Margin Pressure Casts Shadow On Williams-Sonoma Q2 Beat

While investors appear to be satisfied with Williams-Sonoma, Inc. (NYSE: WSM)'s earnings report based on the stock's move higher Thursday some analysts aren't convinced that the report was good enough to declare the stock a Buy.

Credit Suisse: Margins Under Pressure

Expectations heading into the earnings report were "very low" and Williams-Sonoma merely reported an in-line result, Credit Suisse's Seth Sigman commented in a research report. Beyond the headline numbers, the report also demonstrated that the company is "deep in investment mode," which will pressure margins.

Merchandise margin was -50 basis points or -76 points on a two-year basis in the quarter against -26 basis point in the same quarter a year ago, Sigman added. This is unlikely to improve in the near-term as the company will lap a +76 basis point increase in the third quarter followed by a +131 basis point increase in the fourth quarter.

Meanwhile, SG&A growth rose by 4.2 percent in dollar terms during the quarter which helped contribute to an EBIT margin which came in at the lowest level for a second-quarter dating all the way back to 2009.

"While sales comparisons are easy in 2H, margin comparisons are more difficult, and guidance already embeds a 50–70 bps increase in 2H EBITDA margin," the analyst concluded (see Sigman's track record here).

Shares of Williams Sonoma remain Neutral rated with an unchanged $44 price target.

Buckingham: Negative Margin Thesis 'Overplayed'

Taking a somewhat different view, analysts at The Buckingham Research Group think that the retailer's margin concerns are "overplayed."

Williams-Sonoma's earnings report did come in at the high end of the company's own guidance and three cents better than expected, Buckingham's Kelly Halsor commented in a research report. The company also demonstrated improvements in its comps and just a 20-basis decline in gross margins. As such, the company at the very least "partially disproves" the short thesis that a lowering of the company's margin outlook is "imminent" in the near term.

In fact, Williams-Sonoma's recent move to offer a flat shipping rate across its brands is indeed helping the company to fend off market share losses, especially at its highest margin business, Pottery Barn, the analyst continued.

"As such, we believe downside to the multiple and, in turn, the stock is limited here as management took a confident stance around the opportunity for further improvement in both comps and margins in 2H17," Halsor wrote.

Nevertheless, Williams-Sonoma's stock could continue to see pressure as bears will likely "double down" on the margin impairment theory, regardless if it materializes.

Shares of Williams-Sonoma remain Neutral rated with a price target lowered from $53 to $48.

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