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Telsey turns bullish on Williams-Sonoma as people spend more on their homes

On Tuesday, Telsey Advisory Group analysts led by Cristina Fernández upgraded shares of Williams-Sonoma to outperform from market perform, and doubled their price target on the stock from $40 to $80. Fernández joins The Final Round to discuss the factors behind the bullish call, and their outlook for home furnishings retailers amid the COVID-19 pandemic.

Video Transcript

MYLES UDLAND: All right. Welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. And it's time now for our call of the day. Today we are talking about Telsey's latest call on shares of Williams-Sonoma. The firm upgrading the stock to outperform from market perform, putting an $80 price target on shares of Williams-Sonoma. And we are joined now by Cristina Fernandez, director and senior research analyst at the Telsey Advisory Group.

So Cristina, I guess just kind of walk us through top level here, what you're seeing in Williams-Sonoma shares that you like for the upgrade here. And I guess, what trends are they benefiting on during this period, you know, as I think a lot of other retailers have really struggled.

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CRISTINA FERNANDEZ: Yeah. Thank you for having me. So there are really three reasons that we looked at in considering an upgrade from Williams-Sonoma. One is that we're seeing an accelerator and digital shift, or shift to digital that plays to Williams-Sonoma's strengths. They already generated 56% of sales online in 2019. So the highest in our coverage group.

Second, we're seeing consumers spend more on home categories, particularly in April and May. And we heard a lot from the companies that reported last week, whether it was Walmart or Target, Home Depot, Lowe's, about consumer spending on cooking and kitchen appliances, work from home furniture, outdoor, et cetera.

And then the third reason is they cater to a more affluent customer. And that customer is really holding up better during this crisis. They're seeing less job losses. And as you mentioned earlier, with the S&P 500 being up over 30% since the bottom, all those trends benefit the company.

MYLES UDLAND: And Cristina, of the company's brands, I want to ask more specifically about West Elm. And how much of this upgrade or how much of your, I guess, thesis around the entire group is about this specific brand. They've had a really good comp trends the last couple of years. They're taking up a larger percent of the entire group's sales. Is this about maybe people saying, I want to upgrade my bed set? Or do you think it's maybe just, you know, treating their kitchen nicer at the kind of the core of Williams-Sonoma brand?

CRISTINA FERNANDEZ: Yeah, I think it's going to be a combination. We're definitely hearing of people buying kitchen appliances and cooking more at home. But also, you know, we've been spending a lot more time at home in the last 10 weeks. And it's very likely we'll spend more time this summer and through the rest of the year. So people are looking at their workspaces, upgrading those. Also, the outdoors. So I think it's across the home.

And the benefit should be across the brand. So Williams-Sonoma, the kitchen brand, you know, that'll be a beneficiary. But West Elm, which is about 25% of sales and their fastest growing, as well as the Pottery Barn, where they have baby, and you know, it's still first in [INAUDIBLE] the category, should benefit as well.

But I would say near term it looks like West Elm and Williams-Sonoma could be the, you know, the better performing of the brands.

DAN ROBERTS: Cristina, Dan Roberts here. During this time, we've talked about some of the brands that have not done well and have struggled, and even some of the retail names that have filed for bankruptcy. We talk a lot about Victoria's Secret and all the ways that brand kind of ruined its image and didn't change. J Crew also just kind of refused to change and rebrand for a long time, got kind of stale.

I'm curious, you know, you did mention it caters to more affluent customers. That helps. Also, the e-commerce helps. But for Williams-Sonoma, I mean, in terms of the brand, can you talk to us a little bit more about what has that brand done right? What does it stand for? What sets it apart? You know, as you mentioned, for affluent customers, I thought of Lululemon. And that brand, it's very clear what it stands for, what it offers that is unique. Or at least it's clear to me.

But when I think of Williams-Sonoma, which, fine, I sort of see it as the same as Crate and Barrel. I'm sure I'm wrong. But a brand that has a lot of different things. But what has the brand done right in the last couple years while a lot of other retail names have flailed?

CRISTINA FERNANDEZ: Yeah, I think the brands and the management team is very good at merchandising and catering to their customer, you know, appealing, you know, creating the assortment. They also are savvy when it comes to digital marketing, obviously already 56% of sales coming from that. And they've had a lot of focus on sustainability, particularly at the West Elm brands and Pottery Barn. So you're seeing materials that are certified and really catering to the consumer who is willing to pay more of a premium for a product that's more environmentally safe.

So the combination of all those things. And actually, thinking about Crate and Barrel, we just heard their CEO last week on a webcast with the NRF talking about how strong their e-commerce growth has been in the last six weeks. And they're similar to Williams-Sonoma, smaller in size, about $2 billion in sales, but also generated over 50% of their sales online. And that also gave us confidence that Williams-Sonoma is seeing similar trends.

SEANA SMITH: Hey, Cristina. This is Seana. I wanted to follow up just talking about the strength of their e-commerce presence. And we talked about how coronavirus is changing consumer behavior. It's accelerating the shift to the online channel and away from brick and mortar. So when you just take a look at Williams-Sonoma and its umbrella of brands, my question to you is do you think we could see even a wave of more store closures specifically related to Williams-Sonoma?

CRISTINA FERNANDEZ: Yeah. I think-- I mean, this management team, the company has kept their store base, you know, flattish over the last couple of years. They have about 600 stores, which is, you know, a fair amount of stores but definitely a lot less than other retailers. I think as the business moves more online, we'll definitely see them continue to trim the stores, particularly the brands that have the largest store fleets, Pottery Barn and Williams-Sonoma. So we'll see those.

And then also I think we'll see with them, and perhaps with a lot of other retailers try to move some locations from inside the mall to outside the mall, as those stores could perform better and people could feel more comfortable going to a street or an open air location.

- And Cristina, I know under your purview at Telsey, you also cover Stitch Fix, Amazon, Peloton. Just thinking about, you said the affluent customer seems to be very protected during this time, would you say, you know, can you rattle off a couple names that really round out the companies that you're bullish on right now?

CRISTINA FERNANDEZ: Yeah, I would say across our space, yeah, definitely Lululemon, Peloton. All those are seeing benefits from more consumers working out at home. We also like Nike.

On the essential retailers, we've been positive on Walmart and Target. They're seeing a lot of market share gains during this time period. Lowe's is a company that's also benefiting from a lot of home improvement spending. They reported last week and talked about April and May to date sales being up 20%.

And then Best Buy was one we just upgraded last week as well. We are seeing consumers spend more on electronics as they work from home and trying to entertain themselves. And they also have a very good e-commerce business. So those are a few of the ones where we're positive on.

MYLES UDLAND: All right. Cristina Fernandez with the Telsey Advisory Group, again, upgrading shares of Williams-Sonoma today to outperform, $80 price target. That stock is up about 5.5% right now. Cristina, thank you so much for joining the program.