Williams-Sonoma (WSM 4.43%) might not fit the conventional definition of an under-the-radar stock. The company dates back to 1956 and is one of the best-known names in home furnishings retail. It also owns West Elm and Pottery Barn.
But as a stock, it doesn't get much attention from Wall Street -- which offers an opportunity for individual investors.
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Always in style
Williams-Sonoma stock fell 32% last year on a broad sell-off in home furnishings retail stocks after a boom earlier in the pandemic faded.
However, unlike many of its peers, Williams-Sonoma continued to deliver strong results even as much of the industry struggled. In its third-quarter earnings report, the company reported comparable-store sales were up 8.1%, or 25% on a two-year stacked basis, so it's maintaining its momentum from the pandemic.
The company also delivered strong profitability, with an adjusted operating margin of 15.5%, and earnings per share rising 13% to $3.72.
Though Williams-Sonoma is thought of as a brick-and-mortar retailer, around 70% of the company's sales actually comes through the e-commerce channel. And the company has been focusing on rationalizing its store footprint, closing down underperforming stores to pivot to e-commerce and capture its scalability.
But rather than valuing it like e-commerce stocks, investors have left Williams-Sonoma in the bargain bin. It currently trades at a price-to-earnings ratio of just 7, which seems to be a reflection of the macroeconomic climate. Not only have home goods sales slowed due to the pull-forward effect of the pandemic, but investors also have been anticipating a recession, which would also weigh on discretionary retailers like Williams-Sonoma.
Despite weak results from industries like tech and transportation so far this quarter, the likelihood of a recession seems to have slimmed. Wall Street banks have reined in their forecasts for a downturn, and the International Monetary Fund also upgraded its global economic outlook, saying it does not see a global recession.
More importantly for home-focused retailers like Williams-Sonoma, activity in the housing market seems to be picking back up, according to data from sources like Redfin. And that could drive increased demand for home furnishings as sales in the category are correlated with home move-ins.
In addition to its pivot to e-commerce, the company also has promising new revenue streams in its third-party marketplace, as well as its business-to-business segment, outfitting commercial spaces.
The price is right
Williams-Sonoma offers a well-known brand and rock-solid financial metrics, but the stock also trades at a rock-bottom price these days, and management has shown its ability to take advantage of that and return capital to shareholders.
The stock currently offers a dividend yield of 2.4%, and the company has been aggressively buying back stock over the past year, reducing shares outstanding over the past year by 11% and helping to drive earnings per share higher.
Tthe stock is down in part because the company stepped back from its fiscal 2024 guidance in its last earnings report, but that seemed to be more out of a sense of caution around an uncertain macroeconomic environment rather than a specific weakening of the business.
In fact, the company even said that it expected margins to improve year over year in the second half of 2023 as it laps inventory-related headwinds, which are hampering much of the rest of retail as well.
With a nearly 70-year history, Williams-Sonoma isn't going anywhere, and even if the company does get hit by a recession, it will bounce back in a healthier economy.
The current valuation looks like a mispricing, especially considering its pivot to e-commerce, and investors can take advantage of the sell-off by buying the stock before its fourth-quarter earnings report next month.
If Williams-Sonoma delivers another strong report, the stock should get a jolt as investors will realize that the sell-off is overblown.
