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In the wake of a pandemic that ignited the housing market, in turn fueling demand for all the things people buy to furnish their homes, home-goods retailer Williams-Sonoma Inc. is ready for a return to whatever we’re now calling normal, Wedbush analysts said on Thursday.
That assessment came despite warnings from Williams-Sonoma
WSM,
in November about consumers who are still reluctant to spend on bigger, pricier furniture items. The Wedbush analysts upgraded the stock to their equivalent of a buy rating from hold, saying Wall Street underappreciates the chain’s potential to manage costs and grow operating margins.
Shares of Williams-Sonoma finished the day up 2%. The stock is up 57.3% over the past 12 months.
“Although home-improvement furnishings demand weakened in 2023 on the back of spiking interest rates, plummeting existing-home sales, consumer spending shifting to services and unwinding of pulled-forward demand throughout the pandemic, we believe many of these key drivers are bottoming or reversing, which should translate to stronger demand in 2024,” the analysts said.
The analysts noted they expect home-furnishing retail sales to rise at least in the low-single digits this year. And they said that a shift toward online sales has helped Williams-Sonoma, along with efforts to tighten up its shipping operations and product assortment. Analysts added that the company has managed to demonstrate some ability to keep prices higher, in an industry where discounts have proliferated for nearly two years as retailers compete for inflation-battered customers.
“While we expect some of these costs to come back in a more-normalized environment, we believe when taken together with the selling-margin tailwinds now flowing through, these dynamics lend credence to the company’s claims that it is now a far more efficient and disciplined company than past downcycles would have suggested,” the analysts said.
Rolling all of that together, the analysts see operating margins rising to 16.9% in 2024, as well as flat same-store sales growth, revenue growth of 2% and a per-share profit of $15.71 — well above Wall Street consensus.
Still, when Williams-Sonoma reported quarterly results in November, the company cut its full-year outlook and noted “ongoing consumer hesitancy” on buying big-ticket items. High-end furniture chain RH
RH,
last month swung to an unexpected quarterly loss, with executives blaming a “frozen” housing market.
Higher prices for the things people need — like groceries and heating — have forced many consumers to hold off on things like furniture over the past two years. A jump in home prices during the pandemic’s home-buying spree, and higher mortgage rates since, have locked many potential homebuyers out of the housing market. However, those rates began to fall near the end of last year, and as of last month had held below 7%.
“Lower rates are bringing potential homebuyers who were previously waiting on the sidelines back into the market, and builders already are starting to feel the positive effects,” Sam Khater, chief economist at Freddie Mac, said last month.
Echoing that sentiment, homebuilder KB Home
KBH,
on Wednesday said that consumers were “responding favorably to the recent decline in mortgage rates.“
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