Williams-Sonoma Inc (WSM)

Conclusion

Williams-Sonoma is an omni-channel specialty retailer of home goods, cookware and furniture, selling through its websites, catalogues and stores under brands such as Williams Sonoma, Pottery Barn and West Elm. The shares closed at 261.68 USD on 2026-11-09, giving a market capitalisation of 30.82 billion USD.

The verdict is overvalued. The price-to-earnings ratio is 26.1 against a ten-year median of 16.2, and enterprise value to EBITDA is 16.3 against a median of 7.6. The discounted cash flow gives 115.96 USD per share and the fair value from historical multiples is 119.83 USD. The fair value band runs from 94.32 to 141.48 USD with a midpoint of 117.90 USD, a margin of safety of -54.9%. The reverse DCF implies growth of 16.0% a year, while revenue grew 2.9% a year over five years and free cash flow per share grew 4.2%.

The strongest supports are a return on invested capital of 44.1% against a weighted cost of capital of 12.0%, free cash flow at 114.2% of earnings over the last twelve months, and an Altman Z-score of 8.47. The weakest numbers are revenue, which fell at a compound rate of 3.5% over three years, the price-to-sales ratio of 3.85 against a median of 1.16, and the price-to-book ratio of 14.4 against a median of 5.8. If sales keep shrinking, the premium to history becomes hard to justify.

Financial health

Financial strength is green, held up by a current ratio of 1.45, a net debt to EBITDA of 0.26 and an Altman Z-score of 8.47. The quick ratio is 0.62 and debt to equity is 0.71. The company does not report its interest expense, so interest coverage is not available. The Altman model was designed for manufacturers, so its zone of 8.47 ("safe") is only indicative for a retailer. Insolvency risk: low, about 0.5% by the estimate of the Ohlson model over one to two years, based on figures as of 2026-01-31. Balance sheet strength is not what limits this stock.

Earnings quality

Earnings quality is green, supported by free cash flow conversion of 114.2% over the last twelve months and 102.1% over five years, and by an accrual ratio of -4.2%, which means cash earnings exceed reported earnings. Stock-based compensation is 2.1% of revenue, and free cash flow after it is 1.18 billion USD. The share count fell at a compound rate of 4.9% over five years, reflecting buybacks. The Piotroski score is 4 of 9, a middling result. The Beneish M-score is not available. The company beat earnings estimates in all 8 of the last quarters, by an average of 7.6%. Estimates have been revised up: the current-year figure is up 6.0% over 90 days, and the next-year figure is up 2.7%, with next-year growth expected at 10.5%.

Profitability

Profitability is green. The gross margin is 47.2% against a ten-year median of 40.6%, the operating margin is 19.2% against 14.7%, and the net margin is 14.7% against 11.1%. The operating margin stability measure is 32.6%. Return on invested capital is 44.1% against a weighted cost of capital of 12.0%, and the given spread is 32.1%. The five-year median return on invested capital is 43.2%. Return on equity is 55.1%, but the DuPont split shows that leverage plays a large part: a net margin of 13.9%, an asset turnover of 1.44x and an equity multiplier of 2.60x. Returns come mainly from margins and capital efficiency, not from debt.

Growth

Growth is green, with the colour resting on earnings and consistency rather than sales. Earnings per share grew at a compound rate of 2.7% over three years, 15.5% over five years and 18.0% over ten years. Revenue compounded at -3.5% over three years, 2.9% over five years and 4.6% over ten years. Free cash flow per share grew 19.2% over three years, 4.2% over five years and 16.6% over ten years. Revenue grew in 8 of the 10 comparable years. Next year's earnings growth is estimated at 10.5%. The recent revenue decline is the main concern.

Valuation

Valuation is red. Today's multiples are well above their ten-year medians: price-to-earnings 26.1 against 16.2 (a premium of 61.5%), enterprise value to EBITDA 16.3 against 7.6 (114.3%), price to free cash flow 22.9 against 13.0 (75.7%), price to sales 3.85 against 1.16 (232.9%) and price to book 14.4 against 5.8 (148.3%). The discounted cash flow gives 115.96 USD per share, using a discount rate of 12.35%, and the fair value from historical multiples is 119.83 USD. The fair value band of 94.32 to 141.48 USD rests on fixed assumptions, a 5% equity risk premium and capped growth, so it is an order of magnitude rather than a target. The cost of debt is assumed rather than observed. The dividend yield is 1.1% and the forward yield is 1.2%, with a payout of 25.0% of free cash flow. The reverse DCF implied growth of 16.0% compares with delivered revenue growth of 2.9% and free cash flow per share growth of 4.2% over five years.

Risks

The main risk is the valuation: at a margin of safety of -54.9%, the price already assumes growth well above what revenue has delivered. A further fall in revenue, which declined 3.5% a year over three years, would make that gap harder to close. Gross and operating margins are high relative to history, so a slide back toward their medians would weigh on earnings and on free cash flow. The Piotroski score of 4 of 9 shows that several quality tests are not met. The interest coverage and the Beneish M-score are not available, so the risk of earnings manipulation and debt service cannot be fully checked. This analysis has no debt maturity schedule and no revenue split by segment, so refinancing risk and the drivers of sales by product line cannot be assessed.