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Williams-Sonoma (WSM -1%) is in the hot seat today despite reporting robust same-store sales growth and its seventh straight double-digit earnings beat for Q3 (Oct). The home décor and furnishings company, which owns Pottery Barn and West Elm, amongst other brands, also continued to grow revenues by double-digits as home improvement trends continued to drive growth across all its brands.

However, WSM expects to struggle to obtain enough inventory to keep up with demand moving forward. We noted while reviewing La-Z-Boy's (LZB) latest quarterly results earlier this week that factory shutdowns in Vietnam that have been causing supply disruptions for LZB were more than likely going to impact WSM. With the COVID-related production halt in Vietnam also affecting other corporations like NIKE (NKE), Under Armour (UAA), and Skechers (SKX), factories are wrought with backlog orders. As a result, WSM does not expect a full recovery of its inventory until mid-2022, which is weighing heavily on the stock today.

• That is not to say that WSM didn't deliver a solid quarter. Consolidated same-store sales jumped +16.9% despite lapping unfavorable comps of +24.4% from the year-ago period. This puts WSM's two-year comps at +41.3%, highlighting the shift in consumers' focus on home upgrades. WSM also noted that customers upgrading to larger spaces or second homes is further fueling home furniture spending. Wayfair (W) recently expressed similar thoughts and stated that it has seen high-income households increase home furnishings spending by over 40% since 2017.
• Although all WSM's brands delivered strong comps, West Elm led the pack at +22.5%, mainly due to strength in sales in the upholstery category. Pottery Barn's same-store sales showed similar growth at +15.9% as spending within Kids and Teens was especially high this year, due in part to an excellent back-to-school season.
• A standout in the quarter came from B2B sales, which nearly doubled yr/yr to over $200 mln, making up about 10% of overall sales. WSM has expanded its B2B client base 44% over the past year, making clear that businesses are undergoing swift recoveries. We think that going forward, B2B sales should continue to see a tailwind as the hospitality industry, which makes up a significant component of furnishing sales, continues to climb back to pre-pandemic levels. For example, in late October, Wyndham Hotels & Resorts (WH), which has the most hotels around the world, noted that rooms opened in Q3 were still off about 20% from 2019 despite soaring 50% yr/yr, suggesting that there is still plenty of upside left for WSM's B2B business.

The main takeaway is that WSM performed well in Q3, but investors are more concerned about its future, especially given its mid-2022 timeline on inventory recovery. Although production in Vietnam restarted last month, numerous companies agree with WSM's mid-2022 timeline, such as Haverty Furniture (HVT), which said in late October that production should be getting back to 50-75% by early February 2022 with 100% by the end of March.

Bottom line, WSM is still in a good position to benefit from secular trends, such as remote work. Still, supply constraints make the short-term view fuzzy, which could quickly worsen should COVID-19 cases rise in Vietnam or other regions where WSM has factories. This uncertainty is driving the stock price lower today, which could make for a good entry point. However, given the short-term concerns, we think a wait-and-see approach is best at the moment.