What to Expect From Williams-Sonoma's Third Quarter

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Over the last 12 months, Williams-Sonoma has been on the move. The stock has pretty much matched the S&P 500 for growth, with revenue and income rising steadily. Over the first half of the company's fiscal year, sales grew in all its brands except for the Williams-Sonoma brand. The best performers have been Pottery Barn and West Elm, and their growth has more than made up for the relative flatness at the namesake stores. The company announces its third-quarter earnings tomorrow, and here's what you should look out for.

The bottom line at Williams-Sonoma
The market is estimating that the company will come in at the top of its earnings guidance. Management has forecast between $0.51 and $0.54 per share for the third quarter, and the consensus on Wall Street is $0.54. Operating margin should come in just under 10%, with the company hitting 8.4% for the same period last year, and forecasting a full-year margin of more than 10%.

All of that is going to be dependent on two main things. First, the company needs to continue to drive sales up, especially in the direct-to-customer segment of the business, where it's consistently putting up an operating margin above 20%. Second, it needs to continue to manage its advertising costs, allowing it to hit those margin goals.

Step one: Sales
Top-line growth at Williams-Sonoma's brands has been a mixed bag. Over the first six months, Pottery Barn grew revenue by around 10%, West Elm was up close to 15%, and Williams-Sonoma fell about 1%. Williams-Sonoma sales were hurt by weak seasonal sales and aggressive pricing, which the company undertook in order to keep foot traffic up while moving through seasonal merchandise.

The third quarter should show some new strength, though, as the weather leveled out and seasonal goods came back in fashion across much of the retail landscape. Pier 1 Imports , which has had a good bounce in the last year, put up a 7.6% increase in revenue in its last quarter. The company noted that customers were responding positively to its seasonal merchandise, although they did the same thing earlier in the year as well.

Step two: Cost management
One of Williams-Sonoma's hidden talents is its ability to manage its costs and sales through its direct sales channel. The company still makes about 50% of its revenue from online and catalog sales, which give it additional leverage to keep margins high. For example, if it needs to clear merchandise, it can move its products through its higher-margin direct channel, taking a margin hit in a larger-margin business. That pushes a 20%-plus margin down slightly instead of weakening the lower retail margins.

It would be great to see the company needing to do less of this sort of thing, but as long as it can do it, it may as well. Investors should hope to see more sales moving to the retail business, pushing those margins up as much as possible.

In summary, keep it up
Tomorrow shouldn't have any big surprises, though the company might miss its income target if expansion costs continue to weigh it down. Its international business is growing, which is good, but it's also cutting into the business's available cash. Costs came heavy in the first year, but are expected to slow down a bit in the second half, although occupation costs will be rising.

I like -- and I own -- Williams-Sonoma for the long run. The business is growing at a steady pace and making inroads in Australia, which is having a housing price surge. Jumps in housing often spell good things for Williams-Sonoma, so the market could turn out to be a big driver in the future. Of course, it could all go pear-shaped and sink into the sea as well. That's not for tomorrow, but a good investor is always aware of potential bad news in the future. Keep your eyes open.

Getting into the market
Williams-Sonoma is one of my favorite stocks because it means something to me. I worked for the company years ago and still associate with the values that it professed. Having that sort of connection to a business can help new investors find their way around the market. In our new report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your free copy today.

The article What to Expect From Williams-Sonoma's Third Quarter originally appeared on Fool.com.

Fool contributor Andrew Marder owns shares of Williams-Sonoma. The Motley Fool recommends Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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