On Thursday, Telsey Advisory Group increased its price target for Williams-Sonoma (NYSE:WSM) shares to $320 from the previous $265, while maintaining an Outperform rating on the stock. The adjustment follows a review of the company's fourth-quarter 2023 performance, which revealed several positive developments.
Williams-Sonoma reported slightly better comparable brand sales at negative 6.8% compared to FactSet consensus estimates at negative 9.1%. The company also noted that furniture sales showed improvement in the fourth quarter of 2023 compared to the third quarter, and early trends in seasonal sales for the first quarter of 2024 are looking promising.
The retailer provided guidance for an operating margin of 16.5% to 16.8% for 2024, which is higher than the 16.1% forecasted by FactSet, indicating a potential increase from the 16.4% margin in 2023. Additionally, Williams-Sonoma announced a significant 26% increase in its quarterly dividend to $1.13 per share and unveiled a new $1 billion stock buyback program.
Telsey further highlighted the company's updated long-term operating margin target, which has been raised to the mid-to-high teens from approximately 15% previously. Williams-Sonoma's stock experienced an 18% surge, marking the largest single-day movement in over a decade of the firm's coverage.
The report acknowledged that Williams-Sonoma's premium product positioning and differentiated offerings, including exclusive products and collaborations, could justify a higher price-to-earnings (P/E) multiple than the 13x it traded at pre-pandemic. The company's improved operating margins, which are indicative of a brand offering unique, high-quality products, support this view.
However, it was also noted that the home furnishings sector's cyclicality, particularly with its ties to the housing market, could warrant a lower multiple compared to more stable consumer categories. In establishing the new price target, Telsey compared Williams-Sonoma to other companies with similar operating margins and determined a fair P/E multiple based on industry averages and specific company performances.
The updated price target of $320 is based on applying a 20x P/E multiple to Telsey's 2025 earnings per share estimate of $16.00 for Williams-Sonoma, reflecting a bullish outlook on the company's financial prospects and market position.
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