Williams-Sonoma Earnings: Shares Pressured on Outlook, Despite Performance That Remains Top-Notch

No-moat Williams-Sonoma's second quarter printed solid performance despite facing an uncooperative housing market still plagued by elevated interest rates, low home turnover, and a customer focused on services rather than goods. While sales suffered, falling 4% in the period, operating margin expanded by 160 basis points to 16.2%, 60 basis points ahead of our estimate, benefiting from higher full-price sell-through as well as lower input and logistics costs. We think Williams-Sonoma has done a top-notch job utilizing advertising to highlight product innovation offers, upping the willingness of customers to accept price increases. However, this implies that persistent advertising could be required to lift the awareness of new products as they come to market, keeping the selling, general, and administrative ratio elevated. Alternatively, if promotions rather than advertising start to motivate sales conversion, the firm could lean into promotions—we’re fine with either effort as the operating margin outlook remains rangebound regardless of the strategy. As such, we don’t expect to alter our long-term outlook, which includes a five-year average operating margin of 19% and a return to 4% sales growth in 2025, bolstering cost absorption.