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  • Writer's pictureMatt Wolodarsky

Stock Idea: Proven performer poised for a rebound

My latest stock idea is a proven performer coming off a lousy 2022 for the stock (-30% YoY) that offers something for both value and dividend investors.

Williams-Sonoma (NYSE: WSM) is a large kitchenware and home furnishings retailer that sells into the $750B global home market under its house of brands, including its namesake brand and a stable of successful extensions such as Pottery Barn, West Elm, Mark and Graham, Rejuvenation and its steady registry business.


Featured in my recently published fourth annual Top 10 Dividend Stocks report - 2023 edition, WSM has grown its business on the back of a very successful brand extension strategy that keeps WSM relevant throughout a consumer's lifecycle (from renting their first apartment and buying their first home to having kids).


WSM has also built itself into a digital powerhouse. They have a strong e-commerce business, accounting for 66% of 2021 sales. WSM is riding the digital channel to increased profitability, with plans to decrease its store base by 25% between 2020 and 2025.


WSM has built a reputation as having some of the best analytics in retail. They have been collecting consumer data for more than 25 years. With more than 100 marketing analytics and data science employees, WSM is in a great position to use it vast trove of data treasure to predict future customer purchases and capture them more effectively than their peers.


Like many retailers that compete in the home category, WSM rode the surge in home renovation caused by the pandemic over the last few years. Unlike other retailers that saw slowing sales due to inflation, WSM has continued to grow throughout a murky economic cycle. The stock took a hit in November 2022 when management shared that a potential recession may cause it to miss its goal of $10B in annual revenue by 2024.


WSM has a 16-year record of consecutive annual dividend increases. Five-year annualized dividend growth rate of 17%. Combined dividend yield and five-year growth rate is 20%, well above my minimum 10% hurdle rate. With a payout ratio of 19%, they are well positioned to be able to grow their dividend. Their EPS has grown at an annualized rate of 34.5% over the last five years, although this is somewhat exaggerated by management’s aggressive share buy back program.

Valuation

WSM has a P/E ratio of 7.7, below its 5-year average of 15.1. Trading at/near its highest earnings yield over the last 10 years, WSM is likely priced below fair value.


Risks

WSM has come under heavier competitive fire in the last few years with e-commerce pure play Wayfair moving into the home furnishing space.


WSM faces macro headwinds from a looming recession, inflation and housing market weakness.


The Bottom Line

While WSM is likely to be affected by macro economic headwinds in the short term, it is well positioned for long-term growth. WSM has some strong growth initiatives, including a new franchise model powering international expansion, entrance into the $80B US B2B market, cross-shopping initiatives and continued digital transformation.


I have a position in Williams-Sonoma and as of this posts publish date (February 27th, 2023) its stock price is $126.25.


As with any investment decision you make it’s important to complete your own due diligence and assess if the investment matches your risk profile. Like any individual stock there is risk. You are entirely responsible for your own investment decisions.

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