In this piece, we used TipRanks’ Comparison Tool to have a closer look at two of the market’s most intriguing and beaten-down high-end retailers. High-end retailers have been pummeled over the past year, with mounting recession jitters that could cause many consumers to tighten their purse strings. Undoubtedly, big-ticket merchandise, like furnishings from RH (NYSE: RH) or high-end kitchen appliances from Williams Sonoma (NYSE: WSM), just isn’t in high demand when times get tough.
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Now, nobody knows to what extent the average consumer will be pressured. Regardless, investors have been very quick to throw in the towel on quality retailers like RH and Williams Sonoma well ahead of time. Such amplified volatility is to be expected when it comes to discretionary retail. When there’s panic and fear on Wall Street, shares tend to overswing to the downside, paving the way for steep discounts available to dip-buyers brave enough to adopt a contrarian mindset.
At the end of the day, market cycles happen, and steep ups and downs in high-end retailers are to be expected. The real upside comes from when recession risks are “overbaked” into share prices because that’s when upside relief corrections may be needed.
Williams Sonoma (WSM)
Williams Sonoma is a specialty retailer behind such names as West Elm, Pottery Barn, and its flagship Williams Sonoma stores. The company sells high-quality merchandise popular in middle and upper-middle-class households.
Though a recession will weigh heavily on home spending (it’s already shown signs of slowing), Williams seems ready to ride out the downturn, whether it be short-lived or long-lasting.
The company’s brand has resonated with consumers over the years. With growing brand power comes the ability to command higher margins. Though the recession will deal a heavy hit to margins over coming quarters, the long-term fundamentals could not be better.
Further, it isn’t just growing brand affinity that keeps customers returning to its stores. The firm has done a marvelous job using data analytics to get the most out of its expenditures. Data analytics is a secret weapon for Williams Sonoma. I expect the firm will continue to leverage such tech to help it navigate the coming downturn.
Finally, WSM seeks to become more than just a home or furniture retailer. With such a strong brand, a long-term expansion into new product categories is likely to be successful, as the firm looks to reduce the extreme cyclicality from furnishings while raising its TAM (total addressable markets). If there’s Williams Sonoma branding on a good, you can bet that it’ll have a premium price tag!
After a 42% drop, shares of WSM look beyond cheap at one times sales, 7.9 times trailing earnings, and 6.6 times cash flow. Clearly, the market is bracing for an earnings shortfall as economic growth continues to wind down with every interest rate hike.
While there’s no escaping the decaying macro as a discretionary retailer, I think the damage is a tad overblown. Shares nearly got cut in half from peak to trough. Though it will be a slog through an economic downturn, Williams seems to have all the tools to climb back to new highs once the market flips the switch to recovery mode.
Is WSM Stock a Buy?
Wall Street is shying away from Williams Sonoma with a “Hold” rating, likely due to its cyclical nature. Demand for expensive durable goods can fall very fast in a recession. As such, I can’t blame analysts for erring on the side of caution, even though Williams is a very well-run retailer. The average WSM stock price target of $162.17 implies 28.7% upside.
RH Stock
RH is at the very high end of luxury retail. The company markets itself as a luxury lifestyle company with some of the priciest offerings aimed at affluent consumers.
Of late, revenue has been slowing, with $992 million reported in the second quarter, pretty much flat year over year. Looking ahead, revenue is expected to fall considerably to $842.7 million in the third quarter and $797.9 million in the fourth quarter. Indeed, it’s tough to gauge how far sales will slip as we move further into a recession.
Despite the bleak macro picture, RH’s longer-term prospects still seem very much intact. The luxury brand is getting stronger with time, and the firm will be ready for the next cyclical upswing.
Further, the stock is down around 64% from its all-time high. That’s a sizeable decline that bakes in a lot of pain in the quarters ahead. The stock trades at 1.6 times sales and 9.6 times trailing earnings.
Difficult times may be ahead, but with such a dominant position in high-end luxury products, it’s just a matter of time before the stock is in rally mode again. For now, I expect RH could continue overshooting to the downside.
Is RH a Good Stock to Buy?
Wall Street remains mildly bullish on RH, with a “Moderate Buy” rating. The average RH stock price target of $305.10 implies 15.2% upside over the next 12 months. With such a powerful brand, it is worthwhile to keep the stock on your radar.
Conclusion: Analysts Appear to Favor RH Stock Over WSM
High-end retail is feeling the full force of the market sell-off. Sales could fall further into 2023. Despite this, many analysts have already had ample opportunity to lower their earnings estimates. Between the two names, Wall Street seems to favor RH stock over WSM.
