Williams-Sonoma

Williams-Sonoma's second-quarter sales growth accelerated sequentially to 6.7% on 6.2% brand comps. Adjusted operating margin was 17.3% (down 60 basis points), as weaker merchandise margin wasn’t fully mitigated by occupancy, supply chain, or labor efficiencies.

Why it matters: Williams-Sonoma's merchandising continues to resonate with consumers, as indicated by its recent market share gains—in the second quarter the industry grew just 1%. Broad-based strength was evidenced by positive comps at all brands, along with a higher level of full-priced sales. Demand has remained resilient despite a housing recovery that is yet to arrive, the continued implementation of tariffs, and higher energy (logistics) and input costs. With elevated mortgage rates, we don't expect a catalyst from home turnover, leaving sales contingent on innovation.

The bottom line: We plan to raise our $138 per share fair value estimate for no-moat Williams-Sonoma by a high-single-digit rate but still view shares as rich. Our increase stems from a modest improvement in our 2026 outlook with faster long-term unit growth driving faster sales growth. The firm would have to print high-single-digit sales growth and 20%-plus operating margins consistently to trade at market. We think this is unlikely given the fragmented and competitive bent of the home furnishing space. We expect 5% sales growth and an 18% operating margin on average. The firm raised its 2026 outlook to include sales growth of 4.7%-6.2% (2.7%-6.7% prior) and an adjusted operating margin of 17.8%-18.2% (17.5%-18.1% prior). We expect to lift our 2026 sales forecast to around 6% (from 5%) and operating margin to 18.2% (from 18%) after digesting results.

Between the lines: Productivity of its model continues to produce significant cash flow, which allows for the ongoing return of capital to shareowners. With $1.1 billion in repurchase capacity, EPS should see a 4% benefit in 2026 and 2027 if buybacks stay at a similar pace.

We are raising our fair value estimate to $151 per share from $138 after incorporating second-quarter results and a refined 2026 outlook. Williams-Sonoma's second quarter included comparable brand sales growth of 6.2%, marking the seventh consecutive quarter of positive comp performance. All of the brands delivered positive comps, helping the firm post an operating margin of 17.3%. Management lifted its 2026 outlook to include sales growth of 4.7%-7.2% (from 2.7%-4.7% prior) and an operating margin of 17.8%-18.2% (from 17.5%-18.1%). Our updated outlook includes a sales increase of 5.8% (up from 4.6% prior) and an operating margin of 18.2% (from 18.0%) in 2026. We think full potential remains bound by unfavorable mortgage rates, which remain above 6%.

Over the next decade, we forecast operating margins to average around 18% as we expect a structural mix shift benefit to remain from faster growth in B2B, marketplace, and franchise sales, which have generally carried elevated profit margins. We project total sales growth that averages 5% over the long term (up from 4% previously), as global (franchise) and white-space category expansion (B2B) supports modestly faster-than-industry growth (3%). We forecast EBIT margins will be constrained by reinvestment to fortify Williams-Sonoma's competitive edge, including spending on advertising, technology, e-commerce, and the supply chain. Over time, we forecast gross margins could remain around 46% (modestly above the 44% earned in pandemic-benefited 2021 and well ahead of the 37% average earned in the five years prior), as the competitive environment normalizes amid an evolving sales mix. We believe selling, general, and administrative expenses should return toward historical levels, at 28% of sales, similar to the 27% the firm has averaged over the past 10 years, despite a rising sales base, as investments to improve corporate technology and maintain the topnotch pace of innovation more than offset these gains. This generates operating margins of 18% at the end of our forecast.

We think the furniture and home furnishings category will remain fragmented and competitive, making significant market share gains difficult. We see this in the 1.2% sales increase Williams-Sonoma reported in fiscal 2025, not far from the 2.6% rise for the seasonally adjusted furniture and home furnishings industry (per the US Census) in calendar 2025.

Williams-Sonoma has generated ROICs above our weighted average cost of capital estimate of 9%. We would expect average ROICs to continue to surpass our WACC unless the housing market faces another downturn (the firm had mid-single-digit ROICs in 2008-09). Even in our bear case, we expect the firm could generate 20%-plus ROICs, owing to the strength of its operating strategy.

Williams-Sonoma is a no-moat retailer. Its past brand strength—once supported by superior data, marketing, and merchandising—has been eroded by more-agile competitors with sharper digital targeting. The home furnishings market remains fragmented with low barriers to entry, minimal switching costs, and volatile discretionary demand, making a durable advantage difficult. Generally, we think competitively advantaged home goods retailers tend to develop a moat around intangible assets, benefiting from higher full-price sell-through consistently, and often facilitate consumer stickiness through a proven loyalty program. Although the firm has posted a strong adjusted return on invested capital of 35% over the past five years (versus a 9% weighted average cost of capital), we view this as a product of pandemic-driven demand and a capital-light model rather than a durable competitive edge. The structural conditions of the category prevent Williams-Sonoma from developing the kind of intangible assets that support moats in stronger home goods brands.

We don’t see much quantitative support for the existence of a defensible intangible asset, which often manifests in superior and stable gross margin and/or significant market share. Williams-Sonoma has delivered gross margin metrics generally in the range of other covered home furnishing companies in its peer group, averaging 44% over the past five years. This is below 47% at no-moat RH over the same time frame, but above the roughly 30% reported at no-moat Wayfair and the 34% generated in the last five years of operation at the former version of Bed Bath & Beyond (which went bankrupt and was previously rated as no-moat). Our long-term forecast is for gross margins that average 46%, benefiting from inventory optimization, occupancy leverage, and cost improvements as the business-to-business piece of the business grows, partially held back by intermittent promotional periods that can eat away at profitability, given a lack of pricing power. In comparison, we forecast a 45% average gross margin for RH over the next decade.

Williams-Sonoma still only captures a mid-single-digit share of the furniture and home furnishings market domestically (per the US Census), despite being one of the longest-standing operators. We forecast the firm to largely grow in line with Morningstar’s repair and remodel outlook, which we use as a directional proxy, implying meaningful share gain is unlikely to occur over the next decade. We expect home furnishings to remain a very fragmented industry, which could prompt higher price competition among peers to facilitate conversion, attracted by the healthy ROICs that Williams-Sonoma has historically generated (averaging 31% over the last decade). To ascertain the fragmentation of the market, we utilize the Herfindahl-Hirschman Index, where an HHI below 1,000 indicates a fragmented market, per the US Department of Justice. The top four players exhibit an HHI of less than 100 in the US, which we think signals the lack of competitive edge that Williams-Sonoma can gain, given its limited market share position, despite robust spending to build brand awareness. Even when considering a larger home goods retailer like Wayfair, which generates more than $12 billion in annual revenue (roughly 50% larger), we see the sales leaders in the category holding just single-digit market share.

Switching costs in home furnishings are essentially nonexistent, and loyalty programs do little to lock consumers in. Williams-Sonoma’s cross-brand Key Rewards program may lift spending at the margin, but with limited disclosure on its members and unclear activity levels, there’s little evidence it creates meaningful stickiness. Consumers can easily shift to RH for a 30% discount via its paid membership ($200 per year) or to other retailers like Ethan Allen or Wayfair, all of which run frequent promotions. Loyalty efforts across the category don’t overcome the sector’s inherent lack of switching costs.

There is no indication that Williams-Sonoma has developed a cost advantage. While selling, general, and administrative expenses fell 300 basis points through the 10 years ended January 2020 (prepandemic), we contend that this was a result of an optimized store base. Williams-Sonoma locations fell to 220 from 259 over that time frame, while West Elm locations (which target a wider total addressable market) grew to 112 from 36. Furthermore, in 2019, the higher-margin direct-to-consumer mix represented 55% of total sales, up 1,500 basis points over 2009. With the store base recalibrated and direct-to-consumer stabilizing at around two-thirds of the sales mix over the last five years, we don’t see much upside stemming from changing channel mix ahead and think margin gains fail to reflect an enhanced competitive position.

Williams-Sonoma continues to spend around 7% of sales on advertising, in line with the five years ended 2019 (we exclude the period with covid-related leverage, as we don’t expect it to be repeated). This indicates the persistent need to utilize sales and marketing to elevate its visibility with consumers. While we think bolstering the brand through visibility is imperative, advertising spending is still not leveraging, even though absolute sales in 2025 were 32% higher than in 2019. With other peers in the category also spending significantly on advertising (Wayfair continues to spend at a double-digit rate of sales), Williams-Sonoma is unlikely to ease its pace of brand investment anytime soon.

When considering little pricing power, given some above-industry-average price points, and few to no cost advantages, Williams-Sonoma’s profitability is largely not materially ahead of peers', despite a higher sales base. Our long-term operating margin forecast of 18% is just north of the 14% average we have modeled at RH. As such, we don’t think there’s enough evidence that the firm possesses an intangible asset or cost advantage.

Less discretionary categories, such as cookware and small appliances, offer some resiliency amid macroeconomic cyclicality. Trade and contract B2B customers can offer a steadier source of revenue.

Williams-Sonoma opened company-owned stores in Australia in 2013 and has since expanded to the UK and Canada. International opportunities (owned and franchised) could provide location and sales growth while elevating brand awareness.

In recent years, around two-thirds of sales have come from the e-commerce channel, which helps minimize store expenses and maximize operating margins.

Port congestion and freight pricing could increase, leading to higher costs from supply chain factors.

Protracted periods of economic weakness, including in the housing market, could hinder home-related purchases and weigh on top- and bottom-line growth more than we anticipate.

Rising promotional activity can create a challenging environment for nearly all types of retailers, including furniture and home furnishing retailers. Low customer switching costs, along with the proliferation of e-commerce and mass-merchant competitors, could pressure long-term profitability.