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What Was Wrong With Willams-Sonoma's Latest Quarterly Beat?

Williams-Sonoma (NYSE: WSM) released reasonably strong fiscal third-quarter 2019 results after market closed on Thursday. But with shares of the home-furnishings retailer falling as much as 5% early Friday before partially recovering to close down 1.9%, it seems apparent Wall Street wasn't pleased.

At first glance, the primary culprit appeared to be a more pronounced decline in comparable-brand sales at Williams-Sonoma's namesake stores. But before we get there, let's zoom in for a better look at how Williams-Sonoma's consolidated revenue and earnings fared relative to the same year-ago period:

Metric

Fiscal Q3 2019*

Fiscal Q3 2018**

Growth

Revenue

.442 billion

.357 billion

6.3%

GAAP net income

.7 million

.5 million

(8.3%)

GAAP earnings per diluted share

$0.94.94

.00

(6%)

Data source: Williams-Sonoma. *For the quarter ended Nov. 3, 2019. **For the quarter ended Oct. 28, 2018. GAAP = generally accepted accounting principles.

"Another quarter of strong performance"

These GAAP results include the impact of one-time items related to tax legislation and restructuring expenses. Adjusted for those items, Williams-Sonoma's non-GAAP net income increased 7.4% year over year, to .02 per share.

For perspective -- and noting that Williams-Sonoma doesn't provide quarterly guidance -- most analysts were modeling roughly the same adjusted earnings on lower revenue of .41 billion.

Image source: Getty Images.

Meanwhile, consolidated comparable-brand revenue climbed 5.5% year over year, decelerating slightly from 6.5% last quarter. Within that, comparable-brand revenue grew 3.4% at the core Pottery Barn business (generating revenue of 7 million), 14.1% at West Elm (with revenue of million), and 4% at Pottery Barn Kids and Teen (with revenue of 8 million). However, similar to last quarter, the lone weak spot remained in actual Williams Sonoma stores, where revenue arrived at 5 million and comps declined 2.1%. The was latter below the roughly 1% drop most analysts were expecting.

Williams-Sonoma CEO Laura Alber called it "another quarter of strong performance." She added:

Our results and continued success relative to the industry reflect that our strong value proposition of high quality, design-led, sustainable products is resonating with our customers. In a fragmented home furnishings industry, it is hard to overstate how important it has been for us to continually evolve to stay ahead of the pack and remain at the forefront of driving profitable growth. Importantly, our digital-first model is a key component of our success. Our year-to-date performance gives us the confidence that we can carry this momentum forward in the holiday season and beyond.

On narrowing guidance for the better

Leading into that key holiday quarter, Williams-Sonoma now expects full fiscal-year 2019 revenue of .77 billion to .9 billion, marking a roughly million increase from the bottom end of its previous range. Williams-Sonoma similarly narrowed its full-year targets for comparable-brand growth in the range of 3.5% to 6% (improved from 3% to 6% previously), and adjusted earnings per share of .65 to .80 (up from .60 to .80).

Finally, Williams-Sonoma reiterated its longer-term goals for total revenue and adjusted operating income growth in the mid- to high-single-digit percentage range and "above-industry average" returns on invested capital (ROIC).

In the end, it likely didn't help that shares were already up more than 35% year to date leading into yesterday's report. But apart from the slight shortfall in the company's flagship brand's comps relative to Wall Street's estimates, there was little not to like about this modestly better-than-expected quarter from Williams-Sonoma.

Despite traders' knee-jerk reactions to the news, I think there's nothing here that should dissuade patient, long-term investors from continuing to buy and hold Williams-Sonoma stock.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Williams-Sonoma. The Motley Fool has a disclosure policy.


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