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Better Buy: William Sonoma vs. Wayfair

The demand for products such as home furnishings, furniture, and decorative items has increased markedly amid the pandemic as people, forced to spend more time at home, seek to beautify their surroundings. As a result, Williams-Sonoma (WSM) and Wayfair (W) have benefited from greater demand for their products. With an expected continuation of pandemic-driven life and work trends, at least over the near term, both companies are expected to see steady demand in the coming months. But let’s find out which of these two stocks is a better buy now.

Williams-Sonoma, Inc. (WSM) and Wayfair Inc. (W) are two of the world’s top players in the retail space, offering home furnishings and furniture, among other products. WSM operates retail stores in the U.S., Canada, Puerto Rico, Australia, and the U.K.  W operates through two segments — U.S. and International.

Home comfort and beautification products, such as home furnishings, have garnered much interest from consumers amid the pandemic as people spend more time at home and pay more attention to such things. As such, both WSM and W have seen a significant rise in their revenues.

While WSM has returned 150% over the past five years, W has gained 680%. In terms of their past-year performance, W is a clear winner with 180.8% returns versus WSM’s 63.2%. But which of these two stocks is a better pick now? Let's find out.

Latest Movements

WSM’s Pottery Barn announced on January 4 that it has set a goal of planting three million trees by the end of 2023. In partnership with Arbor Day Foundation, the brand is expected to plant one tree for every piece of indoor wood furniture sold since December 31, 2020. In  December, the company announced a quarterly cash dividend of $0.53 per common share, payable on February 26.

WSM unveiled the names of 14 members its2020 Chef’s Collective in October. The chefs and bar experts named will each serve as advisors and ambassadors to the company and provide personal insights on how the company can continue to support the culinary hospitality industry and chef community. The company had also announced several plans  to further enhance the holiday season experience with a focus on health and safety. Additional services offered included contactless curbside pickup, and waiting list apps, among others.

W announced several attractive deals for its 72-Hour Clearance Sale through January 18. The company offered up to 60% off on almost all items. W  announced the Way Day 2020 on September 9, , which commenced from September 23. The company extended the popular retail holiday to a full two-day sales event r and offered the lowest prices of the year across thousands of top-rated products.

On November 13W company named Michael E. Sneed, Executive Vice President of Global Corporate Affairs and Chief Communication Officer for Johnson & Johnson (JNJ), to its board of directors. And  September, it launched the Kelly Clarkson Home collection, in collaboration with Kelly Clarkson.

Recent Financial Results

WSM’s revenue has surged 22.4% year-over-year to $1.76 billion for the third quarter ended October 31, 2020 driven by accelerated sales activity  across all brands. Comparable brand revenue growth accelerated to 31% year-over-year, while e-commerce net comparable brand revenue growth was 49.3%. Its gross profit increased 36.2% year-over-year to $705.58 million, and net earnings increased 170.1% year-over-year to $201.77 million, yielding non-GAAP EPS of $2.56, representing a 151% increase year-over-year.

W’s revenue for the third quarter ended September 30, 2020 increased 66.5% year-over-year to $3.84 billion. Its gross profit increased 112.5% year-over-year to $1.15 billion. The number of its active customers increased nearly 51% year-over-year to 28.8 million. And its net income and non-GAAP EPS was reported to be $173.17 million and $2.30, respectively. This is in comparison to a loss incurred by the company in the third quarter of 2019.

Past and Expected Financial Performance

WSM’s revenue has increased at a CAGR of 6.8% over the past three years. Analysts expect the company’s revenue to increase 16.8% for the quarter ending January 31, 2021 and 12.7% in 2021. WSM’s EPS is expected to grow 55.4% for the quarter ending January 31, 2021, 60.8% for the quarter ending April 30, 2021, and at a rate of 14.9% per annum over the next five years.

In comparison, W’s revenue has increased at a CAGR of 45% over the past three years. The market expects W’s revenue to increase 47.1% for the quarter ended December 31, 2020 and 12.6% in 2021. The company’s EPS is expected to grow 128.6% for the quarter ended December 31, 2020, 92.6% for the quarter ending March 31, 2021, and at a rate of 30% per annum over the next five years.

Profitability

W’s trailing-12-month revenue of $13.01 billion is higher than WSM’s $6.33 billion. However, WSM is more profitable with a gross margin of 37.5% versus W’s 27.9%.

Also, WSM’s leverage free cash flow margin of 14.9% compares favorably with W’s 6.2%.

Valuation

In terms of forward P/E, W is currently trading at 65.2x, 320% more expensive than WSM, which is currently trading at 15.56x. Moreover, W is more expensive both in terms of trailing-12-month P/S (2.18x versus 1.53x), and trailing-12-month EV/S (2.39x versus 1.63x).

In terms of trailing-12-month price/cash flow, W’s 25.41x is 230% higher than WSM’s 7.7x.

Thus, WSM is the more affordable stock.

POWR Ratings

While WSM is rated “Strong Buy” in our proprietary POWR Ratings system, W is rated “Buy.” Here are how the four components of overall POWR Rating are graded for WSM and W:

WSM has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade, and a “B” for Industry Rank. It is currently ranked #11 of 66 stocks in the Home Improvement & Goods industry.

W holds an “A” for Trade Grade, and a “B” for  Industry Rank, a “C” for Buy & Hold Grade, and a “D” for “D” for Peer Grade. It is currently ranked #9 of 42 stocks in the Specialty Retailers industry.

The Winner

Both WSM and W are good investment bets considering their market dominance and steady demand for products. However, WSM appears to be a better buy at a lower valuation based on its superior financials and higher profitability.

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WSM shares were trading at $130.43 per share on Thursday morning, up $1.89 (+1.47%). Year-to-date, WSM has gained 28.07%, versus a 2.93% rise in the benchmark S&P 500 index during the same period.



About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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