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While topping Q2 (Jul) earnings estimates was a positive development, Williams-Sonoma's (WSM -7%) weaker-than-expected revs in the quarter combined with its lowered FY25 guidance is making investors feel uncomfortable today, driving a sell-the-news reaction as shares slip back to previous lows reached on August 5. The home furnishings retailer's quarterly report followed a concerning performance from peer La-Z-Boy (LZB), which issued soft Q2 (Oct) revenue guidance due to a persistently challenging consumer spending environment. This economic backdrop proved the culprit for WSM, as high interest rates, low housing turnover, and sticky inflation eroded demand during Q2 and weighed on FY25 revenue guidance.

• After dishing out back-to-back positive comp growth in Q1 (Apr) and 4Q24 (Jan), WSM slipped back into negative comp territory, registering -3.3% in Q2. It was not a complete surprise that comps turned negative, given WSM's previous remarks that demand will not pick up meaningfully until the back half of FY25. However, investors did not anticipate comps deteriorating to such a degree so quickly, underscoring just how volatile the economic landscape continues to be.
• This rapid weakening led WSM to concede that it will likely not see the second half acceleration it anticipated, driving its decision to lower its FY25 comp outlook. WSM now expects comps of -5.5% to -3.0% instead of -4.5% to +1.5%, removing any possibility of positive comp growth. The company also lowered its FY25 revenue growth guidance to -4.0% to -1.5% from -3.0% to +3.0%.
• WSM is sticking to its core strategy amid the tumultuous economy, focusing on its three key priorities: returning to growth, improving customer service, and enhancing its margins. On that last note, WSM has performed well, delivering a 550 bp expansion in gross margins yr/yr to 46.2%, supported by higher merchandise margins and supply chain efficiencies. WSM also lifted its FY25 operating margin forecast by 40 bps to 17.4-17.8% despite the headwind from a lower revenue forecast.
  • Part of WSM's higher margins is because it prioritizes market share capture without deploying extensive marketing campaigns. Given its banners, such as Pottery Barn, WSM commands meaningful premium name recognition, which allows it to limit markdowns.
• Diving deeper into WSM's initiatives, a few elements underlying its expected return to growth revolve around product innovation and channel experiences. More specifically, WSM is committed to bringing more newness across its assortments and expanding its breadth of online content, including launching new online design tools allowing for 3D rendering.

WSM's lowered FY25 guidance was disappointing given the company's relatively uplifting remarks last quarter. While management is actively engaged in rekindling demand, whether its actions will be sufficient to drive growth despite soft discretionary spending and a suppressed housing market is unclear. WSM has proven to be a formidable opponent fighting against numerous economic headwinds, typically registering decent growth while its peers struggle. Given this context, it is hard to discount WSM and its initiatives. If interest rates begin to drop, WSM is well-positioned, especially against its competition, to reignite growth.