Williams-Sonoma helped by West Elm brand, hurt by PBteen

By Sarah Very

Shares of Williams-Sonoma Inc. tumbled Thursday as disappointed investors responded to lower-than-expected earnings caused by softening performance at the retailer’s Pottery Barn brand.

The San Francisco, Calif.-based specialty home goods retailer, parent of the Pottery Barn and West Elm brands, said net income fell 4 percent to $141.1 million, or $1.55 per diluted share, from $147 million, or $1.57 per diluted share, in the year-ago quarter.

The per-share results landed 4 cents short of the $1.59 analysts surveyed by Zacks had been expecting from the cookware and home furnishings company.

Earnings declined even though the company’s top line bumped higher by 2.9 percent to $1.59 billion from $1.54 billion a year earlier; the latest quarter’s revenue was lower than the $1.62 billion analysts had been anticipating.

The California company released its year-end results after the market closed Wednesday evening. On Thursday, shares of Williams-Sonoma – which have declined significantly over the past twelve months – were trading down $3.84, or 6.5 percent, at $55.64.

The stock was under pressure even though the company said it was boosting its quarterly dividend by 6 percent to 37 cents per share, and announced plans for an up to $500 million share repurchase program.

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Williams-Sonoma shares dropped 6.5 percent Thursday. (Sarah Very/MEDILL)

Williams-Sonoma operates two main segments, e-commerce and retail. Fourth quarter e-commerce revenues rose 2.9 percent to $792 million from $770 million in the fourth quarter of 2014. Retail net revenues were also up a similar 2.9 percent, to $794 million from $772 million.

“In 2015, we delivered top and bottom line performance within our guidance ranges despite a challenging end to the year,” said Laura Alber, president and chief executive officer, in a statement accompanying the earnings release.

Julie Whalen, Williams-Sonoma Inc.’s chief financial officer, emphasized in the conference call that 2015 was a year of record revenue and earnings, despite the company having to absorb higher shipping and fulfillment costs as well as “a more challenging retail and macro environment.”

Williams-Sonoma’s West Elm brand boosted the company’s comparable brand revenue by 12.8 percent, compared to 19.6 percent a year earlier. In 2015, West Elm opened 18 new stores, ending with 87 company-owned stores. It plans to open 13 new stores in 2016.

“We are also investing in our high-growth newer brand, particularly West Elm,” said Adler in a conference call accompanying the earnings release. “The brand’s current growth trajectory, entry into the commercial furniture market with West Elm Workspace, and International growth potential, position it to become a $2 billion brand.”

On the other hand, the Pottery Barn brand’s comparable brand sales declined 2.2 percent. This is significant, as Pottery Barn has historically been Williams-Sonoma’s largest revenue source. Still, the brand is projected to grow with new programs like a Star Wars program and partnerships with designers such as Monique Lhuillier.

Sales for PBteen sank 12 percent after rising 3 percent a year earlier.

“Similar to Pottery Barn, we saw declines in our gifting collections (for PBteen),” said Adler. “We believe we relied too heavily on best sellers from previous seasons. From a product standpoint, to address these challenges, we have been developing differentiated and innovative products to refresh our core assortments. We are also expanding our offering across the distinct teen life stages to address differing needs of the tween, teen and college customer.”

Whalen added that “Unlike other retailers, however, we were able to substantially hold our merchandise margins as a result of our direct sourcing advantage that has allowed us to bring higher quality product to market at a lower cost and to pass that along to the consumer.”

She said going into 2016, the company is better balanced form an inventory standpoint and has seen improvement in shipping costs. Williams-Sonoma is implementing a new inventory system that will make its inventory more visible throughout the supply chain. To combat these challenges, it will also eliminate products to improve order fulfillment and open a distribution center in the Southeast.

Williams-Sonoma predicts sales to hit $5.15 billion to $5.25 billion in 2016, with $1.07 to $1.09 billion in the first quarter. The company now predicts earnings per share in a range of 48 to 52 cents for the first quarter of 2016, below the Zacks 56 cents consensus estimate.

For the full year 2015, Williams-Sonoma Inc. said net income was up less than one percent to $3.10 million, or $3.37 per diluted share, from 3.09 million, or $3.24 per diluted share, in 2014. Revenues rose to $2.52 billion from $2.37 billion a year earlier.

Photo at top: Williams-Sonoma Inc. is the parent of brands including West Elm, Pottery Barn, Williams-Sonoma and Williams-Sonoma home. (Photo: Flickr)
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