Jackie Arnold
Managerial Accounting
Michael Livengood
Financial Analysis of Williams-Sonoma, Inc.
Williams-Sonoma, Inc. is a specialty retailer of high end products for the home.
Their brands, Williams Sonoma, Pottery Barn, Pottery Barn Kids, PB Teen, west elm,
Williams-Sonoma Home, Rejuvenation, and Mark and Graham, represent specific direct
merchandise strategies. The company currently has 585 stores and markets their
products through e-commerce websites, direct mail catalogs, and their stores. They
operate in the United States, Canada, Australia, and the United Kingdom and are
operating unaffiliated franchises in the middle east. They offer a wide variety of products
that that cover different segments within the industry and their products appeal to
multiple age and economic demographics. Although the company was founded in
Sonoma, California in 1956, it was not incorporated until 1973 and went public 10 years
later with an initial offering of 1 millions shares at $23 per share.
Williams-Sonoma faces stiff competition from a variety of other retailers including
department stores, super store as well as specialty retailers; their biggest overall
competition is Pier1 and Bed, Bath and Beyond. Other competition includes Wal Mart,
Target, JC Penney, IKEA, and Crate and Barrel. In addition, web retailer, casa.com may
become a potential threat to Williams-Sonoma due to lower prices and no fixed costs in
retail stores.
Williams-Sonoma overall sales revenue has been driven by the downturn of the
housing market and the collapse of the financial market beginning in 2007. Williams
Sonoma has answered his issue by offering more moderately priced goods to
consumers to compete with lower cost items in big box stores. An analysis of the
Williams-Sonoma Five-Year Selected Financial Data from fiscal year 2009 through 2013
shows a steady growth in net revenues. This is consistent with increased sales as they
continue to recover and shift their brand marketing as a result of the financial and
housing crisis. Fiscal year 2012 showed the greatest increase in gross margin as a
percent of net revenue at 39.4%; which decreased in 2013 to 38.8%. The comparable
brand revenue growth, while a slightly higher percentage, shows that WilliamsPage 1 of 5
Sonoma’s sales are comparable to their competitors. Calculations for 2013 and 2014
are 38.84% and 39.34%. This shows a slight decrease from 2013 to 2014 of .5%. This
could be due to various changes in the company such as a change in the product mix
within the retail and e-commerce stores, shrinkage of inventory items due to theft or
defective goods, undervaluation of the inventory, or discounted prices to generate sales.
Calculating EBITDA is a way to get a clearer picture of Williams-Sonoma’s
business performance and give a better indication of the business when comparing to
comparable brands. As shown in the table below, both the EBITDA AND EBITDA
Percentage to Sales increased. although the percentage to sales is only .25%, this
shows the company is controlling expenses throughout the various segments of the
company.
2013
2012
Revenue
$278,902
$256,730
Plus: Interest
584
793
Plus: Tax
173,780
149795
Plus: Depreciation/Amortization
149,795
134,453
EBITDA
603,061
545,202
EBITDA Percentage to Sales
13.74%
13.49%
The Interest Coverage Ratio measures how EBITDA covers the ability to pay any
lenders cash in the form of regular interest payments that would be due within a
financial reporting period. In the case of Williams-Sonoma, the interest reported on the
Income Statements for 2013 and 2012 are $584 and $793. This gives an interest
coverage ratio of 1034:1 and 688:1. Low interest rates in the money market may
account for the low interest reported. This company is in a good financial position to
meet any regular interest payments since the ratio is greater than two for both year
analyzed.
Net Income
2013
2012
$278,902
$256,730
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2013
2012
Sales Revenue
$4,387,889
$4,042,870
Net Profit Margin
6.36%
6.35%
Net profit margin asses profitability after all expenses have been deducted. From
2012 to 2014, net profit margin increased by .01%. This is consistent with other data
which shows small increases in the overall financial picture of the company.
2013
2012
2011
Net Income
$278,902
$256,730
$236,931
Stockholder’s Equity
$1.256,002
$1,309,138
1,255,262
Average Stockholder’s
Equity
$1,282,570
$1,282,200
Return on Equity
21.75%
19.61%
In continuing the analysis of Williams-Sonoma, it is necessary to link the income
statement data to the balance sheet to show how strong the company is with respect to
what it owns and owes. The first analysis will be by assessing return on equity for fiscal
years 2013 and 2012 to see what the owners are getting out of the business compared
to the amount they have invested in the company. There is no preferred stock included
in the calculations. As the chart below shows, return on equity increased from 2012 to
2013 by 2.14%. This increase could be caused by an increase in net income, a
decrease in assets, or an increase in liabilities. While this simple form of return on
equity gives an indication of equity performance, it does not provide information on what
has actually caused the return on equity to change. Therefore, it is necessary to analyze
return on equity by using The Dupont Framework method. This method breaks down
the return on equity equation into three components to provide more information where
changes in return on equity are actually coming from. This analysis is far better to track
where changes actually occur. The chart below shows that Williams Sonoma had only a
slight increase in net profit margin from 2012 to 2013. This shows that the net profit
margin stayed basically the same for both periods and that the company is consistent
with their operating efficiency. The asset turnover ratio was also approximately the
same for both 2012 and 2013, which mean that asset efficiency was approximately
constant for both accounting periods. Therefore, both the net profit margin and the asset
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turnover ratio can be factored out of the analysis on the change in ROA. There is an
increase of .10% on the equity multiplier, suggesting that the company is relying on on
less debt and more equity to finance its asset.
Net Income
Stockholder’s Equity
2013
2012
2011
$278,902
$256,730
$236,931
$1,309,138
1,255,262
$1.256,002
Average Stockholder’s
Equity
$1,282,570
$1,282,200
N/A
Revenue
$4,387,889
$4,042,870
N/A
Assets
$2,336,734
$2,187,679
Average Total Assets
$2,262,206.50
$2,124,258.50
N/A
Net Profit Margin
6.36%
6.35%
N/A
Asset Turnover
1.94
1.90
N/A
Equity Multiplier
1.76
1.66
N/A
Return on Assets using
Dupont Framework
21.75%
20%
N/A
$2,060,838
Return on assets (ROA) provides information and an assessment of what a
company does with their assets. ROA measures every dollar that the company makes
against each dollar’s worth of assets. The higher the ratio, the more money the
business is earning on its investment in assets. In analyzing 2012 and 2013 ROA,
Williams-Sonoma maintains consistent ROA with 12.33% in 2013 and 12.09% in 2012.
This means that the company earned approximately $.12 for every dollar invested in
assets.
Cash flow analysis determines the extent to which profits are transformed into
actual cash in the bank and assess the liquidity of the business. Liquidity ratios in the
chart below aid in providing the answers. Current ratios asses the ability of the business
to pay its current debt. A current ratio of at least 2:1 is considered acceptable. In 2013,
the company is slightly below the acceptable range with a ratio of 1:65:1. In both 2012
and 2013, Williams-Sonoma is slightly below the acceptable ratio of 1:1 to meet its most
immediate debt obligations. This suggests that the company may have a too much of its
money tied up in inventory and be unable to meet its short term bill obligations. The
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debt to equity ratio for Williams-Sonoma is slightly above the standard of .5:1 with $.67
of debt to every $1.00 of equity in 2012. In 2013, the ratio increases to $.86 to every
dollar indicating that for both periods, the company owes ore to its creditors than to its
owners.
2013
2012
Current Ratio
1.65:1
2:1
Quick Ratio
.45:1
.74:1
Debt to Equity Ratio
.86:1
.67:1
Data was not available to determine the Net Credit Sales for the company for
2013 so Days Sales Outstanding and Accounts Receivable Turnover is not available for
analysis. Inventory days on hand decreased from 2012 to 2013, a good indicator that
the company is moving its inventory through increased sales.
2013
2012
2011
Merchandise
Inventory,net
$813,160
$640,024
$533,461
Average Inventory
$726,592
586,742.50
N/A
Cost of Good Sold
$2,683,673
$1,592,476
N/A
Inventory Days on Hand
99 Days
134 Days
N/A
Inventory Turnover
Ratio
3.69:1
2.71:1
N/A
Based on everything that I have researched and analyzed about WilliamsSonoma, their competitors, and their position in the market, I believe that this company
is strategically positioned to continue to be a good investment for the future. New
marketing concepts to engage customer’s in brick and mortar stores, e-commerce
expansion and pricing to draw consumers back to Williams-Sonoma will aid in the
continued recovery of the company from the housing and financial collapse of previous
years. With new leadership at the helm of the company, increase in e-commerce and
international expansion as well as revitalization of its Williams-Sonoma brand, the
company is positioned to target socio-economic groups worldwide.
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