Stocks to buy

GameStop (NYSE:GME) is up 85% over the past month through June 8. GME stock now has a market capitalization of $21 billion. It is unquestionably the King or Queen of Reddit stocks. 

Source: Shutterstock / mundissima

If you’re thinking about buying GME around $300, I implore you to consider buying Williams-Sonoma (NYSE:WSM) before you do. 

Here’s why. 

GME Stock Isn’t the Best Retail E-Commerce Play

The latest boost to GME stock is the news the company is planning to build out a platform for non-fungible tokens (NFTs). It even has a website looking for talent to join its NFT team. It seems even a Ryan Cohen fart is worth a few dollars of upside these days. 

The former co-founder of Chewy (NYSE:CHWY) is busy turning GameStop into the Amazon (NASDAQ:AMZN) of gaming, whatever that means. We know that more details are likely to flow after the company’s June 9 annual shareholder meeting in Texas. 

I’m not privy to those details as I write this article. Still, I’m confident it won’t be enough to justify a market cap that’s 1.6 times Williams-Sonoma’s. The company is the undisputed e-commerce champion for those shopping for cookware, home furnishings, etc. 

As I’ve said before, Ryan Cohen attained cult-like status for building a company that’s never made money. Meanwhile, WSM CEO Laura Alber flies under the radar, despite her e-commerce business generating almost 70% of its Q4 2020 sales while growing those sales by 48% year-over-year. 

The company’s reward for these excellent results? It had operating income in the fourth quarter of $402.1 million, a margin of 17.5%. That’s 650 basis points higher than in the same quarter a year earlier.

For all of 2020, Williams-Sonoma had an operating income of almost $911 million on $6.8 billion in sales. That’s an operating margin of 13.4%, 550 basis points higher than 2019.

The company’s four major brands had same-store sales growth in 2020 between 15% and 25%: Pottery Barn (15.2%), West Elm (15.2%), Williams Sonoma (23.8%) and Pottery Barn Kids and Teen (16.6%). 

In Williams-Sonoma’s worst year in the past five for sales — $5.08 billion in fiscal 2016 — the retailer had an operating profit of $472.6 million for a 9.3% operating margin. 

How Did GameStop Do?

In fiscal 2016, GameStop’s best year out of the past five, the retailer had sales of $7.97 billion. However, if I go back to the actual 10-K for fiscal 2016, it says the company had sales of $8.61 billion and operating earnings of $557.7 million for an operating margin of 6.5%.

If I go back a full 10 years, GameStop’s best year for operating profits was $648.2 million in fiscal 2015, an operating margin of 6.9% on $9.36 billion in sales.

So, in Williams-Sonoma’s worst year, it had an operating margin 240 basis points higher than GameStop’s best year. 

And yet, Williams-Sonoma has a price-to-sales ratio of 1.84x, compared to 3.58x for GameStop. 

If that’s not enough to convince you GME isn’t the right call at current prices, consider the fact that GameStop’s generated $63.7 million in free cash flow (FCF) over the trailing 12 months (TTM). Based on a market cap of $21 billion, it has an FCF yield of 0.3%. 

On the other hand, Williams-Sonoma has an FCF yield of 8.7% ($1.1 billion FCF divided by a market cap of $12.8 billion). Anything above 8% I consider to be in value territory.

The Bottom Line

Since Laura Alber became CEO of WSM in January 2010, its stock’s gained almost 800% over 11.5 years for a compound annual growth rate of about 20%. 

Back in 2012, I recommended WSM stock, suggesting that it was a mid-cap stock worth owning.

“[T]he major reason for my excitement is Williams-Sonoma’s direct-to-customer business, which delivers much higher operating margins and represents 47% of its overall revenue, up from 45% year-over-year,” I wrote in September 2012.

“Some experts suggest online revenues could account for as much as 50% of the retail industry’s overall business within 20 years. Williams-Sonoma is positioned better than most to deal with this transition.”

It certainly was.

Meanwhile, Ryan Cohen’s been granted god-like status for 1) creating an e-commerce business in Chewy that’s yet to make money in a single fiscal year, and 2) pivoting GME stock from an obvious old-school brick-and-mortar business model.  

You can bet on this so-called proven winner in Cohen. Or you can bet on Alber, someone who’s actually achieved a thing or two as CEO.

It’s your call.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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