Will Weakness in Williams-Sonoma, Inc.'s (NYSE:WSM) Stock Prove Temporary Given Strong Fundamentals?

By
Simply Wall St
Published
July 19, 2021
NYSE:WSM
Source: Shutterstock

It is hard to get excited after looking at Williams-Sonoma's (NYSE:WSM) recent performance, when its stock has declined 8.7% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Williams-Sonoma's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Williams-Sonoma

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Williams-Sonoma is:

60% = US$873m ÷ US$1.4b (Based on the trailing twelve months to May 2021).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.60.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Williams-Sonoma's Earnings Growth And 60% ROE

First thing first, we like that Williams-Sonoma has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 24% which is quite remarkable. This probably laid the groundwork for Williams-Sonoma's moderate 18% net income growth seen over the past five years.

As a next step, we compared Williams-Sonoma's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.3%.

past-earnings-growth
NYSE:WSM Past Earnings Growth July 19th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is WSM worth today? The intrinsic value infographic in our free research report helps visualize whether WSM is currently mispriced by the market.

Is Williams-Sonoma Making Efficient Use Of Its Profits?

Williams-Sonoma has a three-year median payout ratio of 42%, which implies that it retains the remaining 58% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Williams-Sonoma has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 24% over the next three years. Regardless, the future ROE for Williams-Sonoma is predicted to decline to 38% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Conclusion

In total, we are pretty happy with Williams-Sonoma's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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