Morgan Stanley lifts Williams-Sonoma PT on steady top-line, margin gains

Investing.com - Morgan Stanley on Thursday raised price target on home furnishing retailer Williams-Sonoma Inc (NYSE:WSM) stock to $170 from $145, citing margins gains and steady top line growth.

The brokerage highlighted steady comparable sales in the quarter, with company holding market share despite a challenging macroeconomic environment and minimal discounting. Innovation, particularly in furniture, has been a key driver of top-line resilience, with strong consumer response to new product launches.

However, Morgan Stanley (NYSE:MS) remained cautious while brokerage maintained an “equal weight" rating, saying there was limited visibility on earnings.  

Williams-Sonoma reported improvement in gross margins in the third quarter, driven by pricing power and operational efficiencies. The company has defied market skepticism about its margins, which stood at 46%, significantly above 2019 levels of 36%.

“Steady top-line and continued margin strength show WSM delivering against their plan and disproving the bear case. Margins may still fluctuate in the future, and a recovery timing is unclear,” Morgan Stanley analysts said.

However, Morgan Stanley flagged concerns about limited earnings visibility, given a potentially prolonged weak consumer environment and the retailer's significant exposure to China tariffs, which pose a medium-term risk.

The analysts also pointed to inefficiencies in Williams-Sonoma’s supply chain and shipping network, suggesting room for further margin expansion in the long term. Still, any near-term margin gains in the fourth quarter are expected to be reinvested in advertising to support sales.

Morgan Stanley sees ~3% downside to its $170 price target and a more significant downside risk of 45% under its bear case scenario, compared to a 20% upside in its bull case.