Why this stock just hit an all-time high

Specialty retailer Williams-Sonoma (NYSE: WSM) broke out on Wednesday as one of the biggest gainers, up 20% on the day to $289 per share and hitting an all-time high in the process. The major catalyst was a solid earnings report which showed that the retailer of goods and products for the home blew past earnings and revenue estimates.

Williams-Sonoma also rewarded investors with a huge 26% dividend boost, bringing it to $1.13 per share and marking 18 straight years of annual dividend increases dating back to 2006. Let’s examine the results and see if investors can expect more after this sizable share-price rally.

A huge dividend boost

The past couple of years have been a mixed bag for specialty retailers. However, Williams-Sonoma, whose brands also include West Elm and Pottery Barn, has been one of the most consistent performers, even during a difficult environment for sales of home furnishings.  

“We outperformed in 2023 despite the slowest housing market in several decades and geopolitical unrest,” said President and CEO Laura Alber in the Q4 earnings report. “Although this pressured our top-line trend, we stayed focused on full-price selling, supply chain efficiencies, and best-in-class customer service.”

Williams-Sonoma’s revenue fell 7% year over year to $2.28 billion for the fiscal fourth quarter, which ended Jan. 28, but the result was better than estimates. However, the cost of goods sold was down significantly, to $1.23 billion from $1.44 billion the same quarter a year ago, which raised the retailer’s gross profit by about 4% to $1.05 billion.

The company’s gross profit margin jumped 480 basis points to 46%. The margin improvement can be attributed to higher merchandise margins and lower costs from supply chain efficiencies. On the bottom line, Williams-Sonoma’s net income was basically flat at $354 million, or $5.53 per share.

The company also dramatically improved its liquidity over the past year with $1.3 billion in cash and equivalents, up from $367 million, and $1.7 billion in operating cash flow, up from $1.1 billion a year ago. This allowed Williams-Sonoma to provide investors with a huge 23-cent dividend raise, bringing the quarterly payment to to $1.13 per share at a yield of 1.5%.

The retailer also maintains a low 24% payout ratio, which means it has plenty of excess cash to keep its streak of annual dividend increases going beyond 18 years. In addition, Williams-Sonoma authorized a $1 billion share repurchase plan.

“After our strong finish to 2023, we are proud to be positioned to increase our quarterly dividend 26% and expand our stock repurchase program to $1 billion,” Alber said. “These actions reflect our ongoing commitment to maximize shareholder value and deliver returns to our shareholders.”

More room to run?

For fiscal 2024, Williams-Sonoma expects its operating margin to improve to between 16.5% and 16.8%, which would be up from 16.4% in fiscal 2023. The company projects net revenue growth of between -3% to +3% for the year. Longer term, the company is forecasting mid-to-high single-digit annual net revenue growth with an operating margin in the mid-to-high teens.

Wednesday’s rally puts Williams-Sonoma stock up more than 41% year to date, and over the past year as of March 13, the stock has risen 141%.

The company’s valuation remains relatively reasonable, trading at about 16 times forward earnings, but it is up from 9 a year ago. Analysts have a median price target of $240, which would represent a 16% drop from its current price. I think that may be too harsh, and the stock could get some price target upgrades after this report, even though the company’s revenue growth is muted.

Overall, Williams-Sonoma is a good company with an excellent dividend and a stock that has averaged a 17% annualized return over the last 10 years. Nonetheless, based on its solid outlook, investors probably shouldn’t expect the type of returns the stock has posted in the past year. It is a solid hold, but it might not be the best time to buy coming off an all-time high.