Bullish on Williams-sonoma
Lehman Brothers---Rifkin, Alan---Analyst
>>Welcome back. federal prosecutors added six new criminal charges to a fraud indictment against former worldcom chief executive bernard ebbers charging him with making false statements, false filings% -with the securities and exchange% -commission from the company’s 2000 to 2002 fiscal years. ebbers is also charged with securities fraud and conspiracy as in the original indictment. prosecutors say he masterminded the biggest accounting fraud in u.s. history and is scheduled to appear tomorrow for a pretrial hearing. shares of novell fell sharply in extended-hours trading. sales of new licenses came in less than the forecast by the analyst with pacific crest securities. meanwhile, the company earned $10.4 million in its most recent quarter, translating to a loss of four cents a share due to dividends related to the conversion of new stock. williams-sonoma reports earnings tomorrow and our next guest follows the retail company and a number of others and while he expects williams-sonoma to beat last year’s numbers, he’s cautious on the group. that man is alan rifkin, retail analyst with lehman brothers joining us from the firm’s studio in new york city. thank you for being here. help us understand how we just introduced you, which is that you are bullish on williams-sonoma’s last quarter but going forward you are cautious.
>> we think that williams-sonoma will not surprise anyone and deliver a solid quarter tomorrow, 16 cents versus 11. we think the company witnessed equal balance in both williams-sonoma and pottery barn, two of their divisions. however, we think a lot of that is built into the stock. what we see right now is that there seems to be somewhat of an overhang on many of the stocks because of the fear of rising interest rates. that really leads us to be more discriminating on the group going forward.
>> tell us specifically what metrics you’ll look for from tomorrow’s report. one of the issues might be their inventory situation?
>> some of the metrics we’re looking for is same-store sales, an important barometer of the vitality of any retailer and williams-sonoma is no different. we’ll wait to see how they report on the two core businesses―pottery barn and williams-sonoma. but it will be interesting to see how they do on developing businesses like pottery barn kids. we’ll also look to see how they’re doing on the emerging businesses, brand new businesses, which albeit are small today but represent the real opportunity for growth going forward and as you alluded to, bob, we will look for the inventory numbers which we think will continue to be slightly higher than sales.
>> is that a problem for them?
>> not really a problem because williams-sonoma made a concerted effort more than a year ago to be in stock and not sacrifice any revenues at the detriment of being short on inventory. while some investors do not like to see inventory levels significantly higher than sales because after all that may mean that the company could experience markdowns down the road, it is a planned, concerted effort on the part of the company to be in stock.
>> one of the items you’re looking for is same-store sales. what do you expect?
>> a 5.5% increase on the williams-sonoma part of the business and about a 4.5% to 5% increase on the pottery barn side of the business. we think that pottery barn kids will put up a 4% comp but that’s up against an easy compare last year.
>> what are the greatest growth prospects for the company? one of the issues is how williams-sonoma home, which may conbalize pottery barn sales --% -tell us about that division and its emerges mergence and competition?
>> williams-sonoma home offers a% -terrific opportunity to leverage% -the powerful brand. the key will be to differentiate that part of the business from pottery barn because there will be overlapping product categories. the company will slowly transition the chambers catalog into williams-sonoma home and get traction that way. right now it’s difficult to ascertain what the success will be as it’s only on the drawing board. the company will roll out the catalogs later this year and we’ll have to look at the product selection and compare that to pottery barn before we determine the vitality of the chain in the near term.
>> talking about retail in general. the employment scenario seems to be improving. will that lift retail stocks overall?
>> not necessarily. retailers are typically early cyclical names and as we’re in the latter stages of the cycle, the group typically doesn’t fare all that well. thus far 2004 is living up to that bill. we think it’s prudent at this point in time to stick with the less cyclical names. they’re not the fanciest names out there―advanced auto parts, petsmart, petco, e.riley auto parts, but these are company and spaces, namely the pet products and after-market auto parts, that do well irrespective of interest rates.
>> our thanks to alan rifkin, hard-line retail analyst with lehman brothers. our next guest says new york attorney general eliot spitzer has a strong case against richard grasso. the trial will be long, he says, and could end in a settlement.
