Williams-Sonoma Earnings: 2024 Profit Margin Expansion Signals Strategy Success, but Shares Lofty

Shares of no-moat Williams-Sonoma jumped around 20% on solid fourth-quarter performance—sales of $2.3 billion and EPS of $5.44, which were in line with our estimates—and a bump in the firm's long-term operating margin target—to a mid- to high-teens rate from "greater than 15%" prior guidance. We think the change in language around long-term profitability signals improved confidence that the firm's operating strategy is resonating with consumers. However, we remind investors that performance can change rapidly across retail. After all, just two years ago, Williams-Sonoma was pointing to long-term targets "relatively in line with our fiscal year 2021 operating margin" (17.6%) while also calling for 2024 revenue of $10 billion versus our $7.8 billion preprint estimate. While Williams-Sonoma has fared better than most in the normalization of home furnishing spending, with operating margin contracting a mere 110 basis points in 2023 despite an 11% annual sales decline, we see shares as rich, now trading at nearly 20 times 2024 implied earnings. That figure is significantly above the 12 times average price/earnings metric the business has traded at over the past five years.