Meet 1 of the Market’s Latest Stock-Split Stocks. Is It a Buy?
Williams-Sonoma stock is up by 150% over the last 12 months.
The stock-split scene was quiet for a while before Nvidia and Walmart announced splits earlier this year, followed by Chipotle Mexican Grill‘s mega 50-for-1 split announcement.
There have been a few more high-profile stock-split announcements since, but one of the latest is one you might not predict: home goods giant Williams-Sonoma (WSM -0.19%). Let’s see why this market-beating stock is splitting and what investors should expect.
Slow sales, high resilience
The company’s namesake Williams Sonoma chain sells high-end furniture, kitchenware, and home goods. That said, it sits at the lower end of the luxury spectrum, so while it targets an affluent clientele, its wares are also accessible to mass consumers. The company also owns popular brands Pottery Barn and West Elm, each of which has a slightly different branding and focus.
These are the kinds of brands that can often thrive even amid higher inflation, since their target customers aren’t as much impacted by it. However, with the real estate market still slow and Williams-Sonoma relying on mid-range customers for some of its sales, the impacts of recent macroeconomic conditions have been showing up in its financial statements. CEO Laura Alber said that it’s increasing its marketing spend to capture market share and also invested in improving its already excellent e-commerce segment.
In the company’s fiscal 2024 first quarter (which ended April 28), comparable sales were down 4.9% year over year. However, that beat expectations. Earnings were $4.07 per share, which blew Wall Street’s consensus estimate out of the water. Management said that $0.59 per share of that came from an adjustment related to over-reporting of expected expenses in earlier quarters, but even without that, earnings increased by 48% from $2.35 per share in the prior-year period.
Operating margin also came in ahead of estimates at 19.5%, or 16.6% without the adjustment. That was also far above last year’s figure of 11.4% despite the lower sales. Management raised its full-year outlook for operating margin, and the market sent the stock soaring in the wake of the report.
Why is it splitting its stock now?
When Williams-Sonoma recently announced its intention to split its stock, it cited the usual reasoning for such moves: “To make its stock more accessible to investors and employees.”
Williams-Sonoma stock has risen by about 150% over the last year, crushing the broader market’s gains. It trades at about $300 per share, which isn’t exceptionally high these days — Chipotle is trading at a 4-digit price ahead of its planned split, as was Nividia prior to its split. These kinds of price gains and price tags can still put a stock out of reach for some investors and employees. Walmart stock was only trading at about $165 when it announced its split in February, and it’s up by about 14% since it split.
There’s some evidence to suggest that stocks do tend to jump in the period just after a stock split, but it doesn’t look like Williams-Sonoma needs to jump-start its stock. Stock splits typically imply that a company is doing well and that management expects that to continue.
Wall Street has been impressed with Williams-Sonoma’s extraordinary performance in this economic climate, which bodes well for it in the coming years.
Should you buy Williams-Sonoma stock?
Williams-Sonoma is leading the housewares industry into the future. A full 66% of its sales come from digital channels, and as it invests more in these channels, it should be able to grab greater market share. What many retailers are seeing since digital accelerated early in the pandemic is that omnichannel is the way to go; retailers that are too focused on e-commerce aren’t giving customers the physical experience they crave when making digital shopping decisions. Williams-Sonoma has the omnichannel model down pat.
The housewares and furnishings retail segment has low e-commerce penetration rates compared with other segments. Given that two-thirds of its sales already come from digital channels, Williams-Sonoma should benefit organically as the broader rates of penetration increase.
Williams-Sonoma is a growing, well-managed company with strong growth drivers. It also pays a growing dividend. Its share price could jump a bit thanks to its pending stock split, but the real reason to buy it now is for its excellent long-term prospects.
Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Nvidia, Walmart, and Williams-Sonoma. The Motley Fool has a disclosure policy.
