Williams-Sonoma Inc. (NYSE:WSM)

The period between February 2019 and January 2024 demonstrates a significant evolution in economic profit. Initially, the company experienced negative economic profit, but transitioned to positive economic profit and subsequently exhibited fluctuations. Net operating profit after taxes (NOPAT) increased substantially over the period, while the cost of capital and invested capital also showed variation.

Economic Profit Trend

Economic profit began at a negative US$207,378 thousand in February 2019 and improved to negative US$147,449 thousand in February 2020. A substantial shift occurred in January 2021, with economic profit turning positive at US$3,229 thousand. This positive trend continued, reaching US$487,837 thousand in January 2022 and US$422,991 thousand in January 2023. However, economic profit decreased to US$119,617 thousand in January 2024, although remaining positive.

NOPAT Performance

Net operating profit after taxes exhibited a generally increasing trend. From US$390,105 thousand in February 2019, it rose to US$399,368 thousand in February 2020. A significant increase was observed in January 2021, reaching US$799,145 thousand, followed by a further increase to US$1,237,417 thousand in January 2022. NOPAT then decreased to US$1,172,531 thousand in January 2023 and continued to decline to US$1,034,060 thousand in January 2024. Despite the recent decline, NOPAT remained substantially higher than in the earlier years of the period.

Cost of Capital Fluctuations

The cost of capital varied throughout the period. It started at 18.71% in February 2019, decreased to 17.58% in February 2020, and then increased to 22.72% in January 2021. It decreased slightly to 22.49% in January 2022, then to 21.43% in January 2023, before rising again to 23.40% in January 2024. These fluctuations likely influenced the economic profit calculations.

Invested Capital Changes

Invested capital showed an overall increasing trend, though not consistently. It began at US$3,192,653 thousand in February 2019 and decreased to US$3,110,082 thousand in February 2020. An increase was observed in January 2021, reaching US$3,503,840 thousand, followed by a decrease to US$3,332,675 thousand in January 2022. Invested capital then increased to US$3,497,304 thousand in January 2023 and further to US$3,907,227 thousand in January 2024. The increasing invested capital base, combined with NOPAT and cost of capital movements, contributed to the observed economic profit trends.

In summary, the company transitioned from generating negative economic profit to positive economic profit, driven by increases in NOPAT. While economic profit experienced a decline in the most recent period, it remained positive. Fluctuations in the cost of capital and increases in invested capital played a role in shaping these results.

Net Earnings Trend

Net earnings showed a positive growth trajectory from 2019 to 2022, rising from $333.7 million to approximately $1.13 billion. This represents a more than threefold increase over four years, demonstrating robust profitability expansion. However, in the following years, net earnings stabilized around the $1.13 billion mark in 2023, before declining to about $949.8 million in 2024, indicating a contraction in profitability after a period of sustained growth.

Net Operating Profit After Taxes (NOPAT) Trend

NOPAT followed a similar growth pattern as net earnings, increasing from $390.1 million in 2019 to a peak of approximately $1.24 billion in 2022. This near tripling of after-tax operating profit highlights improved operational efficiency or increased operating income during this period. Subsequently, NOPAT decreased slightly to $1.17 billion in 2023 and further declined to roughly $1.03 billion in 2024, suggesting a marginal deterioration in operating performance or higher operating costs affecting profitability.

Comparative Observations

The parallel movement of net earnings and NOPAT indicates that the company's profitability growth was primarily driven by operational improvements, as both metrics expanded significantly up to 2022. The decline observed in both metrics from 2023 onwards might reflect weakening margins or increased expenses. Notably, net earnings seem to have decreased proportionally more than NOPAT in 2024, which could imply the impact of non-operating factors such as higher interest expenses, taxes, or other non-operational costs.

Summary

The company experienced a period of considerable earnings growth and operational profitability increase through 2022, indicating strong financial performance. However, the subsequent reduction in both net earnings and NOPAT in the last two years is a point of concern, suggesting a potential slowdown in growth or emerging challenges affecting earnings quality and operating efficiency.

Provision for income taxes

The provision for income taxes showed an overall upward trend from February 2019 to January 2023, increasing from 95,563 thousand US dollars in 2019 to a peak of 372,778 thousand US dollars in 2023. However, in the most recent period ending January 28, 2024, this figure declined to 323,593 thousand US dollars, indicating a notable decrease after several years of growth.

Cash operating taxes

Cash operating taxes followed a similar increasing pattern, rising from 83,339 thousand US dollars in 2019 to a peak of 406,434 thousand US dollars in 2023. Thereafter, there was a decline to 357,651 thousand US dollars in 2024. The growth over the years was relatively consistent until the slight downturn in the last recorded period.

Overall summary

Both provision for income taxes and cash operating taxes showed strong growth over the five-year span from 2019 through 2023, more than doubling or nearly doubling in magnitude. The simultaneous decline in both metrics in the latest year could signal changes in tax planning, profitability, or tax rates affecting the financial outflows related to taxes. The parallel movement of these two items suggests a close relationship between tax provisioning and actual cash tax payments over time.

The data reveals several notable trends in the financial structure over the six-year period.

Total reported debt & leases

This figure shows a general decreasing trend from 2019 to 2022, dropping from approximately 1,784 million USD to around 1,284 million USD. However, there is a reversal in 2023, with debt increasing to about 1,444 million USD, before slightly declining again to approximately 1,391 million USD in 2024. Overall, the company's leverage appears to have been reduced significantly in the first part of the period before stabilizing somewhat in the most recent years.

Stockholders’ equity

Stockholders’ equity exhibits a consistent upward trend each year, starting at roughly 1,156 million USD in 2019 and rising steadily to over 2,127 million USD by 2024. This indicates a strengthening equity base and suggests improved retained earnings or additional capital contributions over the years. The growth from 2023 to 2024 is particularly pronounced, highlighting accelerated equity accumulation recently.

Invested capital

Invested capital fluctuates somewhat but generally rises from about 3,193 million USD in 2019 to approximately 3,907 million USD in 2024. There is a dip noted in 2022, falling to roughly 3,333 million USD from a peak of around 3,503 million USD in 2021, but it resumes growth afterward. This pattern suggests some variability in total capital deployment, but the overall increase aligns with rising equity and suggests ongoing investment in business operations or assets.

In summary, the company has reduced its debt substantially over the initial period and has steadily increased its equity base, resulting in an overall rise in invested capital despite some short-term fluctuations. This pattern reflects a potential shift towards a more equity-oriented capital structure with possibly enhanced financial stability and investment capacity over time.

The economic spread ratio demonstrates a significant improvement over the observed period. Initially negative, the ratio transitions to positive values and then exhibits a declining trend in the most recent year.

Economic Spread Ratio

In February 2019, the economic spread ratio was -6.50%, indicating that the company’s return on invested capital was less than its cost of capital. This negative spread persisted in February 2020, albeit with a slight improvement to -4.74%.

A substantial shift occurred by January 2021, with the ratio turning positive at 0.09%. This suggests the company began generating returns at least equal to its cost of capital. The ratio experienced considerable growth, reaching 14.64% in January 2022 and 12.09% in January 2023, signifying a period of strong value creation.

However, the most recent observation in January 2024 shows a decrease to 3.06%. While still positive, this represents a notable decline from the previous two years, suggesting a potential narrowing of the gap between returns and the cost of capital.

The economic spread ratio’s movement closely mirrors the trend in economic profit. The negative economic profit values in 2019 and 2020 align with the negative spread ratios, while the positive economic profit from 2021 onwards corresponds with the positive spread ratios. The decline in the economic spread ratio in 2024 coincides with a decrease in economic profit, indicating a consistent relationship between these two metrics.

Invested capital generally increased throughout the period, although not consistently. The fluctuations in invested capital do not appear to be the primary driver of the changes observed in the economic spread ratio, as the ratio’s trend is more directly linked to the performance of economic profit.

The economic profit margin exhibited a notable progression over the observed period. Initially negative, the metric transitioned to positive values and subsequently demonstrated fluctuations before concluding at a lower positive level. This analysis details the observed trends in economic profit, adjusted net revenues, and the resulting economic profit margin.

Economic Profit

Economic profit began with substantial negative values in both 2019 and 2020, registering at -207,378 and -147,449 US$ in thousands, respectively. A significant shift occurred in 2021, with economic profit turning positive at 3,229 US$ in thousands. This positive trend continued, peaking in 2022 at 487,837 US$ in thousands, before decreasing to 422,991 US$ in thousands in 2023 and further declining to 119,617 US$ in thousands in 2024.

Adjusted Net Revenues

Adjusted net revenues generally increased from 2019 through 2023. Starting at 5,661,431 US$ in thousands in 2019, revenues rose to 5,897,176 US$ in thousands in 2020, 6,866,740 US$ in thousands in 2021, and reached a peak of 8,705,876 US$ in thousands in 2023. A decrease was observed in 2024, with adjusted net revenues falling to 7,845,327 US$ in thousands.

Economic Profit Margin

The economic profit margin reflected the changes in economic profit. It started at -3.66% in 2019 and improved to -2.50% in 2020. A marginal positive margin of 0.05% was achieved in 2021, followed by substantial increases to 5.86% in 2022 and 4.86% in 2023. The margin decreased in 2024, settling at 1.52%. The decline in the economic profit margin in the most recent year suggests that while the company remained profitable from an economic perspective, the efficiency of generating economic profit from revenue decreased.

The correlation between adjusted net revenues and economic profit is apparent. While revenue growth generally accompanied increasing economic profit, the most recent period indicates a divergence, with revenue decreasing while economic profit also declined, albeit remaining positive. This suggests factors beyond revenue volume, such as cost management or capital efficiency, may be influencing economic profit.