Williams Sonoma stock tumbles 14% after top line miss; Can the 200-day provide support?

Williams-Sonoma (WSM) reported mixed results for its fiscal second quarter, with both revenue and earnings falling short of analyst expectations. The company generated net revenue of $1.79 billion, a 4% decline year-over-year and slightly below the consensus estimate of $1.81 billion. However, earnings per share (EPS) were a bright spot, coming in at $1.74, reflecting an 11.5% increase from the previous year, driven by an improved operating margin of 16.2%, up from 14.6% last year. Despite the revenue miss, the company’s profitability remains strong, thanks to better-than-expected margin performance.

The revenue miss at WSM underscores the challenges faced by high-end retail stores. The stock has dropped around 15% in response, approaching a critical support level at its 200-day moving average of $128. This could create an opportunity for an intraday bounce for traders, but the longer-term trend continues to look bearish.

Williams-Sonoma’s comparable sales decreased by 3.3% in Q2, which was slightly worse than the anticipated 2.5% decline but a significant improvement from the 11.9% drop seen in the same quarter last year. The performance varied across its different segments: Pottery Barn’s comparable sales fell by 7.1%, more than the expected 5% decline, while West Elm saw a 4.8% drop, underperforming the estimated 1.6% decrease. On the other hand, the Williams-Sonoma segment saw a modest 0.8% decline, roughly in line with expectations, and Pottery Barn Kids and Teen outperformed with a 1.5% increase, surpassing the consensus estimate of 0.42%.

The company provided an updated outlook for fiscal 2024, reflecting a more cautious view on revenue but a more optimistic outlook on margins. WSM now expects full-year revenue to decline by 1.5% to 4.0%, which is a downgrade from earlier expectations. However, the company raised its operating margin guidance to a range of 17.4% to 17.8%, up from previous estimates, which suggests that despite the top-line pressure, WSM is focusing on maintaining strong profitability.

Key metrics in the report showed mixed performance compared to consensus estimates. The gross margin for the quarter was 46.2%, up 550 basis points year-over-year, driven by higher merchandise margins and supply chain efficiencies, offset slightly by occupancy cost deleverage. The SG&A rate increased to 30.0%, up 390 basis points year-over-year, reflecting higher performance-based incentive compensation and increased advertising spend. Despite the rise in SG&A expenses, the company’s operating income reached $290 million, with an operating margin of 16.2%, outperforming expectations.

Williams-Sonoma maintained a strong liquidity position, with $1.3 billion in cash and operating cash flow of $246 million. This financial strength enabled the company to return $203 million to shareholders through stock repurchases and dividends during the quarter. Additionally, WSM completed a 2-for-1 stock split in July, which has been retroactively applied to all share and per-share amounts in the earnings report.

In summary, while Williams-Sonoma faced challenges with declining revenue and mixed segment performance, the company demonstrated strong profitability and a solid financial position. The revised guidance for fiscal 2024 reflects a balanced approach, with expectations of lower revenue offset by higher margins. WSM’s ability to maintain profitability despite headwinds in the retail environment underscores its resilience and strategic focus on long-term value creation.