Taking the Bright Side of Williams-Sonoma

The direction Williams-Sonoma is taking is open to interpretation and observers can, and have, differed significantly with one analyst, Joan Storms of Wedbush Morgan, upgrading the company’s shares based on its latest posted results and another Michael Lester of Barclays Capital downgrading it.

Williams-Sonoma may deserve the benefit of the doubt.

Storms said the main reasons behind her upgrading the stock had to do with the company’s aggressive inventory management and a strong balance sheet that can sustain it in a recession, as well as the advertising efficiencies Williams-Sonoma has instituted. She said that the well-considered marketing effort it outlined in its recent conference call would continue to bring customers to the stores but at a lower cost.

Storms had other reasons for her upgrade. She liked William-Sonoma’s decision to add more lower priced products particularly at Pottery Barn, the most middle-of-the road and highest volume of the company’s several chains. The lower price merchandise may provide Pottery Barn’s currently cautious but still affluent customers with a reason to buy.

It’s important to take into consideration also that the chains the company operates, including Pottery Barn, Williams-Sonoma, Pottery Barn Kids and West Elm, have solid identities and unique positions in the market and seem to be taking market share even if they are suffering reduced sales and earnings.

The last is a particularly important point. Williams-Sonoma chains face less competition in the better end of the home furnishings sector as Linens ‘N Things, Great Indoors and Expo Design Center depart the market. Not only that but competitors such as Macy’s are closing stores or severely cutting back on store openings.

At the same time, some housewares and home furnishings retailers are contracting the range of products they offer, particularly on the higher end, leaving Williams-Sonoma facing less competition. That might not seem to be a big benefit in a vicious recession, but keep in mind that housewares consumers in the United States have been gravitating away from the middle-range products for several years, favoring cheap and replaceable or expensive and central to personal lifestyle. Given the evidence that consumers are willing to make major purchases that have a bearing on home leisure time and entertainment, Williams-Sonoma may emerge as the go-to place for the at-home chef and neighborhood host even before the recession ends.