Back in late September, I suggested that investors should wait before investing in specialty retailer Williams-Sonoma Inc. (NYSE: WSM).
I argued then that the price tag for purchasing the company's goods was too high for most consumers in the current environment, as the days of easy money were over.
No more endless dollars from rising home values funding unlimited purchase of goods like furniture, beds and kitchen gadgets of the sort sold by WSM. This was evidenced by continuing declining earnings and same-store sales at the company.
In addition, I noted that Williams-Sonoma had any number of formidable competitors, which could put a strain on its profit margins. There will be a time to own this stock, I wrote, but that time hasn't arrived yet. I foresaw another 20% decline in the shares.
As it turned out, there was a lot more than 20% more downside to the stock -- more like 75% before the stock finally found a bottom as Thanksgiving approached. A brief rally ensued, but a miserable Black Friday sent most shares in the retail sector quickly south again.
The American consumer is still strapped to be sure, but I think the selling in WSM has seen the worst. The stock appears to have found a bottom, and now may be a good time to build a position.
There are a number of good reasons why I feel this way.
Mortgage rates are falling and refinancing is on the rise.
In addition, oil prices are falling to help ease monthly budgets. As a result, consumers are more flush with cash than last year.
With that extra cash, I expect spending to return in 2009, and WSM stands to benefit.
The bad news is behind the company, although things may still be bumpy for a quarter or two.
Recently released third-quarter results weren't pretty. The company saw a 16% decline in net revenue, and same-store sales got progressively worse during each month of the quarter. The company's core brands (Pottery Barn, Pottery Barn Kids and Williams-Sonoma) saw net revenue decrease nearly 18%. Loss for the quarter was 10 cents per share.
The company reiterated financial guidance in early December for Q4, and said if the trends it saw in October and November continued, revenue would be down 27% to 32% year over year and earnings would be between 10 cents and 30 cents per share for a year-over-year decline of 74% to 91%.
Williams-Sonoma figures if trends continue the way they are, 2009 revenue will be down 10% to 12% from fiscal 2008.
It is planning to reduce inventory receipts by 10% from fiscal 2008, targeting a 50- to 100-basis-point improvement in cost of goods sold, a $75 million reduction in SG&A expenses, a $10 million to $15 million reduction in returns, replacements and damages etc., and a $100 million or nearly 50% reduction in capital spending, coupled with a steady plan to close underperforming stores where possible.
All this should enable WSM to protect its bottom line, build the balance sheet and position its brands to emerge stronger when the economy finally does turn around.
I think $7 and change for WSM shares is not unreasonable and would buy more on weakness, as the shares are likely to be volatile in the short term.
Long term, this stock has the chance to double in value over a two- to three-year period.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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