Williams Sonoma falls on analyst downgrade

Janney Capital Markets is concerned with the company's inflated margins and ability to sustain sales growth.

By Kim Peterson Jan 3, 2012 3:10PM
Image: Home kitchen (© Tim Pannell/Corbis/Corbis)Williams Sonoma (WSM) is a great company. But a great company doesn't always make for a great stock.

That's the message behind Janney Capital Markets' downgrade Tuesday of Williams Sonoma to "sell" from "neutral." The stock fell more than 3% to $37.19 as a result.

Williams Sonoma owns its namesake brand of home goods stores as well as the Pottery Barn and West Elm names. All cater to the high-end consumer -- which is part of the problem, according to the analysts at Janney.

One of the notable trends of 2011 was that wealthy consumers were in full economic recovery and had no problem spending. Michael Kors (KORS), Macy's (M) and Ralph Lauren (RL) had a great year.

But how long can these retailers tie their fortunes to the wealthy? Williams Sonoma saw sales bounce back 20% from their 2009 lows, Janney notes, to only about 7% below the peak levels seen in 2007. It's unrealistic to expect the company to keep up that pace.

"To drive sales beyond current levels, the company will need to expand its customer base," Janney writes. How to do that? One obvious answer is more advertising and more promotions -- and that will cost money, which will eat into the company's inflated margins.

Other analysts are more bullish on the stock, as the following video shows.

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"Management has done a great job during the recovery but we fear they don't have levers to pull to drive earnings when sales moderate," the Janney analysts write. They are taking down their earnings-per-share estimates for this year to $2.41 from $2.45 to $2.41 -- far below the consensus estimate of $2.54.

Williams Sonoma wasn't the best performer last year. Its shares roller-coastered from a high of more than $45 in early May to a low of below $29 in August.

The company bought specialty lighting retailer Rejuvenation last year, which seems to indicate that it's searching for growth, Janney analysts wrote. "In our humble opinion, the burden of proof is on the company, as the history of successful growth internationally or via acquisitions is not encouraging across the retail sector."
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