Yahoo Finance Live anchors discuss a Barclays analyst's decision to downgrade Williams-Sonoma and RH stocks to Equal Weight from Overweight as home goods spending slows.
JULIE HYMAN: Somebody else might be losing money or at least not making as much of it, according to Adrian Yeo over at Barclays, are some of the home furnishings retailers. She is downgrading this morning both Williams-Sonoma and RH. Both of those stocks are falling this morning. And she's downgrading them to equal weight from overweight, talking about growing inventory levels, decelerating demand, and basically saying the weakening housing cycle is going to have a trickle-down effect on home furnishing spendings. She's talking about for the next 12 to 24 months. So this is not a short term call, that this is going to be a pretty down cycle that's going to last a while for these [INAUDIBLE].
BRIAN SOZZI: Good call by our friend of the show Adrian. Love, love, love this research. This is an analyst trying to get out in front of what could be a very challenging set of numbers, not only just in terms of the, let's say, existing home sales or new home sales data, just the earnings. These companies are going up against some very strong still two-year COVID sales comparisons. What does that mean in plain English? Sales are likely to slow further next year and slow-- as will earnings as well. I like this call by Adrian. It makes a lot of sense.
I will add this, though, on the other side. You go over the Yahoo Finance statistics page, and these stocks are not necessarily expensive versus the S&P 500. I'm surprised to see Williams-Sonoma trading at seven and a half times forward earnings. RH, a luxury retailer, trading at about twelve times. That is a discount to the broader market.
BRAD SMITH: Well, and they're going to be coming off of some tough comps as well. For at least the Williams-Sonoma side, they had just reported recently a record quarter of revenues and earnings in what they defined as a challenging environment. And it is a challenging environment. Now, if you add on to that a year out from now that you're still going to have people that are trying to figure out, all right, do we have an environment where we can purchase a home? Do we have an environment where we can furnish that home that we purchase?
Or for the number of homes that already have been sold at favorable prices over the past 18 months, are there still going to be people on the more affluent side, perhaps, of the consumer spectrum that say, yeah, I'm going to go into a Restoration Hardware and purchase a distressed mirror and decide to put that in my home.
BRIAN SOZZI: Do you want to buy a distressed mirror?
BRAD SMITH: No.
BRIAN SOZZI: Isn't it cracked? It's cracked, no?
BRAD SMITH: Yes.
JULIE HYMAN: No, it's not cracked. It's [? Bettina. ?]
BRAD SMITH: I mean, yes.
BRIAN SOZZI: [? Bettina, ?] OK.
JULIE HYMAN: It's [? Bettina. ?]
BRIAN SOZZI: I can't afford to shop at RH.
JULIE HYMAN: She addresses this issue in her note. She talks about-- and this is what we've talked about-- the wealth effect, right? Because the stock market has been down so much, that does affect higher household income customers. And so these are the customers of these two companies, which are higher end. And she also talks about, in particular for RH, RH Contemporary recently launched, what she said, with price points roughly 30% higher than current prices. And this could also curb demand in the near term.
BRAD SMITH: It was already expensive.
BRIAN SOZZI: Last little thing-- Williams-Sonoma has been losing a lot of executives the past six months. So just anytime you see that as an investor, not a good thing.
JULIE HYMAN: And a reminder, of course, Williams-Sonoma doesn't just make pots and pans. They own West Elm as well. So there's also a furniture component there.
BRAD SMITH: Exactly.