How Well Is This Retailer Dealing With the Competition?

High-end housewares seller Williams-Sonoma turned in a solid quarter yesterday. The company beat top- and bottom-line estimates, earning $0.41 per share on $888 million in revenue. Management raised the company's full-year guidance, to between $2.67 per share and $2.77 per share. Overall, it looked like a very good quarter, even though the stock dipped 2% in trading today.

For the long run, investors interested in Williams-Sonoma seem to be sitting pretty, but new Wall Street competition may make the investment choice more difficult. Last year, Restoration Hardware reentered the stock market, after being taken private years ago. The company's fourth quarter was a fantastic thing to behold, and now it looks like the company to beat.

Success at Restoration Hardware
Restoration's quarter had a lead number that almost defied explanation. The company managed to grow comparable-store sales by 26%. This year, most retailers have been getting by with comparable-sales increases below 10%, if they even manage to hit positive territory. Williams-Sonoma's comparable brand sales -- its comparable-store sale measure that includes direct sales -- only managed 7.2% growth last quarter.

If that wasn't enough, Restoration is predicting that comparable sales in its first quarter are going to be up 41%. I think management at Williams-Sonoma might keel over dead if the company turned in that kind of result.

I think the big difference between the two is the youth of the newly revived Restoration. The company was posting negative comparable sales as recently as 2010. Since then, it's been able to turn itself around, and now it's being flooded with customers who are rediscovering the brand. That's being compounded by a big increase in the number of products that Restoration offers. In short, it's just taking off, while Williams-Sonoma is already at cruising altitude.

The bottom line for investors
That rocket-fueled growth isn't free. Restoration Hardware is trading at a price-to-sales ratio of 1.7, while Williams-Sonoma is sitting at 1.4. But so far, an investment in Restoration has paid off. Investors should keep an eye on costs, though. Right now, the company is still running at a loss as it ramps up its business. Gross margin is strong, though, sitting at 36.5% in the fourth quarter. Williams-Sonoma is a little higher, running a 37.6% gross margin in its first quarter.

I think both companies are looking good; it's just up to investors to decide what kind of business they want to be involved in. Williams-Sonoma is cruising along, looking for expansion overseas, while Restoration Hardware is still trying to expand in the U.S. beyond the mere 71 locations it now operates. Either way, investors should come out as winners in the long run.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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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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