Business Strategy and Outlook

Williams-Sonoma has carved out a solid position in the $750 billion global home category and the $80 billion U.S. B2B industry. It has historically launched most of its brands organically in underserved segments and its brand intangible asset has been the supporting factor in its top- and bottom-line growth. Its ability to drive repeat business relies on customer loyalty and smart marketing and merchandising and the firm has access to some of the best analytics in retail. This should help Williams-Sonoma outperform its competitors and grow its market share, aided by new category expansions. 

In recent years, Williams-Sonoma has set its sights on expanding its total addressable market outside of furniture and home furnishings, via B2B and marketplace efforts, categories with robust end markets that remain fragmented. These white-space business lines, along with faster growth from both franchise and the e-commerce channels (which accounted for 66% of 2021 sales) should help Williams-Sonoma near its $10 billion sales goal by 2024. 

Furthermore, the aforementioned categories have the ability to deliver better operating margins than the historical brick-and-mortar business (which is on track to decrease its store base by 25% between 2020 and 2025), allowing mix to offer a natural lift to profitability. Such efforts, along with lower costs from an improved supply chain (when COVID-19 constraints subside), better distribution network (from direct sourcing and furniture delivery operations), as well as higher productivity of its store fleet (as underperforming locations close and older leases are renegotiated) should allow for operating margins that are consistently at a midteens rate. Despite a solid competitive edge, it is not alleged that the company is insulated from the proliferation of e-commerce peers such as no-moat Wayfair pushing harder into the home furnishing space, bounding upside potential. Even with robust competition in the category, it is held narrow-moat Williams-Sonoma could deliver an average adjusted return on invested capital, including goodwill, averaging 30% over analysts’ forecast, well ahead of analysts’ 9% weighted average cost of capital estimate.

Financial Strength

Williams-Sonoma is in fine financial health, with plenty of cash on hand, ending its first quarter with $325 million on its balance sheet. Given the strong free cash flow it has been able to generate, it is unprobeable the firm will have to tap the equity or credit markets for liquidity anytime soon, and there is currently no long-term debt outstanding, liberating excess cash flow for a return to shareholders. Over the past five fiscal years, the company has produced cumulative free cash flow of $3.4 billion. Williams-Sonoma’s cash requirements are primarily for inventory, property, plant, and equipment, advertising and marketing, technology, share repurchases, and dividends, which is likely to mostly be funded by cash generated from operations. Free cash flow to equity has averaged about 10% of revenue during the past five years, which is likely to be decent for a company that can produce somewhat volatile results that are closely tied to the performance of the housing market. The company resumed share repurchases in the fourth quarter of 2020, and the board authorized a $1.5 billion share buyback program in March 2022, which should facilitate continued buybacks ahead (in fiscal 2021 the company repurchased $899 million in shares, well ahead of any other year in the past decade). Additionally, it pays a dividend of $0.78 per quarter, representing a payout that was raised 10% in March 2022, illustrating the board’s confidence in the strength of the underlying business. Over the next decade, it is projected, the firm to average 7%-8% EPS growth (increasing modestly faster than sales), bolstered by continued top-line growth, a favorable sales mix shift, and stringent cost controls. Williams-Sonoma is positioned to earn an average of around $1.1 billion in free cash flow (cash from operations minus capital expenditures) over the next five years.

Bulls Say’s

• Less discretionary categories such as cookware and small appliances offer some resiliency amid macroeconomic cyclicality. Registries in categories such as wedding and baby offer a steady source of customers. 
• The firm opened company-owned stores abroad in Australia in 2013 and has since expanded to the U.K. International opportunities (owned and franchised) could provide location and sales growth and elevated brand awareness. 
• Around two thirds (or more) of sales has stemmed from the e-commerce channel in recent years, which helps minimize store expenses and maximize operating margins.

Company Profile 

With a wide retail and direct-to-consumer presence, Williams-Sonoma is a leader in the $300 billion domestic home category, focused on expanding its exposure in the B2B, marketplace, and franchise areas. Namesake Williams-Sonoma (175 stores) offers high-end cooking essentials, while Pottery Barn (188) provides casual home accessories. Brand extensions include Pottery Barn Kids (52) and PBteen. West Elm (121) is an emerging concept for young professionals, and Rejuvenation (9) offers lighting and house parts. Williams-Sonoma also has a business-to-business team that supports projects that range from residential to large-scale commercial. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

After its spin-out from Hewlett Packard in 1999 and its divestiture of the electronic measurement

business (Keysight Technologies) in November 2014, Agilent focuses on providing tools to analyze the

structural properties of various chemicals, molecules, and cells. Agilent is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets,

including the healthcare, chemical, energy, food, and environmental fields. While healthcare-related

applications, including clinical diagnostics, remain Agilent’s largest end market, Agilent generates about

half of its sales from nonhealthcare fields. Agilent’s strategy revolves around placing analytical instruments and informatics with relevant customers and then providing related services and consumables such as chromatography columns and sample preparation tools, which account for the rest of Agilent’s sales. About half of Agilent’s sales recur naturally. However, even instrument sales can be relatively sticky at the end of the instrument’s life cycle, especially in the highly regulated pharmaceutical end market (about 35% of Agilent’s sales) and some of its other applications where intensive, time-consuming training is required to master the scientific analysis. Agilent aims to increase its exposure to these sticky customer relationships. Overall, the top-tier positions in most end markets, innovation, marketing operations, and ongoing cost controls should help Agilent grow revenue in the midsingle digits compounded annually and boost margins overall during the five-year forecast period. Overall, the double-digit earnings growth from Agilent, organically and with some share repurchases. While internal growth opportunities look solid, acquisitions should continue to boost its bottom-line growth prospects, as well.

Fair value and Profit Drivers

The rising fair value estimate to $115 per share from $107 to account primarily for cash flows generated in the past couple quarters and slightly higher profit expectations for 2022. The fair value implies a multiple of approximately 23 times fiscal 2022 expected earnings. After strong growth in the high teens on the top line and over 30% on the bottom line in fiscal 2021, Agilent’s growth trajectory to return to more normalized levels. Specifically, from fiscal 2021 to 2026, the expected 6% compound annual revenue growth, or within management’s 5% to 7% core revenue growth target. By end market from fiscal 2021 to 2026, Agilent’s growth to be led by biopharmaceuticals with 9% overall growth expected on strong biologic-related sales and solid growth in small molecules. The expect low- to mid-single-digit growth rates in Agilent’s other applied markets. On the bottom line, the adjusted EPS will rise roughly 11% compounded annually from fiscal 2021 to 2026, or well above sales growth primarily on margin expansion and share repurchases. The cost-control efforts to continue with the potential to improve margins primarily through expanding gross margins and control of the SG&A line. The expect share repurchase activities to account for about 200 basis points of Agilent’s annualized earnings growth prospects through 2026.

Bulls Say

• Agilent’s innovation engine and cost control efforts have been on display through strong growth and margin expansion since spinning out its electronic measurement business Keysight in November 2014.

• As a well-established leader in many of its core markets, regulatory concerns and customer familiarity with Agilent’s instrumentation and services can make market share gains for competitors difficult.

• Agilent continues to increase its exposure to the sticky biopharmaceutical end market, including recent acquisitions in the emerging cell analysis field.

Company Description

Originally spun out of Hewlett-Packard in 1999, Agilent has evolved into a leading life sciences and diagnostics firm. Today, Agilent’s measurement technologies serve a broad base of customers with its three operating segments: life science and applied tools (45% of fiscal 2021 sales), cross lab (35% of sales consisting of consumables and services related to its life science and applied tools), and diagnostics and genomics (20%). Over half of its sales are generated from the biopharmaceutical, chemical, and energy end markets, but it also supports clinical lab, environmental, forensics, food, academic, and government-related organizations. The company is geographically diverse, with operations in the U.S. (34%) and China (20%) representing the largest country concentrations. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.