Undoubtedly, discretionary retail tends to take a huge hit when the economy grinds to a slowdown or contraction. With pundits upping their recession odds, it should come as no surprise to see upscale furniture and kitchenware retailer Williams-Sonoma (WSM) leading the charge lower.
WSM shares have been under considerable selling pressure since peaking in late 2021. The stock lost more than 52% of its value from peak to trough and is in the process of clawing its way higher again, even amid rising recession fears.
If a coming recession proves severe, there’s no question WSM stock could get cut in half again. However, if there is no recession or if it’s short-lived, it’s WSM stock that could have the most room to the upside in a relief rally.
What’s worrisome about Williams-Sonoma is the fact that there are as many Sell recommendations as Buy recommendations when looking at analyst ratings. Personally, I’m bearish on the stock because demand for big-budget “nice to haves” could dissipate very quickly if a recession comes to be.
In any case, the stock looks incredibly cheap at 8.6 times trailing earnings and just 1.1 times sales. Still, many Wall Street analysts aren’t convinced that the perceived value is real.
Now down around 40% from its highs, Williams-Sonoma stock still seems to be an at-risk holding, given the severity of past economic-driven declines. The 2006-08 crash in WSM stock was quite severe, with the name shedding more than 82% of its value.
Weakness in shares began well before the rest of the market slipped. Indeed, Williams and other discretionary retailers tend to act as the canary in the coal mine ahead of economic declines.
Williams-Sonoma: Real Value or a Value Trap?
Undoubtedly, the firm may have over-earned in 2021. Over the next 18 months, Williams could easily under-earn, perhaps raking in less than current estimates suggest. That’s the nature of big-ticket discretionary retail, which tends to be cyclical.
WSM stock may look cheap on a trailing earnings basis, but if coming earnings fall short (and there’s a good chance they could), it could be very difficult to catch a bottom in a name with a history of losing more than 80% of its value during economic downturns.
Wall Street’s Take on WSM Stock
Turning to Wall Street, WSM stock comes in as a Hold. Out of 13 analyst ratings, there are four Buys, five Holds, and four Sells.
The average Williams-Sonoma price target is $138.67, implying upside potential of 5.05%. Analyst price targets range from a low of $100.00 per share to a high of $185.00 per share.
How Williams-Sonoma Can Sail Through an Economic Hailstorm
Williams-Sonoma has done a marvelous job of keeping brand affinity high. Discounting in the face of a downturn could take a bit of shine out of the upscale brand. However, I don’t think it needs to get too aggressive with markdowns as the firm expands into new product categories.
Not everything at Williams-Sonoma is expensive. The company has diversified away from big-ticket furnishings and other pricey items into less-cyclical necessities like must-have appliances. Indeed, such smaller “must-have” items can be bought cheaply from a rival.
However, the Williams-Sonoma brand is a label of quality. Even amid tough times, quality at a reasonable price can trump cheap items that tend not to last and are thus of lesser value.
Moving ahead, management has its hands full as it faces the biggest challenge since the 2008 recession. Recently, Morgan Stanley (MS) analyst Simeon Gutman warned that WSM stock was a retailer poised for further downside.
Williams doesn’t just sell “big-ticket durables,” but they still comprise a huge slice of overall revenues. I think Gutman’s cautionary note is more than warranted.
To Buy WSM stock at these levels is to be adding considerable risk to a portfolio. Sure, the stock is cheap, but it’s cheap for a reason, and it could become even cheaper in a year, given economic storm clouds moving in.
The Takeaway – It’s Probably Too Early to Buy WSM
Williams-Sonoma is a magnificent company with a high degree of brand affinity. However, as a discretionary retailer, it stands to feel the full force of the coming economic slowdown.
While a great deal of damage is already in the books (shares have already gotten cut in half), past stock crashes suggest WSM stock could easily be cut in half again if worse comes to worst.
In short, many Wall Street analysts think it’s too soon to reach for the retailer; I think they’re right.
