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WSM AT A GLANCE

P/E ► -122   EV/EBITDA ► 25.5 AVG ROA ► -0.8% AVG ROE ► -1.5% AVG Debt to Equity ► 0.662 AVG Current Ratio ► 2.15 AVG Interest Coverage Ratio ► -19.5 LOW

 

 

 

 

 

 

With 600 stores and $3.9 billion in revenue in 2007, Williams-Sonoma (NYSE: WSM) is one of the United States' leading sellers of home decor, bed and bath supplies, and cooking equipment.^[1].

As a home goods retailer, Williams-Sonoma is particularly subject to fluctuations in the housing market, unstable exchange rates, and seasonal changes in consumer demand. The housing bust that began in 2006 has taken a significant toll on sales and operating margins for the company; annual net revenue growth was 13%-17% between 2003 and 2005, while it has not risen beyond 6% since 2006.^[2] In spite of macroeconomic challenges and the resulting decrease in annual growth rates, however, Williams-Sonoma has managed to maintain year-to-year consistency in its balance sheet. In both 2006 and 2007, the company's assets were more than double its liabilities, and its debt-to-equity ratio stable at approximately 1%.^[3] Continuing its expansion throughout the negative climate, Williams-Sonoma increased its retail leased square footage by approximately 8%, added 29 net new stores, and expanded or remodeled an additional 20 stores in 2008.^[4]

Business Overview

Williams-Sonoma's Earnings vs. Revenue, 2005-2007^[2]

Williams-Sonoma sells products for the home through its five retail store concepts (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm and Williams-Sonoma Home), and directly to customers through its seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com).^[5] As of February 3, 2008, the five retail concepts operate 600 stores in 44 states, Washington, D.C., and Canada.^[5] The catalogs reach customers throughout the United States .^[5]

Business and Financial Metrics

^[6]

Recent financial data illuminates declining growth rates compared with those from 2002-2005. In 2007, net revenues increased only 5.8% from $3.73 to $3.94 billion, versus growth of 14.2% from $2.75 to $3.14 billion in 2004.^[7] These smaller recent growth figures represent both the effect of a generally slowed economy, as well as the company's less aggressive expansion of its most mature brands. From 2002-2005, Williams-Sonoma created new brands and opened a greater number of additional stores, while it has demonstrated less expansion since 2006.

Nonetheless, 2007 figures reflect positive revenue growth in all brands and across both the retail and direct-to-customer (DTC) channels.^[8]. In fact, annual revenues have grown over each of the past five years (from $2.8 to $3.9 billion)^[2]. The generation of the emerging brands created in 2002-2005 - including West Elm - has served to mitigate the overall trend of decreasing same-store sales, evident in the 5-year decline in gross margin (from 40.3% in 2003 to 38.9% in 2007).^[2] Williams-Sonoma opened 27 new West Elm stores between 2002 and 2007, the growth and development of which account for 37% of the company's unit growth and almost half of its square footage growth for 2008.^[9] While expanding West Elm, Williams-Sonoma also launched brand extensions PBteen and Williams-Sonoma Home.^[10] At the same time, the company closed all of its remaining Hold Everything stores and transitioned the associated merchandising into the other brands.^[10]

Business Segments

Retail Stores ($2.28 billion/ 58% of Net Revenues)

In 2007, retail net revenues accounted for $2.28 billion, or 57.8% of the company's business.^[5]. In the retail channel, 2007 net revenues increased by $127 million (5.9%) Williams-Sonoma's 600 total retail stores include 256 Williams-Sonoma, 198 Pottery Barn, 94 Pottery Barn Kids, 27 West Elm, 9 Williams-Sonoma Home and 16 Outlet stores.^[10]

Store Count by Segment, 2007^[11]

Williams-Sonoma: The original brand, Williams-Sonoma sells modish cookware, including pots, pans, utensils, flatware, glassware, and small appliances. Williams-Sonoma operates 256 stores and markets to an upper-middle class demographic. The average store size is 6,100 square feet, which has increased steadily over the last five-plus years.^[1] Williams-Sonoma, Inc. generally opens 1-3 new flagship stores per year. The brand extension Williams-Sonoma Home launched in 2006 and specializes in bed and bath supplies.

Pottery Barn: Pottery Barn was acquired by Williams-Sonoma, Inc. in 1986 and has since become another flagship brand of the company. Pottery Barn sells casual home furnishings, including internally designed as well as imported products. Extensions include Pottery Barn Kids and PBTeen, brands targeted toward a younger demographic. Pottery Barn operates 198 stores, with an average store size of 12,500 square feet. Much like Williams-Sonoma, store size has increased steadily over the last five-plus years, and the segment is reaching a point of maturity at which its annual unit growth has slowed to 1-3%. ^[1]

West Elm: West Elm is an emerging Williams-Sonoma, Inc. brand, presenting a selection that includes furniture, textiles, decorative accessories, lighting and tabletop items. The products appeal to the style-savvy consumer of chic and modern home dec r. This brand pays particular attention to green practices and strives to offer a collection made primarily from organic materials.^[12] West Elm also aims to offer a more affordable price point and more modern look than Pottery Barn. The average store size is 18,200 square feet. West Elm operates 27 stores.

Direct to Customer Operations ($1.66 billion/ 42% of Net Revenues)

Originating with the Williams-Sonoma flagship catalog “A Catalog for Cooks” in 1972, the direct-to-customer segment of the company sells similar products to those in retail stores through seven direct-mail catalogs (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Bed and Bath, PBteen, West Elm and Williams-Sonoma Home) and six e-commerce websites (williams-sonoma.com, potterybarn.com, potterybarnkids.com, pbteen.com, westelm.com and wshome.com).^[5] This segment builds off of brand awareness established by the retail concepts and represents $1.66 billion (42.2%) of the company's business.^[10] It also serves as a cost-efficient means of testing market acceptance of new products and new brands.^[10] In 2007, DTC net revenues increased by $90 million (5.7%) to $1.66 billion, driven by an overall increase in catalog circulation of 3.7%, in page circulation of 7.9%, and continued strength in the Internet business, where revenues increased 19.0% to $1.1 billion.^[8] Of the six merchandising concepts in the DTC segment (Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home), the Pottery Barn brand and its extensions have been the major source of revenue growth for the last several years.

Key Trends and Forces

U.S Housing Market Slump Stifles Sales

The housing market slump which began after the housing bubble burst at the end of 2005, and which has continued through 2008, has hit the home furnishing retailer business hard. Increased foreclosure rates in 2006 and 2007 came to a head in August 2008 with the subprime mortgage crisis, resulting in a dramatic tightening of mortgage regulations and a corresponding decrease in the number of mortgages granted. The housing slump and mortgage crisis affect Williams-Sonoma twofold. First, fewer homes being purchased mean decreased demand for home furnishings; and second, the crisis contributed to the overall fall of the economy, leaving Williams-Sonoma customers with less purchasing power for furnishings and accessories in general. Annual growth rates from 2006-2008 have hovered around 5-7%, while rates from preceding years were between 13% and 15%. In 2008 leading up to the mortgage crisis, same-store sales decreases worsened dramatically, from 8.6% in May to 14% in July.

Seasonal Variations in Demand Heighten Net Earnings in Fall/Winter

A significant portion of Williams-Sonoma's net revenues and net earnings are typically realized during the period from October through December. In 2007, nearly 35% of the company's net revenues were generated in the 4th quarter.^[14] This trend is attributed largely to the general patterns associated with the direct-to-customer and retail industries.^[15] Net revenues and earnings are generally lower between January and September of each year,^[15] while they rise during the end-of-year holiday season. In 2008, however, the recession has negatively impacted revenues for Williams-Sonoma and its competitors. According to MasterCard Advisors, retailers' sales fell as much as 4 percent during the 2008 holiday season.^[16] In Q4 2008, Williams-Sonoma reported a 16% decrease in net revenues to $752.1 million, compared with $895.1 million the previous year.^[17]

E-Commerce Cuts Costs, Improves Supply-Side Efficiency

Williams-Sonoma's Internet channels assist the company not only by providing rent-free "real estate" from which to make additional sales, but also by allowing the company to test new products without incurring the costs associated with stocking them in-store. The company's fastest-growing and most profitable channel, Internet revenues increased 19.0% in 2007 to $1.10B.^[18] - 66% of the total $1.66B of DTC net revenues.^[19]. An increasing percentage of the company's net earnings depend on its ability to continue developing its Web presence, as "etailer" giants like Amazon.com consistently demonstrate year-over-year revenue growth and increasing retail market share.

Competition

Substantial sales growth in the direct-to-customer industry within the last decade has caused an influx of new competitors and has heightened competition from established companies.^[15] William-Sonoma's specialty retail stores, mail order catalogs and e-commerce websites compete with other retail stores, including large department stores, discount stores, other specialty retailers offering home centered assortments, other mail order catalogs and other e-commerce websites.^[15] In addition to these larger competitors, Williams-Sonoma faces considerable competition from local furniture boutiques that also offer high-quality cookware and furniture. The company aims to distinguish itself through high quality merchandise, top-notch service, and attractive storefronts.^[15]

• Bed Bath and Beyond (NYSM: BBBY) is the top domestic merchandise retailer in the United States. Its total sales were almost double those of Williams-Sonoma in 2006. Bed Bath & Beyond offers less expensive products than Williams-Sonoma and generally caters to a younger demographic.
• Pier 1 Imports (NYSM: PIR) is another leading home furnishings retailer with 1,122 stores. While total sales exceeded $1.6 B in 2006, Pier 1 Imports has historically failed to match Williams-Sonoma’s sales per square foot.
• Crate & Barrel is a smaller competitor (145 stores), but offers a similar style of furniture to Williams-Sonoma.

1. ↑ ^{1.0 1.1 1.2 1.3} KeyBanc Equity Research
2. ↑ ^{2.0 2.1 2.2 2.3} 10-K 2008 WSM, p20
3. ↑ 10-K 2008 WSM, p40
4. ↑ BNET Business Wire, Mar 27, 2008
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} 10-K 2008 WSM, p3
6. ↑ WSM Wikidata
7. ↑ 10-K WSM 2008, p20
8. ↑ ^{8.0 8.1} 10-K WSM 2008, p21
9. ↑ KeyBanc Capital Markets Research
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} 10-K 2008 WSM, p4
11. ↑ 10-K 2008 WSM, p20
12. ↑ Williams-Sonoma Website
13. ↑ 10-K 2008 WSM, p24
14. ↑ 10-Qs Q2, Q3, & Q4 WSM 2008
15. ↑ ^{15.0 15.1 15.2 15.3 15.4} 10-K 2008 WSM, p5
16. ↑ Reuters Dec 26, 2008
17. ↑ DDI Magazine, Dec 8, 2008
18. ↑ 10k WSM 2007, p21
19. ↑