Williams-Sonoma: A Contrarian Gem in a Margin-Driven Market

Investors often overlook companies that appear to underperform on the surface but boast hidden strengths. Williams-Sonoma (WSM) presents such an opportunity. Despite a headline 7% drop in diluted EPS for Q1 2025, a deeper dive into its margin resilience, peer performance divergence, and stock sentiment disconnect reveals a compelling contrarian buy.

Margin Resilience: The Untold Story

Williams-Sonoma’s Q1 results were clouded by a $49 million prior-year freight adjustment, which artificially inflated 2024’s margins. Stripping out this anomaly, gross margin declined by just 60 basis points—a far cry from the 360-basis-point headline drop. Supply chain efficiencies and occupancy leverage offset weaker merchandise margins, while SG&A costs fell 0.6%, boosting the SG&A rate to 27.5%—a 130-basis-point improvement.

The operating margin, at 16.8%, narrowed by 230 basis points year-over-year but expanded by 70 basis points excluding the adjustment. This underscores management’s ability to navigate tariffs and inflation. With inventory up 10.3% strategically to preempt tariff impacts, WSM is positioning itself for stability in a volatile macro environment.

Peer Performance Divergence: WSM Is Outperforming in Disguise

While peers like The Home Depot (HD) saw operating margins drop to 12.9% (down 120 basis points) due to foreign exchange and cost pressures, WSM’s adjusted margin improvements signal superior operational discipline. Even NowVertical Group (NRZ), which achieved a 24% EBITDA margin (up 119% year-over-year), benefits from a post-divestiture reset—a tailwind WSM lacks.

ZoomInfo (ZI), with its 33% adjusted operating margin, thrives in tech, but WSM’s 16.8% margin in a consumer discretionary sector plagued by tariffs is remarkable. The market’s focus on HD’s margin contraction and ZI’s software-driven moat has overshadowed WSM’s resilience in a far tougher retail landscape.

Stock Sentiment Disconnect: Panic vs. Fundamentals

Despite reaffirming its full-year outlook (net revenue flat to +1.5%, operating margin 17.4-17.8%), WSM’s stock has underperformed peers. Why?
- Tariff fears: Investors are pricing in worst-case scenarios despite WSM’s proactive inventory builds and supply chain tweaks.
- EPS headline bias: The 7% EPS drop (excluding the $0.29 prior-year benefit) has spooked short-term traders.
- Defensive shift: The broader market favors “safer” sectors like utilities and healthcare, sidelining retail stocks even with strong fundamentals.

The Contrarian Case: Buy Now

1. Margin Strength: WSM’s adjusted margins are holding up better than peers despite headwinds. The long-term targets of mid-to-high teens margins are achievable.
2. Peer Comparison: HD’s margin declines are structural (foreign exchange, costs), while WSM’s are cyclical. NRZ’s margins are inflated by divestitures, and ZI’s sector is insulated from tariffs. WSM is the best-positioned retail play for recovery.
3. Sentiment Opportunity: The stock trades at 20.5x forward P/E, below its 5-year average of 24x. A sentiment rebound could unlock 18% upside.

Call to Action: Deploy Capital Before the Turn

Williams-Sonoma’s Q1 results mask a story of operational grit. The market’s focus on short-term noise ignores its margin resilience, peer divergence, and undervalued stock. With a 2-for-1 split boosting liquidity and a shareholder-friendly $1.1B buyback authorization, now is the time to buy WSM before the contrarian tide turns.

The disconnect between WSM’s fundamentals and its stock price is a contrarian’s dream. Act before the crowd catches on.

Disclosure: This analysis is for informational purposes only and does not constitute investment advice.