Home goods retailer Williams-Sonoma (NYSE:WSM) is one of the relatively few companies that saw its profits rise amid the challenges of 2022. Despite this fact and record sales, Williams-Sonoma stock is currently trading at very low multiples to earnings and projected future growth. While the stock appears to be heavily discounted, the question needs to be asked whether it’s a value trap?
Record Revenue at Williams-Sonoma
Williams-Sonoma is a retailer of high-end specialty housewares and furniture, best known for its Pottery Barn brand.
Despite the challenging economic conditions that 2022 presented, Williams-Sonoma achieved both record revenue and record earnings last year.
Revenue rose 6.5 percent for the year, while diluted EPS rose 11 percent. Although higher shipping costs increased operating expenses, the company still managed to maintain a gross margin of 42.4 percent.
This year, analysts expect Williams-Sonoma to see its earnings rise by a much more modest 3.45 percent. Over the next five years, though, growth is expected to average out at a higher level of nearly 9 percent.
While slower than many popular high-growth stocks, this growth rate should put Williams-Sonoma on track for a steady, gradual increase in share prices over several years.
Although Williams-Sonoma may not see its earnings rise massively in the near future, the company’s profitability metrics are very strong. With a return on invested capital of 39.8 percent and a return on equity of 83.08 percent, Williams-Sonoma is clearly doing an excellent job of generating cash for shareholders.
The company’s free cash flow yield is currently 10.7 percent, lending further weight to the potential value argument from a cash flow perspective.
Is Williams Sonoma Significantly Undervalued?
Analysts do not expect Williams-Sonoma to rise substantially in the coming year. The consensus analyst target price for the stock is $122.50, just 4.8 percent above the most recent price of $116.89.
It should be noted, however, that there’s little consensus among analysts on Williams-Sonoma price forecasts. The range of target prices offered runs from $98 to $185, reflecting a wide range of views on the company’s near-term future.
Turning to valuation, Williams-Sonoma appears to be significantly undervalued at today’s prices. The stock is priced at 8.76 times earnings and 0.90 times sales.
Price-to-cash-flow is 5.75, and price-to-earnings-growth is 0.88. All of these factors could individually suggest that Williams-Sonoma trades below its intrinsic value. Together, they present an extremely strong case for undervaluation. Further supporting this argument is the fact that the company has no long-term debt, giving it a high degree of protection from rising interest rates.
Based on a discounted cash flow analysis, a probable fair value for Williams-Sonoma appears to be around $184. While this is toward the upper end of the analyst target price range, the difference between this fair value and the current trading price leaves an ample margin of safety for investors.
Although the company offers a line of premium housewares and home furnishings, consumers are increasingly turning to platforms like Amazon for their household needs.
Wayfair, another eCommerce giant that focuses mainly on household goods, could also gradually take market share away from Williams-Sonoma. With that said, Wayfair’s reputation for quality versus Williams Sonoma are not an apples to apples comparison. Plus, the company’s record sales in 2022 demonstrate that it is keeping up reasonably well with more widely-used eCommerce platforms.
A downturn associated with rising inflation and recession risks in 2023 is a very real threat to WSM share price. As a seller of premium home goods, the company may experience slower sales as consumers become less willing to spend.
This downturn would likely be temporary, however, and Williams-Sonoma could also benefit disproportionately when the economy eventually recovers.
Is Williams-Sonoma Stock a Buy?
Based on its current performance, valuation metrics and limited risks, Williams-Sonoma is trading at a deep discount to its intrinsic value. Although the company may not see exponential near-term growth, the stock is priced well below the probable value of future cash flows that Williams-Sonoma will generate over time.
There also seems to be little chance that Williams-Sonoma is a value trap. Between the company’s strong balance sheet and high likelihood of reaching new heights when the economy recovers, the market appears to have genuinely mis-priced this stock. While slower near-term growth could eat into investor returns, the margin of safety on Williams-Sonoma is large enough to allow for quite a bit of error.
Finally, it’s worth taking into account that Williams-Sonoma management seems to be strongly committed to returning cash to shareholders through distributions and stock buybacks. In 2022, the company expanded its buyback capacity to $1 billion while also raising its dividend by 15 percent.
The dividend paid by Williams-Sonoma has grown at a compounded rate of over 17 percent during the last three years. Given that the company’s payout ratio is still only 19 percent, the distribution likely has ample room left to grow. These factors could significantly bolster long-term returns for investors who buy at today’s prices.
Taking all of this into consideration, Williams-Sonoma appears to be a strong potential buy for both value and dividend growth investors. While the stock almost certainly won’t experience the highs and lows of high-growth tech stocks, its discount to intrinsic value makes it a natural choice for investors seeking long-term returns from undervalued assets.
Due to the uncertainty of the economy in 2023, however, investors who buy Williams-Sonoma should be willing to hold it for some time while waiting for a fairer valuation.
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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.