Gross margin pressure drags Williams-Sonoma, Inc. (NYSE: WSM) stock lower

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Williams-Sonoma, Inc. (NYSE: WSM) stock fell over 4.2% in the pre-market session of November 22nd, 2019 (as of 8:56 am GMT-5; Source: Google finance) after the company posted mixed results for the third quarter of FY 19. Williams-Sonoma has reported net income of $74.7 million compared with net income of $81.4 million in the year-ago period. The company’s operating income grew in line with sales growth to a $109.9 million and the company has posted the operating margins flat to last year at 7.6%. The company has ended the quarter with a cash balance of $155 million compared to $164 million last year. Year-to-date, the company had invested $121 million in the business and have returned $226 million to stockholders, including the share repurchases and dividends of approximately $113 million each.

WSM in the third quarter of FY 19 has reported the adjusted earnings per share of 94 cents, missing the analysts’ estimates for the adjusted earnings per share of $1, according to the analysts surveyed by FactSet. The company had reported the adjusted revenue growth of 6.3 percent to $1.44 billion in the third quarter of FY 19. Comparable brand revenues grew 5.5% compared to 3.1% last year, on the back of e-commerce, growing 9.3% to a record high of almost 57% of total revenues.

By brand, the company delivered out-performance in the West Elm brand, with a 14.1% comp, continued strong performance of the Pottery Barn brands, including Pottery Barn at a 3.4% comp, and the kids and teen businesses growing to a 4% comp, double digit growth for Rejuvenation and Mark and Graham combined, and growth in the international operations of 9.2%.

The gross margin for the third quarter declined to 36% compared to 36.5% last year, due to the incremental impact from the China tariffs, as well as higher shipping costs, mainly from a higher mix of furniture sales, which is more expensive to ship, partially offset by occupancy leverage. Despite the tariff impact almost doubling from the second quarter, the company’s margin sequentially.

For fiscal year 2019, the company expects the net revenues to be in the range of $5.770 billion to $5.900 billion. Comp growth is expected to be in the range of 3.5% to 6%, and diluted earnings per share is expected to grow in the range of 7% to 10%, excluding the impact from the 53rd week last year, to a range of $4.65 to $4.80.

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