Morgan Stanley Shows Concern For Williams-Sonoma's Margins, Lowers Price Target

On Wednesday after the market close, Williams-Sonoma, Inc. (NYSE: WSM) reported earnings mirroring analyst estimates, but missed on revenues and comparable sales. In addition, company management’s weak forecasts spooked investors.

Morgan Stanley’s Take

Morgan Stanley’s Simeon Gutman’s key takeaway from Williams-Sonoma’s Q2 results was that the company’s operating margins would likely struggle to expand in the future. The analyst lowered his price target from $55.00 to $54.00 and maintains his Equal-Weight rating on the company.

“The cost of growing sales is increasing for WSM and the broader home furnishings segment and we believe it will be difficult to drive improvement in both sales and EBIT margin over time,” stated Gutman.

Expect Lower Profit Margins

Although sourcing and inventory investments were paying off, promotional intensity was high, pressuring margins. Gutman expected Sonoma’s excessive promotional strategy to continue, potentially contracting the company’s Gross margins in the future.

Related Link: What Bulls And Bears Will Take Away From Williams-Sonoma's Q2 Results

Declining Key Brands

In addition, four of William-Sonoma’s core brands declined in comparable same-store sales during Q2, flagging Sonoma’s need to increase advertising dollars to drive traffic, according to the Morgan Stanley analyst.

“Ultimately, we think it would be difficult to optimize the tradeoffs mentioned above in a highly competitive, highly promotional home furnishing segment,” stated Gutman. A weak consumer environment does not help Williams-Sonoma’s case either.

At time of writing, Williams Sonoma traded at $54.91, up 1.42 percent shortly after Thursday's opening bell.

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