Williams-Sonoma's Strategy Shift: Go Directly to Consumers

Williams-Sonoma (WSM) knows it's going to be a tough year, so it is placing its bets carefully. It hopes that new economy e-commerce, not traditional stores, will pave the way to growth.

The company finished fiscal 2009 strong. Fourth-quarter revenues and earnings beat analyst estimates, and the company raised its earnings guidance for fiscal 2010. Still, the company is far from soaring optimism.
For proof, consider that it expects to finish 2010 with seven fewer stores than it had at the end of last year (610). Five of the six chains the company operates, including Pottery Barn and West Elm, will lose stores, despite an abundance of low-cost commercial properties on the market. The sixth and smallest, Williams-Sonoma Home, will stick to its 11 locations.

In an uncertain economic environment, it is virtual possibilities, not real estate, that Williams-Sonoma is finding more intriguing.

The company's direct-to-consumer business, such as catalog and online operations, provides a low-cost growth alternative to opening new stores. In the fourth-quarter, the company saw such revenues rise more than eight percent, to $398 million. Internet sales rose 15 percent, to $309 million, or 78% of the total for direct sales. For the full year, direct-to-consumer sales actually fell, but the fourth-quarter advances represents green shoots of growth the retailer wants to nurture.

In particular, it is intensifying its online efforts, in part by being more selective in mailing its catalogs and shifting the money saved to online initiatives. In a fourth-quarter conference call as transcribed by SeekingAlpha, CEO Howard Lester noted that Williams-Sonoma had completed the roll-out of a new e-commerce platform at the end of the third quarter.

This enables company merchants to make changes in online sales operations without IT help. Downloads are faster and the site is easier to navigate. The company also improved its customer insight capabilities, making its e-mail targeting more efficient.

Williams-Sonoma's stability in store count and growth on the Internet give it an opportunity to increase market share relative to retailers that have been forced to close stores, said Lester. Pier 1, for example, has closed more than 150 stores in the past three years, though it has recently seen some green shoots of its own.
"E-commerce is our fastest growing and most profitable channel," Lester concluded. It also keeps shoppers engaged with the retailer even if they are shy about stopping by the store and tripping their frugality up with temptation.

William-Sonoma is about dressing up the house, which gives it an edge coming out of a recession that has kept consumers close to home. Yet, the retailer needs to keep customers living the lifestyle it sells, even if they're doing it more frugally. Ultimately, Williams-Sonoma's customers are more important to its sales growth than new stores.