Williams-Sonoma’s (NYSE: WSM) stock surge is due to its persistent outperformance and quality business. The company contracted in 2023 along with the housing market, but cash flow remained solid, driving substantial capital returns for investors. The Q4 results continue the trend and point to a pivot this year. That will be a pivot back to growth accompanied by solid margins and sustained capital returns. 

Among the drivers for the share price is the valuation. The stock is arguably a highly-valued issued trading at 19X earnings, but that perspective is based on the brick-and-mortar business. Lifestyle retailers are struggling in 2023 with consumers shifting to dailies, consumables, and off-price retailers like The TJX Companies (NYSE: TJX), as seen in their share prices. And it’s not like lifestyle stores trade at high valuations. Haverty’s (NYSE: HVT) trades at 16X earnings, aligning with Williams-Sonoma’s pre-release valuation, while Ethan Allen Interiors (NYSE: ETD) trades closer to 12X

Looking at the company from the eCommerce perspective, it is undervalued. eCommerce category leaders such as Arhaus (NASDAQ: ARHS), RH (NYSE: RH), and Wayfair (NYSE: W) trade at much higher valuations. Besides WSM, Arhaus is the cheapest of the group; it trades for 24X earnings, while RH trades at 36X and Wayfair at 60X. From this perspective, the stock could gain another 25% to 200% on price-multiple expansion. eCommerce accounts for roughly 65% of the business, so it makes sense to value it like one. 

Is Williams-Sonoma a Best in Breed? The Results Say Yes

Williams-Sonoma’s results, guidance, balance sheet, and capital returns prove it is a best-in-breed quality stock for investors. The company’s revenue fell 6.9% compared to last year but exceeded expectations and is up 29% compared to the pre-COVID quarter. Comps are down 6.8% across the network, with the most weakness in West Elm. West Elm contracted by 15%, Pottery Barn fell 9.6%, and Pottery Barn Kids 2.5%. The core Williams-Sonoma brand grew by 1.6%. 

Margin news is the most impressive aspect of the report. The company reported a solid 20.1% operating margin, well above its long-term target. This represents Williams-Sonoma’s brand strength and market, which is more affluent and discerning, allowing for full-price selling. The takeaway is that earnings outpaced the consensus by a wide margin, and the outlook for next year is good. 

The company guided for flat revenue +/- 3%, including an extra 53rd week, and for margins to remain strong. Margin is expected to contract over the year but remains within the long-term target of mid-to-high teens. Analysts expected revenue to fall more than 1% at the consensus. 

Did Williams-Sonoma Increase its Capital Return? Substantially

Another catalyst from the report is an increase in capital returns. The company increased the dividend by 25% and raised the repurchase authorization by $1 billion. $1 billion in stock repurchases is worth 6.5% in market cap with shares at the new high: the new dividend yield is just over 1.5% and sustainable. The payout ratio is still below 30%, and the balance sheet has no red flags. 

Cash flow allowed for a significant improvement in the balance sheet, and robust cash flow is expected again this year. Balance sheet and cash flow highlights include $1.7 billion in cash flow, a 3X build in cash, and a 5% increase in equity. 

Do Analysts Think Williams-Sonoma is Overvalued? 

Analysts' sentiment may cap gains in Williams-Sonoma because the market has outrun the estimates. The stock surge has this market trading above the analysts' highest target, and they are not gushing over the news. The first revision on Marketbeat’s radar is a reiterated Outperform from Telsey Advisory Group with a price target of $265, $20 below current action, and the consensus is $80 lower than that. The bottom line is that Williams-Sonoma's stock price may not sustain the new highs without upward revisions. 

Technically speaking, the market is at a critical resistance target projected when it broke to new highs this year. That point is near $290; a move above it would open the door to another $90 upside.