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What happened

Sales and profits may be falling for home goods retailer Williams-Sonoma (NYSE: WSM), but its profit margins are stronger than what anyone on Wall Street expected. These revelations came before the bell Wednesday morning when the company released the results for its fiscal 2023 second quarter, and led to traders bidding the stock up by 12.8% as of 1 p.m. ET.

In the quarter, which ended July 30, net revenues were down by almost 13% year over year to less than $1.9 billion. And Williams-Sonoma’s operating income fell by almost 26% to about $275 million as its operating margin contracted from 17.1% in the prior-year quarter to 14.6% this time. But even though the numbers are down, its margin impressed the market.

So what

Management has said it can keep Williams-Sonoma’s operating margins above 15% over the long term, which is quite the promise. Over the last decade, the company’s margins were usually below 10%, only spiking above 15% during the pandemic era. For what it’s worth, that margin spike was common among home goods retailers during the pandemic, which suggests that Williams-Sonoma wasn’t doing anything special.

WSM Operating Margin (TTM) data by YCharts.

The market clearly believed that Williams-Sonoma’s management was overpromising. As evidence, consider that the stock now trades at a price-to-earnings ratio below 10, though it has traded more often in the 15 to 20 range throughout the past decade.

Many home goods retailers have already seen operating margins contract to more normal levels. Wall Street expected the same from Williams-Sonoma and was already pricing in lower profits. But in fiscal Q2, the company lived up to management’s lofty expectations.

Now what

Williams-Sonoma was guiding for an operating margin of 14% to 15% in fiscal 2023. On Wednesday, management raised its guidance range to 15% to 16%.

Fiscal Q2 was a good quarter, and if the company can maintain its margins in this range, it could bring in over $1 billion annually in operating income. That’s substantial for a company with a market capitalization of just $9.3 billion, which suggests the stock could have more upside ahead.

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