Recession impacts on Williams-Sonoma 'appear underestimated'

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Retailer Williams-Sonoma (WSM) was cut to Underweight from Equal-Weight by Morgan Stanley analyst Simeon Gutman on Monday, also lowering the firm's price target on the stock to $100 per share from $150.

Gutman told investors in a research note that earnings revisions could turn sharply negative in 2023 as the "impacts of reversion, recession & normalizing promotions appear underestimated, even at the stock's current discounted valuation."

Williams-Sonoma shares have tumbled Monday, currently down more than 4.5%, adding to its year-to-date losses.

"The market is anticipating negative revisions and this is reflected in the WSM's current discounted valuation (~8.5x consensus NTM P/E vs. the stock's pre-COVID average of 13-14x). That said, the large anticipated magnitude of EPS cuts — and their timing, which could accelerate in the next 1-2 quarters — may be greater than the market expects, and should keep valuation pressured until there is more clarity on the earnings/margin trough," the analyst wrote.

He added that a "significant" downside to estimates alongside only modest anticipated multiple expansion over the next 12 months drives the firm's bearish view on the stock.

"Risk/reward skews wide and relatively balanced with ~50% upside/downside to our $180/$60 bull/bear cases. The market is focused more on the downside case with industry trends decelerating and after WSM's long-term revenue/margin targets were withdrawn with the Q3'22 earnings release. Alongside our cautious fundamental view, we thus see a higher probability of our bear case playing out than our bull case," Gutman concluded.

By Sam Boughedda