How is this “digital-first, design-led, sustainable home retailer” recording comparable-sales increase amid of the COVID-19 pandemic?

High Quality Products. Loyal Customer Base. Outstanding Financial Performance.

As we all know 2020 has proven to be a very challenging year for many individuals and businesses as a result of the COVID-19 related lock-downs and economic shut-downs, which have quite honestly put the global economy on the ropes. The remarkable efforts of central bankers and politicians around the world for ensuring that the flow of liquidity in the market doesn’t stop and that people have everything they need to survive this difficult period, have also proven to be of essential importance for keeping the ball rolling. Multiple different and unprecedented monetary and fiscal measures have been taken in order to stimulate consumer spending, productivity and small-business operations as these are the most influential factors for the overall economic well-being of every nation. With shelter-in-place and social distancing orders going into effect many businesses have had to find a way of changing their core business model in order to stay relevant and functional. The brick-and-mortar sector has experienced major store shut-downs, as people are not willing to risk their health by buying things physically from the store anymore. This has led to a meaningful shift towards online shopping, which in turn has been a substantial tailwind for some of the e-commerce leaders in the US., like Williams-Sonoma Inc.

It is important to note that the performance of the business so far this year has been truly impressive for a retail chain that sells mostly unessential products with stores closed for several weeks during the fiscal first quarter (ended May 3). While most retailers outside of those selling essentials have seen moderate to large declines during the pandemic, Williams-Sonoma (NYSE:WSM) scored a comparable-sales increase. So why is that the case? Well, it is a difficult task to build a brand beloved, appreciated and cherished by many with a loyal customer base and a great reputation, but that is exactly what Williams-Sonoma Inc. has managed to accomplish as a business in recent years. The truth behind the company’s success is that customers love it, especially when they’re at home all day. Wlliams-Sonoma bills itself as “The world’s largest digital-first, design-led, sustainable home retailer.” That’s a lot of adjectives, but within that slogan are the core elements that make Williams-Sonoma a leader in housewares and retailing.

The company is not a newbie in the industry that it operates in as it has a history of driving market share gains, supported by strong e-commerce websites, direct mail catalogs and retail stores, along with shipping fees received for the delivery of merchandise. When you combine all of these tailwinds with the tremendous senior management leadership in the company then you shouldn’t be surprised that Williams-Sonoma has been consistently delivering strong financial performance, surpassing the consensus mark in all the trailing 11 quarters.

It has always focused on innovation within the e-commerce space, which inevitably has helped the company to drive e-commerce growth. In fiscal 2019, e-commerce revenues touched an all-time high of more than 56% of total revenues. The company’s investment in merchandising of its brands, efficient catalog circulations and digital marketing boosts revenues from the e-commerce channel. Despite 616 stores being closed for more than half of the first quarter of fiscal 2020, its e-commerce revenue growth accelerated to more than 30%. Again, during second-quarter fiscal 2020, the company witnessed solid e-commerce sales growth of 46% that accounted for a record 74% of quarterly sales. This highlighted the digital-first nature of Williams-Sonoma’s business.

Meanwhile, the company also aims to maximize its growth capabilities and respectively boost its profitability in the long term, given the substantial growth engines and resources that it has access to. Williams-Sonoma is expected to generate more revenues from the e-commerce channel, as it focuses to re-platform mobile sites to progressive web app technology, streamline checkout process and implement the next-generation of machine learning, on-site search as well as personalized experience. It intends to focus more on growth drivers that includes West Elm, newly launched Business-to-Business offering, its emerging brands — Williams Sonoma Home, Rejuvenation, and Mark and Graham — as well as its largest brand Pottery Barn and namesake brand Williams-Sonoma. The company registered above-industry average ROIC of 20.9% and non-GAAP ROIC of 22.4% in fiscal 2019.

Some of the major contributing factors to the company’s outperformance throughout the pandemic are associated with the fact that, Williams-Sonoma customers tend to have more disposable income. While it is true that target market becomes particularly notable during challenging periods like the present, it’s an advantage in any market, as people with more disposable income are more likely to spend it, especially when they are stuck at home almost 24/7. Comscore reported that visits to home furnishings websites increased 90% in the week of April 27 compared to the week of Feb. 3. But while this increased demand worked in the company’s favor, it was Williams-Sonoma’s omni-channel backbone that allowed it to leverage that demand toward a 31% increase in e-commerce comps in the first quarter. E-commerce made up 54% of the top line in the prior-year quarter, but that figure surged to over 70% in the latest period.

What is Williams-Sonoma?

Headquartered in San Francisco, CA, Williams-Sonoma, Inc. is a multi-channel specialty retailer of premium quality home products. Today, Williams-Sonoma, Inc. is one of the United States’ largest e-commerce retailers with some of the best known and most beloved brands in home furnishings. They currently operate retail stores in the United States, Canada, Puerto Rico, Australia, and the United Kingdom, and franchise their brands to third parties in a number of countries in the Middle East, the Philippines and Mexico. The company’s products are also available to customers through their catalogs and online worldwide. Incorporated in 1973, the company has five brands and each of the brands are operating segments.

Pottery Barn (accounting for 37.5% of fiscal 2019 total revenues) is the largest brand of the company and offers premium quality furniture, lighting, tabletop, outdoor and decorative accessories.

West Elm (24.9%) produces personalized products designed by the company’s team of artists and designers.

Williams-Sonoma (17.5%) offers cookware, tools, cutlery, electrics, tabletop and bar, outdoor, furniture and cookbooks.

Pottery Barn Kids and Teen (15.4%) deals with products used for putting up nurseries, bedrooms and play spaces. It also caters to the teenage population with furniture, bedding, lighting and decorative accents for teen bedrooms, dorm rooms, study spaces and lounges.

Other segment (4.7%) primarily consists of international franchise operations, Rejuvenation and Mark and Graham. Rejuvenation offers premium quality products which are inspired from history and are manufactured in facilities in Portland, OR. Mark and Graham is known for personalized gift items. The brand manufactures women’s and men’s accessories, home décor and seasonal items.

The company operates under six different brand names that each sell different but complementary merchandise to upscale clientele. With that strategy, Williams-Sonoma reaches its customers through multiple storefronts that each offer their own niche of products. Retail has been moving toward small, experiential stores backed up by a capable digital program, and the company has been aggressively pursuing this strategy for years.

Through this model, the company has been able to achieve a 6% compound annual growth rate (CAGR) on its top line and increased earnings per share every year over the past decade. It also reported 2.6% comps growth during the last quarter when other retailers saw losses, many quite significant.

Financial Performance & Valuation

Williams Sonoma has a strong liquidity to navigate through the current environment that is impacted by the COVID-19 outbreak. The company ended the fiscal second quarter with $947.8 million cash and cash equivalents, along with $200 million of unsecured revolving credit facility. Its current cash level is sufficient to meet the short-term obligation of $221.6 million.

Long-term debt obligations totaled $1.38 billion, down sequentially from $1.4 billion. Notably, it strengthened the liquidity position by one-year extension of the $300-million term loan to January 2022. The company has no significant debt maturity in the near future.

The company generated more than $216 million in operating cash flow for first-half fiscal 2020.

It also declared quarterly cash dividend of 48 cents per common share, reflecting strong commitment to return value to shareholders.

Williams-Sonoma Inc. reported better-than-expected second-quarter fiscal 2020 results, courtesy of accelerated e-commerce growth.

Non-GAAP adjusted earnings of $1.80 per share surpassed the consensus estimate of 99 cents by 81.8%. The figure also increased from 87 cents per share a year ago.

Revenues of $1,490.8 million beat the consensus mark of $1,426 million by 4.5% and grew 8.8% year over year. The better-than-expected revenues were driven by 46% notable acceleration in net comps growth of the e-commerce business, which includes purchases made through the company’s omnichannel services such as curbside pickup and shipping from stores. E-commerce penetration reached an all-time high of almost 76% of total revenues, buoyed by content-rich online experience and marketing strategies.

Comps increased 10.5%, higher than 2.6% growth in the fiscal first quarter and 6.5% in the year-ago period. Comps in Williams Sonoma increased an impressive 29.4% against 1.1% decline registered in the prior-year quarter. Comps in the Pottery Barn brand grew 8.1% compared with 4.2% growth in the prior-year quarter. Pottery Barn Kids and Teen’s comps rose 4.8% compared with 3.7% growth in the year-ago quarter. The West Elm brand’s comps rose 7% versus 17.5% growth in the year-ago quarter.

Williams-Sonoma’s shares are up 32.4% in the year-to-date period and 52% over the trailing 12-month period. Stocks in the sub-industry and the Retail-Wholesale sector are up 21.8% and 31.7% in the year-to-date period, respectively. Over the past year, the sub-industry and sector are up 38.8% and 43.6%, respectively. Just as a reference, the S&P 500 index is up 4.5% in the year-to-date period and 16.5% in the past year. The stock is currently trading at 15.6X forward 12-month earnings, which compares to 16.23X for the sub-industry, 31.59X for the sector and 21.97X for the S&P 500 index.

Based on the above-mentioned metrics, we see Williams-Sonoma as a remarkable business model with solid future growth prospects and with its stock trading currently at a very reasonable valuation, we are more than willing to include this fine home retailer in our portfolio.

Technical Analysis

As we have already stated above, the company has managed to keep on delivering great financial results and that has been extremely positive for its share price performance over the past 10 years.

By looking at the chart, one could see the strong uptrend that the price has been following during that period of time. As a matter of fact, Williams-Sonoma was trading at only $7 per share in the beginning of 2009 whereas in the beginning of this October the stock made another attempt of breaking the $101 all-time highs. In other words, it has managed to generate a 13x return for its investors in the last 10 years.

The technical picture on the daily chart shows clearly the strong bullish rally that has occurred in the last 6 months, which has taken the price from the March 23rd lows of around $29 to the $101 highs in the beginning of September. This represented a phenomenal 248% appreciation for the stock in the last 6 months. Since then, we have seen a volatile correction that initially took the price down with 16% in the first 2 weeks of September, before it quickly recovered to its prior highs in the 2nd part of the month. The stock is currently sitting at the $100 mark right at the confluence resistance zone of $101, where we saw the price being rejected strongly last time. The strong and immediate horizontal, diagonal and dynamic support currently lies around the $90-92 mark. In case this level gets broken to the downside, this might open the door for a much stronger correction down towards the $80-81 support levels. Such a correction could be anticipated as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 6 months it is now more than normal for us to see a certain downward corrective movement before the uptrend continues. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the WSM’s stock as long as the stock remains above the $80 level and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent appreciation and are signaling that the uptrend might be in danger if certain key support levels are broken. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

We believe that the short-term correction for the stock should end around the $90-92 mark and that it will resume its uptrend movement afterwards. However, if the price manages to break the $90-$92 strong support levels, then it would be heading towards the other strong horizontal and psychological support at $80-82. The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the $101 highs

We will start buying WSM at the first key diagonal and horizontal support lines currently overlapping around the $93 mark where lots of buying pressure is expected. Should the price break that level to the downside we will be buying more aggressively at the next key support at $82 where we will be able to get a better average cost basis for our positions. Our initial profit-taking target is set at $101, followed by the next targets at $111 and $123 where we will be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy again at a discount.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals, the technicals and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether Williams-Sonoma is a good stock to buy with respect to the current levels of the price, we have decided to analyze the performance of both the XHB (SPDR S&P Homebuilders ETF) and the XLY (Consumer Discretionary Select Sector SPDR Fund). The two ETFs share a very strong and positive 83% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The XHB tracks a broad-based, equal-weighted index of US companies involved in the homebuilding industry. Hugely popular XHB provides quirky and diffuse exposure to homebuilders. It selects firms by market-cap, then equally weights its components. Williams-Sonoma is one of XHB’s largest holdings with its current 4.14% weight within the ETF, which is clearly understandable as the company is a leader in the home-building space. This should definitely be taken as a positive for the stock, as the company has a strong brand identity with a meaningful market share in the industry.

By looking at the daily chart, one could see a very similar movement on the XHB, compared to both the chart of Williams-Sonoma and XLY. Due to the coronavirus outbreak earlier in the year, the XHB made a 51% correction, dropping from its highs at $49 towards the key support at $24 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the XHB has appreciated with 137% in just 6 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to WSM and XLY, the XHB experienced a volatile correction in the first 2 weeks of September that took the price down with around 9%. The ETF is currently sitting at the $57 mark after rebounding from the strong dynamic 50 DMA support at $50, which also overlaps with another strong horizontal support positioned at $49.50. This correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the overvalued stocks negatively, we see that the undervalued winners would most likely continue to win. The strong rebound that we have seen in the first part of October allows us to remain bullish on the XHB ETF and to further believe that all these profit-taking corrections should be treated as great opportunities to buy one of the best-performing ETFs out there and some of the stocks in it at a good discount. Furthermore, this would in turn give us a chance to maximize our profits to the upside and finish this year in a strong and profitable manner. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing early signs of exhaustion of the recent upward movement and are signaling that the uptrend might be at risk if some of the key support levels on the chart are broken. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks. Last but not least, there is a clear divergence between the indicators and the price action on the chart, which clearly confirms our both short-term cautionary and long-term bullish expectations for the future when it comes to the XHB, as well as the XLY and Williams-Sonoma in particular.

By looking at the daily chart of the Consumer Discretionary Select Sector SPDR Fund (XLY), we can see the strong bullish rally that has occurred in the last 5 months taking the price from the March 17th lows of around $85 to the $154 all-time highs in the beginning of September. Since then, we have seen a 9.1% correction for the XLY in the first part of September, which was quickly recovered in the last 2-3 weeks, as the price is back to its prior highs at the moment. The ETF is currently sitting at the $153 mark testing the strong psychological and all-time high resistance at $154. The correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain cautiously bullish on the XLY ETF and believe that all these profit-taking corrections are giving us great opportunities to buy the this good performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent upward movement and are signaling that the uptrend might face some headwinds very soon. However, it is important to note the fact that the XLY only came down with 5-6% throughout the last decline, whereas the broad market tumbled with almost 8%, with some specific sectors seeing declines of over 10%. This makes us rather cautiously optimistic for the performance of the ETF as even if there is a short-term price decline coming soon, we believe that this ETF will be able to hold its ground better than some of the other ETFs out there.

The daily chart shows that the price is currently testing the key resistance line at $154, which actually matches with the all-time highs for the stock. Considering the fact that the price is currently sitting at this high level and there is plenty of uncertainty in the market at the moment, we are expecting to see a short-term correction taking place in the coming days and weeks. As mentioned above, the technical indicators that we are monitoring closely are also signaling that certain exhaustion currently exists in the market. The fact that all three charts that we’ve analyzed are showing the same exhaustion patterns means that there is a roughly 94% chance for the XLY to move slightly lower in the coming weeks, before it resumes its strong long-term uptrend. If we see the price breaking down below the initial strong support levels at $146 and $140, then we could expect a steeper decline towards the next major horizontal support line at $132 and the 100 DMA at $131 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs around $153. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Conclusion

In conclusion, after analyzing Williams-Sonoma’s fundamentals, new products and features, recent financial performance, as well as the technical picture with the recent sell-off and the immediate bullish reaction that followed we wanted to get a further confirmation as to whether WSM qualifies as a qualitative stock purchase according to the DowExperts. Following the general exhaustion of the most recent bullish reaction, we looked at the 2 ETFs that represent WSM’s business model most accurately, in order to see whether or not this exhaustion will be present on the other charts as well. By doing so, we could further test our short-term cautiously bullish and long-term bullish stance for the stock in the right way. Both XHB and XLY confirmed our expectations for an initial short-term weakness before the resumption of the long-term bullish trend for William-Sonoma’s stock. Thus, we will take advantage of the great long-term bullish potential, by joining in after the initial correction takes place later this month.

We will wait for a short-term correction to the downside from the current levels at $101 and start buying WSM’s stock at around $93. Should the price drop further in the short to middle term, we will be adding more to our buy positions at the next strong support mark at $81. In case of a further drop in the short-term, we will be interested in buying more aggressively again at the next key support at $70 where the key horizontal and diagonal supports match and a lot of buying activity is expected to take place. That way we will be able to improve our average cost basis and be able to get a better average price on our long holdings on the stock.

As the price starts to reverse back to the upside, we will be interested in collecting our first profits at the $100 mark. Our next profit-taking area is positioned at $112 and $120 respectively, where we will be collecting the majority of our profits.

Sincerely,

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