Williams-Sonoma scores upgrades on margin retention

Williams -Sonoma’s (NYSE:WSM) ability to maintain higher margins and control expenses earned the company an upgrade from Goldman Sachs and Morgan Stanley, both of which cite the company’s Q4 results for the improved outlook.

Morgan Stanley upgraded Williams-Sonoma (WSM) to Equal-weight from Underweight, while Goldman Sachs moved to Neutral from Sell. Both raised their price targets as well with Morgan Stanley moving higher by 25% to $300 and Goldman by 70% to $263.

The specialty retailer beat Q4 profit and sales guidance and increased its dividend by 26%, sending shares to an all-time high on Wednesday. While yesterday’s rally might have been amplified by high short interest (10.5% vs float) the bullish results come amid a weaker demand environment in big-ticket items, suggesting Williams-Sonoma (WSM) is “past peak pain.”

“We have a better appreciation for the business’s ability to generate operating leverage against a tepid demand backdrop,” Morgan Stanley analyst Simeon Gutman said in a research note, adding that the company’s “solid expense control and structural margin drivers have enabled margins to stay in the high teens% irrespective of top-line declines.”

Same goes for Goldman Sachs which added that despite negative comps, Williams-Sonoma “reported better-than-expected margins by managing promotions and benefiting from freight costs, which offset deleverage.”

And although furniture demand is unlikely to improve until the housing market fully recovers, the company still expects to sustain its current operating margin (16.4% in 2023 and 16.5%-16.8% expected for 2024) even with another year of negative comparables in fiscal year 2024.

Besides upgrades from Morgan and Goldman, RBC Capital, Wedbush, Citigroup, J.P. Morgan, Baird, Telsey, and Evercore all raised their price targets as well.