Buy, Sell, or Hold Williams-Sonoma?

Williams-Sonoma (NYS: WSM) is one of my worst CAPScalls ever. I ended my red-thumb underperform call last April after having lost 300-plus points in CAPS, even though I was astounded the high-end retailer could keep up decent growth in such a nasty economic climate.

Finally, Williams-Sonoma shares plunged last week, sharing the spotlight with Tiffany (NYS: TIF) . Both companies' recent tidings could indicate that the high end's going to hell in a hand basket in 2012.

Williams-Sonoma cut its fourth-quarter earnings guidance to $1.10-$1.15 per share, versus its previous $1.15-$1.20 per share forecast. The retailer spent a lot on marketing and had to adjust to the highly promotional environment during the holiday season, leading the high-end home merchandise retailer to focus more on delivering value to its customers than delivering luxury.

Seriously, I'd imagine it is hard to peddle $40 tea strainers and $200 knife sharpeners in this economic environment. Tiffany also cut its outlook due to lackluster holiday-season spending on its pricey jewelry here and abroad.

Williams-Sonoma's growth hasn't been that bad despite consumers' new frugality. In the last 12 months, it grew total sales by 7.4% and reported $2.13 per share in earnings, and its margins have held steady at 44%. Discount retail powerhouse Wal-Mart (NYS: WMT) has struggled with anemic sales over the last several years, and you'd think it would have been a shoo-in to be a beneficiary of consumers' skittish spending patterns.

Furthermore, Williams-Sonoma's now trading at 13.5 times forward earnings, and sports a PEG ratio of 1.06. Those metrics are less expensive than luxury goods companies Tiffany (forward P/E: 14.7, PEG ratio: 1.14) and Coach (NYS: COH) (forward P/E: 15.5, PEG ratio: 1.17). Williams-Sonoma's dividend actually edges out those of Tiffany and Coach as well.

Still, I'm not ready to make a new, confident, bullish or bearish CAPScall on Williams-Sonoma right now. It may look like a reasonable idea to buy, but I'm still concerned that many consumers will balk at those $40 tea strainers and other nice-to-have, not need-to-have items. I'd just call Williams-Sonoma a hold at the moment.

What do you think? Let us know in the comments box below, add it to your Watchlist, or put your own CAPS rating on it. (You can check my CAPS track record here.) If you're looking for related reading, check out our free report on a retailer you may have never heard of: The Motley Fool's Top Stock for 2012.

At the time thisarticle was published Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Wal-Mart Stores and Coach. Motley Fool newsletter services have recommended buying shares of Coach, Wal-Mart Stores, and Williams-Sonoma. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. 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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