Williams-Sonoma (WSM, Financial) saw a decline in its stock price, falling 7%, after reporting weaker-than-expected Q2 revenue and lowering its FY25 guidance. This reaction followed a similarly concerning performance from peer La-Z-Boy (LZB, Financial), which also issued soft revenue guidance due to ongoing challenges in consumer spending. High interest rates, low housing turnover, and persistent inflation have negatively impacted demand for WSM, affecting both its Q2 results and FY25 outlook.
- WSM's Q2 comparable sales (comps) dropped by 3.3%, a sharp decline after positive growth in Q1 and Q4 of the previous fiscal year. This was somewhat expected, as WSM had previously indicated that demand wouldn't pick up significantly until the latter part of FY25. However, the rapid deterioration in comps highlights the volatility of the current economic landscape.
- Due to this weakening, WSM lowered its FY25 comp outlook to -5.5% to -3.0%, down from the previous range of -4.5% to +1.5%. The company also adjusted its FY25 revenue growth guidance to -4.0% to -1.5%, from the earlier range of -3.0% to +3.0%.
- Despite the challenging environment, WSM is sticking to its core strategy, focusing on three priorities: returning to growth, improving customer service, and enhancing margins. The company achieved a 550 basis point increase in gross margins year-over-year to 46.2%, thanks to higher merchandise margins and supply chain efficiencies. WSM also raised its FY25 operating margin forecast by 40 basis points to 17.4-17.8%, even with lower revenue expectations.
- WSM's higher margins are partly due to its strategy of capturing market share without extensive marketing campaigns. Brands like Pottery Barn give WSM significant premium name recognition, allowing it to limit markdowns.
- WSM aims to drive growth through product innovation and enhanced channel experiences. The company plans to introduce more new products and expand its online content, including new online design tools for 3D rendering.
WSM's lowered FY25 guidance was disappointing, especially given the company's optimistic remarks last quarter. While management is working to rekindle demand, it's uncertain whether these efforts will be enough to drive growth amid soft discretionary spending and a sluggish housing market. WSM has historically performed well despite economic headwinds, often outpacing its peers. If interest rates begin to drop, WSM is well-positioned to reignite growth, especially compared to its competition.
