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Williams-Sonoma (WSM) Banks on Innovation, Revenues Soft

On Nov 21, we issued an updated research report on Williams-Sonoma Inc. WSM, the largest e-commerce retailer in the U.S. offering exclusive designs for home furnishing products.

Williams-Sonoma recently reported third-quarter fiscal 2016 adjusted earnings (excluding one-time items) of 79 cents per share beating the Zacks Consensus Estimate of 77 cents by 2.6%. Earnings were at the high end of the company’s guided range and also improved 2.6% on a year-over-year basis.

Net revenue of nearly $1.24 billion missed the Zacks Consensus Estimate of $1.26 billion by over 1%. Net sales, however, rose 1.1% year over year driven by double-digit revenue growth at West Elm, its newer businesses and international company-owned businesses. The revenue upside was partially offset by weakness in the Pottery Barn brands.

Innovation & Transformation

Product innovation plays a huge role in the company’s success. There is consistent demand for new products, which should match the changing preference of consumers.  Williams-Sonoma addresses this demand very well. The company has studios which provide infrastructure for development of new products, techniques and collaboration with other artists.

The company collaborates with celebrated brands and designers to offer exclusive designs on home furnishings products in order to attract customers, invent trends in home furnishing and widen the company’s social media reach.

The new retail stores incorporate a Design Studio, where customers can receive complimentary assistance from trained professionals. This personalized service has been one of the driving forces behind improving results in recent quarters.

Apart from innovative moves, Williams-Sonoma has adopted a transformation drive to address the slowdown in traffic. The company has been reworking on its marketing strategy, placing more emphasis on digital targeted marketing, investing in remodeling of stores, and liquidating less productive stock keeping units  from its inventory through retail outlets.

Comparable Revenues Soft

Williams-Sonoma has been reporting soft comparable brand revenues for quite some time. The rate of increase of comparable brand revenues has decreased significantly from 8.8% in 2013 and 7.1% in 2014 to 3.7% in 2015. Comparable brand revenues decreased 0.4% in third-quarter fiscal 2016.

The rate of comparable brand revenue increase has softened across all the brands except for West Elm. The PBteen brand was hurt the most, reporting 10.9% decline in comparable brand revenues in third-quarter fiscal 2016 due to weakness in the core furniture and textile businesses.

In fact, the company now expects comparable brand revenues growth in the 1–2% range for 2016, lower than the prior expectation of 1–4%. This does not indicate any significant improvement from the current trend.

Williams-Sonoma carries a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked stocks in the Retail-Wholesale sector include Domino's Pizza, Inc. DPZ, McDonald's Corp. MCD and Papa John's International Inc. PZZA.

Domino's Pizza sports a Zacks Rank #1 (Strong Buy) and is expected to witness a 22.8% increase in full-year 2016 earnings. You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's carries a Zacks Rank #2 (Buy) and is likely to see a 14% rise in full-year 2016 earnings.

Papa John's – a Zacks Rank #2 stock – is expected to witness a 19.9% increase in full-year 2016 earnings.

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