williams-Sonoma (WSM) CEO Laura Alber took the top job at the home furnishings retailer in May 2010. The company’s stock is up 477% since becoming CEO. The S&P 500, by comparison, has gained 382% over the same period. 

While a 95 percentage point difference doesn’t seem like much over a decade, the performance is exemplary when you consider WSM stock went sideways for the better part of three years between 2016 and 2019. 

I’ve followed the company from a distance for most of Alber’s run. Newer shareholders don’t know how lucky they are to own a piece of such a well-run retail business.

Are there issues to be remedied at Williams-Sonoma? Absolutely. Please show me a company that doesn’t have problems to solve. Business isn’t that simple. It changes on a dime, and I’m sure Alber knows this. 

However, the company’s Q2 2022 earnings report is one more reminder that Williams-Sonoma is a special business. If you want to make money over the next 12 years -- I doubt Alber will still be CEO -- WSM is a must-own stock.

The Margins Were Iffy

If I think the stock is all that and a bag of chips, you might wonder why I’d lead with the fact the gross margin in the second quarter fell 60 basis points year-over-year to 43.5%.

As I said in the introduction, every business has its issues. In Q2 2022, higher shipping and freight costs cut its gross margins. However, because its comparable brand revenues grew 11.3% from Q2 2021 and 41.1% over Q2 2020, the gross profits rose 8.2% to $928.8 million, tantalizingly close to $1 billion in a single quarter.

As you move further down the income statement, you will see that its selling, general and administrative expenses fell by 110 basis points. As a result, its operating profit in the second quarter increased 13.1% to $365.5 million. 

So, for every dollar of sales, it makes 17.1 cents from its operations.

“The second quarter marks another quarter of strong performance, delivering an 11.3% comp on the top line and earnings growth of over 19% to $3.87 per share,” Alber stated in the Q2 2022 press release.

“These impressive results reflect the strength of our multi-brand portfolio, the success of our growth initiatives, and the ongoing execution of the team. We continue to demonstrate our ability to perform by offering high-quality, differentiated, and sustainable products that our customers know and love.”

The Multi-Brand Portfolio That Works

Often in retail, the holding company approach fails to deliver for shareholders. We’ve seen it happen many times over the past decade. 

The latest example is Gap (GPS). It’s lost 60% of its value since Alber became CEO of Williams-Sonoma. And although there have been some encouraging signs -- it bought Athleta in 2008 for $150 million and failed to do anything with it for more than a decade -- the three-headed monster that is the Gap, Old Navy, and Banana Republic has never lived up to its potential. 

The Gap is the ultimate value destruction vehicle. I don’t recommend it, even under $10. 

Now consider what Williams-Sonoma has done with its trifecta of brands. 

In the second quarter, Pottery Barn and Pottery Barn Kids and Teen had net revenue of $1.16 billion, 15.6% higher than a year earlier. West Elm saw its net revenues increase by 4.8% to $608 million, while Williams Sonoma’s fell 2.4% to $249 million. But even then, its Rejuvenation and Mark and Graham brands made up for its legacy brand's $6 million shortfall.

There is no question that, at the moment, Pottery Barn is carrying the rest of the WSM team. 

However, if you look at West Elm’s comparable brand revenue growth for Q2 2021, it was off-the-chart good at 51%. It delivered almost $200 million in net revenue growth in last year’s second quarter. That compares to an increase of $207 million for Pottery Barn and Pottery Barn Kids and Teen, albeit from a much larger base.

Alber manages a group of complimentary pieces that pick up the slack when one of them isn’t performing up to par. Ultimately, they all seem to deliver before too long. Long-time Gap investors wish that were the case with their investment. 

I can’t tell you what the secret sauce is that creates such a synergistic group of businesses, but it proves that it shouldn’t be underestimated as a buy-and-hold long-term investment opportunity. 

It’s a Must Own

In July 2021, Investor’s Business Daily featured Alber in their Leaders & Success feature. Alber explained how she could move up the ladder from her first job at the company as a senior buyer for Pottery Barn. 

“‘I never set out to be CEO,’ Alber, Williams-Sonoma (WSM) CEO and president, told Investor's Business Daily. ‘I always focused on the jobs at hand acting like an owner in that position and treating that as a permanent role,’ she said. ‘The promotions follow you because you were able to accomplish the task at hand in an excellent way.’

When Alber joined Williams-Sonoma in 1995, the business had sales of $128 million in the second quarter of that year. Its Q2 2022 sales were 15x larger. 

Alber owns almost 428,000 shares plus another 304,201 for awards exercisable or vesting within 60 days. That’s good for 1% of the company. The ownership mentality has paid off in more ways than one. 

As long as she’s in the CEO chair, WSM is a must-own.   

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