Episode Details

Williams Sonoma (WSM) Q2 FY2026 — Q2 FY2026 (13 weeks ended August 2, 2026): net revenues $1.96bn, UP 6.70%, comparable brand revenue +6.2%. GAAP diluted EPS $2.84; non-GAAP $2.10 against a $2.08 bar. Outlook RAISED. Shares opened -4.58% and closed +1.15% at $237.43 on 2.34x median volume. Comparable brand revenue grew 6.2%, the best of the eight filed quarters we assembled, and every brand was positive. But $123.0m of new revenue produced only $10.4m of new operating profit on the company's own adjusted basis - 8.47 cents on the dollar, against a base business earning 17.3 cents. Occupancy (+40bp) and supply chain (+30bp) both levered; merchandise margin, which the release attributes to tariff costs, took 230bp. That is why the RAISED margin guide of 17.8%-18.2% still has a midpoint BELOW the 18.1% fiscal 2025 delivered. THE CALL: SELL (4/5, AN EXCELLENT RETAILER AT A FULL MULTIPLE) — base-case value ~$177.58 vs ~$237.43 today. KEY METRICS: - THE INCREMENTAL DOLLAR: $123.0m of new revenue produced $27.0m of new non-GAAP gross profit (21.96 cents) and $10.4m of new non-GAAP operating profit - 8.47 cents on the dollar against a 17.3% base margin, 48.98% of the base rate. Over the half: 5.75 cents. - THE DEMAND SIDE IS FINE: comparable brand revenue +6.2%, the best of eight filed quarters, on revenue +6.70% to $1.96bn. Pottery Barn (39.33% of the quarter) went from -2.3% two quarters ago to +5.1%. West Elm +6.4%, Williams Sonoma +7.6%, Kids and Teen +3.5%. - THE COMPANY'S OWN BRIDGE: occupancy leverage +40bp and supply chain efficiency +30bp against merchandise margin -230bp, which the release attributes to tariff costs - about $45.1m at this quarter's revenue. The two scale wins covered 30.43% of the tariff bill. - THE INVERTED GAAP SPREAD: reported EPS $2.84 sits ABOVE non-GAAP $2.10 because of a $167.8m IEEPA tariff refund inside cost of goods sold plus $6.3m of interest, less a $47.5m vendor provision and a $10.0m one-off 401(k) cost - $116.7m pre-tax, $0.74 a share. - THE RAISE IS A REVENUE RAISE: the margin band went 17.5%-18.1% (18 March), was reiterated word for word (21 May), and became 17.8%-18.2% (26 August) - a 20bp midpoint move against 125bp on revenue. FISCAL 2025 DELIVERED 18.1%, above the 18.0% midpoint. - THE PRICE: 23.94x trailing earnings against a 15.80x median we measured across 25 quarterly observations. Since March 2023 the shares are up 4.06x and trailing earnings 1.18x - 88.1% of the return is re-rating. At 9.5% the price needs 5.52% growth forever. - THE COUNTERWEIGHT, WHICH IS REAL: zero borrowings, $1,028.9m of cash, a filed 42.3% return on invested capital and the best operating margin on our board. Fiscal 2025 returned $1.17bn - 110.9% of that year's free cash flow. Our bull case $244.59 clears the tape. What to watch: UP: merchandise margin recovering as the tariff comparison laps - management called Q2 the peak quarter of tariff pressure. DOWN: the raised guide needs second-half margin EXPANSION after a first half in which it fell 60bp, at 23.94x against a 15.80x six-year median. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.