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Williams-Sonoma Continues To Clean Up
Posted: Jan 21, 2011 11:38 AM by Will Ashworth
The holidays were extra special at Williams-Sonoma (NYSE:WSM) in 2010 and based on early guidance provided January 13, this year is set to carry on where last year left off. It seems like just a short while ago the specialty retailer was struggling to compete in the home furnishings industry. Fortunately, for shareholders, management made a conscious decision to focus on building up its e-commerce business while generating higher sales per square foot from its existing network of retail stores. The move is working and barring unforeseen circumstances, it's going to clean up in the coming years.
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E-Commerce Profitability
Its online sales deliver operating margins three times those of its retail stores. This means it has to generate $300 in revenue from its stores to produce the same profit from $100 in online sales. This is a substantial difference, especially when you consider the capital expenditures required to open new stores. Even though direct-to-consumer revenues in fiscal 2008 and 2009 dropped by 15.9% and 12.5% respectively, earnings before income taxes averaged $197 million in each of those years.
Retail earnings, on the other hand, averaged $87 million on revenues that were 50% higher. Most importantly, 2010 looks huge. Pretax margins for the direct-to-consumer segment in the first 39 weeks of the year were 21%. Based on management's 2010 revenue guidance of $1.4B, pretax profits will be $294 million. When you consider direct-to-consumer sales in 2007 were $1.7 billion, the potential for greater profits is palpable.
Retail Store Footprint
While it has permanently closed 46 stores in the last two years, the company is not retreating completely from opening new locations. It's just being more discreet. In its Q4 guidance, CEO Laura Alber said the company would continue to seek market share and extend its brands into other markets and why not. It has 594 stores across its five brands and with the exception of 17 in Canada, all are in the United States.
Internationally, it opened its first Middle East store (Dubai/Pottery Barn) in April 2010 under a franchise agreement with MH Alshaya, the region's biggest retailer. These are the same people who own the Starbucks (Nasdaq:SBUX) franchise in the Middle East. Alber's picked an excellent partner and it's likely to be a successful venture. Domestically, it will expand through the West Elm brand, which currently numbers just 36 locations. Investors can expect capital expenditures between $135 million and $150 million in 2011, most of which will be for West Elm store openings. |
