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The Ratings Game: Williams-Sonoma stock heads for a record close, though analysts question how long the good news will last

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Williams-Sonoma Inc.
WSM,
+18.59%

stock soared 20.2% on Thursday, set for a record close after the furniture and home goods retailer reported fourth-quarter earnings and sales that beat expectations.

Williams-Sonoma also announced an 11.3% quarterly dividend increase to 59 cents per share, payable on May 28 to shareholders of record as of the close of business on April 23.

And the board approved a new $1 billion share repurchase program. The company also announced that it repaid its $300 million term loan early and in full.

But some analysts say COVID-19 stay-at-home orders drove business to new heights, and express concerns about what lies ahead when shoppers begin spending on vacations, dining out and other activities once again.

Williams-Sonoma shares have soared to start 2021, reaching a previous record of $147.60 on Jan. 27.

The stock has rallied 49.3% over the past three months, and has surged a whopping 434.6% over the past year. The benchmark S&P 500 index
SPX,
-1.48%

has gained 63.8% over the past 12 months.

Read: Home Depot is focused on eco-friendly cordless power tools for spring

Williams-Sonoma joins a number of other home retailers, including At Home Inc.
HOME,
+0.27%

(up more than 2,000% over the last year), RH
RH,
+1.98%

(up nearly 516%) and Wayfair Inc.
W,
+1.29%

(up more than 1,240%) that have seen their businesses skyrocket as shoppers move their spending to goods for the home during the COVID-19 pandemic.

Williams-Sonoma executives expressed confidence that its business will continue its upward trajectory throughout 2021.

Williams-Sonoma brands include the namesake, Pottery Barn and West Elm.

‘We expect this strong demand to continue through 2021 and beyond based on a number of factors,” said Laura Alber, chief executive of Williams-Sonoma, on the earnings call, according to FactSet.

Among those factors are retail traffic recovery; replenished inventory levels, which have been impacted by COVID-related and weather-related delays; and a continued work-from-home environment; and the shift to e-commerce. Williams-Sonoma digital business experienced 47.9% growth in the fourth quarter.

But JPMorgan analysts maintained their underweight stock rating in a post-earnings note.

“New stimulus, the lag of strong housing (which is starting to decelerate), and backorders should drive a strong first half (with Williams-Sonoma’s 1Q compare benefitting from closed stores last spring). That said, we continue to believe it is all about 2022 earnings,” JPMorgan wrote.

See: Smucker is betting that continued work-from-home will benefit its coffee and peanut-butter business

JPMorgan raised its price target to $115 from $98.

“Ultimately, however, we believe that this is the best of times and the structural headwinds (mall-based, charging for UPS-shippable items, competition from Wayfair to Home Depot to Walmart and Target, perhaps housing being less supportive) will become more apparent as we look into 2022.”

UBS analysts also raised a red flag, though analysts see both sides of the argument for and against Williams-Sonoma’s continued momentum.

“The skeptics believe that Williams-Sonoma saw a pandemic induced wave of demand that drove strength up and down its P&L. This view argues that these trends are unlikely to persist in a more normalized environment,” UBS said.

UBS rates Williams-Sonoma shares sell with a $115 price target, up from $110.

“The supporters argue the pandemic was simply a catalyst that is ushering in sustainable improvements that had been set in motion long ago. This includes the move to a more digital, less promotional, and higher returning business.”

Wedbush is confident that Williams-Sonoma can continue on its growth track due to its digital business, expansion internationally, and other factors.

Wedbush rates Williams-Sonoma stock outperform with a $175 price target, up from $132.

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But others expect the later half of 2021 to bring normalizing forces that could weigh on the business.

“Looking ahead, Williams-Sonoma has a material backlog and is seeing strong demand, with numerous ongoing margin opportunities,” wrote KeyBanc Capital Markets in a note.

“While we are positive on the fundamental short-term outlook, we believe shares may face risk from thematic rotation as investors look to ‘recovery’ stories.”

KeyBanc rates Williams-Sonoma stock sector weight.

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