Real Estate Rebound Pt. 1: The Home Retailer Leading the Digital Shift

BY ANDY SWAN

Time for a turnaround?

LikeFolio data and building macro trend tailwinds suggest we may be approaching an inflection point in consumer sentiment when it comes to real estate.

After a rough year for would-be home buyers and home improvers, the tides are shifting in their favor.

Borrowing rates are falling, the housing market is picking up, and consumers are talking about buying, refinancing, and taking on home improvement projects at higher rates than we’ve seen in over a year.

This comes as many companies, like the ones featured in this report, have issued cautious guidance — setting the stage for positive surprises as investors reset their expectations.

For example, home improvement retailer Home Depot (HD) is facing a coiled spring of pent-up demand, as you learned last week.

According to HD CEO Ted Decker, consumers have been deferring larger projects due to high interest rates, stating, “Everyone is expecting rates are going to fall, so we’re deferring those projects.” He noted that as rates approach 6%, Home Depot anticipates a return of consumer activity in the housing market, given the uptick it observed when rates dipped below 6.5% at the end of last year.

Consumers waiting for lower rates are jumping back into the market. September’s Fed rate cut helped send mortgage applications 11% higher in just one week’s time:

As interest rates continue to trend lower, the stage is set for a Real Estate Rebound that could lift more than just home improvement retailers.

For investors, that means now is the time to take note. Not later when the rest of the market piles in.

In this special three-part “Real Estate Rebound” series, we’ll spotlight three stocks that could benefit from a big-time release of pent-up demand:

1. A fan-favorite home furnishings retailer walloping its competitors in Consumer Happiness…
2. A fully-digital mortgage lending platform capturing market share from its more traditional peers…
3. And an online home listing marketplace undergoing a full-blown real estate renaissance.

Check out the first stock on our list today…

Stock No. 1: Williams-Sonoma (WSM)

Williams-Sonoma (WSM) is a digital-first, sustainable home furnishings and kitchenware retailer with stores in the U.S., Canada, Puerto Rico, Australia, and the U.K., as well as a variety of websites and catalogs. Its classic-to-modern brands include Williams Sonoma Home, Pottery Barn, West Elm, Mark & Graham, Rejuvenation, and GreenRow.

Expectations are low after the stock fell 9.3% post-earnings on August 22:

• Revenue was down 4% year over year to $1.8 billion, missing analyst estimates
• Adjusted earnings were up 12% year over year to $1.74 per share, beating the consensus
• The company lowered 2024 revenue growth guidance from -1.5% to -4.0% but raised its operating margin outlook

We believe Williams-Sonoma is positioned to capitalize on an evolving consumer shift to online home furnishing shopping, 70% of which still takes place in brick-and-mortar showrooms. Approximately two-thirds of WSM revenue comes from e-commerce channels.

Superior Consumer Sentiment

Williams-Sonoma dominates home furnishing peers such as Wayfair (W) and RH (RH) in positive sentiment, with Consumer Happiness of 71%:

WSM’s strong list of brands appeal to consumers at different stages of life, from decorating a nursery with Pottery Barn Kids to decorating your first house with West Elm. Consumers on social media often tout the quality of home items and the ease of ordering, especially when conducting business online.

Digital First, Not Digital Only

While the home furnishing industry lags other segments in the shift to e-commerce (furniture is notoriously bulky and difficult to ship), WSM is demonstrating it can effectively lead on the digital front.

In 2023, Williams-Sonoma generated 66% of its revenue from online sales, which also have higher operating margins. However, unlike competitor Wayfair, the company also boasts an extensive brick-and-mortar presence for customers who prefer the in-store experience.

B2B Exposure Growing

Williams-Sonoma offers a membership program for businesses, providing an exclusive discount across its brand portfolio, including 20% for all brands and 25% off at Williams-Sonoma Home. This includes an additional 5% discount on top of promotional activity that equals or exceeds the membership discount.

Our data shows that traffic to WSM’s business-to-business (B2B) website surged in August, with monthly active users gaining by 40% year over year:

WSM: The Bottom Line

Known for its high-quality furniture, home decor, and kitchenware, Williams-Sonoma appeals to both upscale buyers and younger first-time homeowners seeking modern, stylish options.

As interest rates stabilize, WSM’s focus on curated collections and sustainable design will resonate with this demo – and potentially provide a “surprise” tailwind to send the stock higher.

Tomorrow, we’ll be back with part two of our Real Estate Rebound series, spotlighting a stock gaining market share in the $5 trillion home buying market with its digital mortgage lending platform.

Stay tuned.

Until next time,

Andy Swan
Founder, LikeFolio

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