Williams-Sonoma Breaks Eggs, but Does It Make an Omelet?


Efficient companies operate like restaurants, working quickly, saving time, and making great hollandaise sauce. Williams-Sonoma (NYS: WSM) recorded top-notch earnings for 2011 but surprised investors by announcing the retirement of its COO/CFO. With a new chef coming in, will the kitchen fall apart as analysts predict?

Financial slice and dice
The company released its 2011 earnings report on March 8, and performance exceeded analysts' expectations. Sales grew by 6.2% to $3.72 billion, but that headline number doesn't reflect the change in operations.

The fat got sliced away in distribution. Catalog and online sales -- referred to as "direct to consumer" or DTC sales -- grew by 12.8% and represented 44% of total sales. The increase in DTC sales means that margins increased as well, since these sales don't require store staffing or Main Street locations.

The shift grew out of Williams-Sonoma's 2011 focus on and investment in its online channel. As a result of the savings, net earnings grew 18% to $237 million. Gains were slightly offset by an increase in employment to support the DTC sales channels, but the staffing costs remain well below costs associated with bricks-and-mortar storefronts.

Now compare Williams-Sonoma's 10.3% operating margin to Pier 1 (NYS: PIR) , which managed to hold on to only 7.8% of its revenue. Both Pier 1 -- original importer of the papasan chair -- and Williams-Sonoma are still lagging behind competitor Bed Bath & Beyond (NAS: BBBY) , which maintains an incredible 15.2% of every sale.

While Williams-Sonoma has a long way to go before hitting that mark, the company has recognized the value of online sales and will invest even more in developing its DTC channels this year.

Bringing in a new head chef
Even with Williams-Sonoma's Michelin star success, the stock price took a 9% dip. Analysts were delighted by the revenue souffle but were caught off-guard by two negative side dishes.

Along with the earnings announcement came the unexpected retirement of Chief Operating and Financial Officer Sharon McCollam. She has overseen a good deal of Williams-Sonoma's recent increases in efficiency and expansion.

Along with the resignation came a revision for 2012 earnings. Analysts were predicting $2.48 per share, but management instead offered a range of $2.37 to $2.47. Once the company provided guidance, investors were quick to correct the price.

Does anyone want seconds?
Williams-Sonoma is a luxury brand that thrives on disposable income. As earnings power slowly seeps back into the economy, the brand should profit. McCollam's temporary replacement is Julie Whalen, SVP, corporate controller, and treasurer. Whalen has been with the company since 2001 and has worked alongside McCollam for a good deal of that time. I think she'll be well-suited to the role, for the time being.

Competitively, companies such as Williams-Sonoma will continue fighting the big online retailers. Amazon.com (NAS: AMZN) commands a huge share of online sales at tiny margins in aggressive defense of its market share. With almost 13 times the sales revenue of Williams-Sonoma, Amazon only managed to book two and a half times the net income. Fortunately for Williams-Sonoma, its brand strength continues to be strong, allowing it to realize far higher margins than convenience- or price-driven online retailers such as Amazon.

Meanwhile, Amazon is trading at 132 times earnings while Williams-Sonoma, Bed Bath & Beyond, and Pier 1 are all around 17.

As long as Williams-Sonoma can continue its focus on sales efficiency, I believe it will be well-poised for growth in 2012. I see no reason why that focus should disappear with McCollam nor why Williams-Sonoma wouldn't be able to bounce back from its recent price downturn. To me, this looks like a cheap and filling meal.

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At the time thisarticle was published Fool contributor Andrew Marder owns one entire share of Williams-Sonoma, which was given to him as a Christmas present one year. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Bed Bath & Beyond, and 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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