Tickers in this Article: WSM, SKS, M
Williams-Sonoma delivered fourth quarter earnings March 20. Its online business was especially strong demonstrating how bricks and clicks retail is supposed to work. However, its stock is very close to an all-time high of $50.49. Despite nose bleed prices, I'll show you why you should own its stock.

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Williams-Sonoma's fiscal 2012 revenues were $4.04 billion, exactly $98 million higher than those reported in fiscal 2007. It's taken five years to return its business to pre-recession levels. That's tough sledding for sure. However, it has been able to make some headway in the profit department where operating income this past year was $409.2 million, 31% higher than in 2007; operating margins have improved 220 basis points to 10.1%. With the exception of 2011, this year's operating margin was the best in the past decade. Its overall business is looking good.

SEE: Understanding The Income Statement

There's no question this is the growth engine of the company although it did hit a rough patch for a couple of years back in 2008-2009. Five years ago catalogs represented almost 34% of its direct-to-customer revenues. Today that's down to 11% with e-commerce picking up the slack. Not surprisingly this has made a substantial difference in its profitability. It's much cheaper selling goods through digital catalogs rather than paper ones.

E-commerce revenues grew 14.7% on a comparable basis in 2012 to $1.66 billion. It now represents 42% of Williams-Sonoma's overall business. That's up from 38% in 2011 and 16.8% in 2007. Now here's where it gets interesting. Two years ago I wrote an article entitled Williams-Sonoma Continues To Clean Up. In it I suggested that its financial picture could change dramatically in a good way if in the future it continued to achieve positive, same-store sales growth from its retail stores. It's done that delivering 3.5% growth in 2011 and 6.1% in 2012. I also called for 20% direct-to-consumer (I mistakenly inserted e-commerce) revenue growth in each of the next two years. That didn't quite happen with DTC revenue up 12.4% in 2011 and 11.8% in 2012. Despite the miss, my projection of $349 million in operating income for 2012, was about $60 million too low.

Most importantly, if Williams-Sonoma continues to grow its DTC business to the point where its more than half its overall revenue, shareholders are going to be very happy. It's almost there but it has to keep its foot on the gas. With operating profits almost three times higher than its retail stores, it can't be hard for CEO Laura Alber to keep focused on growing this side of its business.

Call It What You Will
Jack Love is CEO of Internet Retailer, the premier publication covering the e-commerce industry. Love recently wrote about the misconceptions that exist surrounding omnichannel and multichannel retail. He specifically takes umbrage with retailers who use their websites as extensions of their businesses rather than as the separate, independent entities that they are or should be. Focusing on the needs of the web-centric shopper, retailers would achieve far greater financial benefit while still meeting the needs of customers who visit physical locations. E-retailing, according to Love, grew three times as fast as physical retail in 2012. It's a trend that's been around for years. Yet, many retailers hide the good news because it also highlights the not-so-good news at their physical locations. Saks (NYSE:SKS) and Macy's (NYSE:M) are just two examples of firms that no longer separate the businesses in their financial reports.

Williams-Sonoma has separated its retail and direct-to-consumer business since at least 1995 (that's as far back as its 10-K's go art SEC site) and will likely continue to do so well into the future. In 2008, when its same-store sales declined by 17.2%, right there on page 27 of its 10-K are the gory details of a really bad year for both its retail and direct-to-customer businesses. There won't be any hiding for Williams-Sonoma. As an investor what more can you ask for?

This is a company that recognizes the opportunity that exists online. Last November it opened Mark and Graham, a website-only store providing consumers with personalized gift giving. Think of it as Martha Stewart without the snarky attitude. Whether it develops into a brand as big as Pottery Barn is irrelevant. The mere fact it's creating businesses exclusively for online shoppers suggests it understands the needs of the web-centric shopper.

SEE: Earning Forcasts: A Primer

Bottom Line
The E-Tailing Group Inc. conducted its 15th Annual Mystery Shopping Study in the fourth quarter of 2012. Rating the online shopping experience at 100 e-retailers during the busiest time of the year, Williams-Sonoma ranked first ahead of both Nordstrom (NYSE:JWN) and Amazon (Nasdaq:AMZN). It gets e-commerce.

When I wrote about Williams-Sonoma two years ago its enterprise value was 6.8 times EBITDA. I suggested that its stock wasn't cheap, but it wasn't terribly expensive either. Today, its EV/EBITDA multiple is 8.2, about 20% higher than in January 2011. Considering its operating profits in that time have grown by 27%, I don't think much has changed. You're going to pay a little more for quality. Williams-Sonoma is definitely that.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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