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The current climate remains unfavorable for Williams-Sonoma (WSM -6%), evidenced by its first earnings miss in over five years and slowing sales growth in Q3 (Oct). Making matters worse, the current uncertainty in the economy, particularly with how consumers will respond to increasing interest rates, led WSM to neither reiterate nor update its FY24 guidance, which called for revs to grow to $10 bln. Therefore, despite some comforting developments in Q3, the rough patches were far more unsettling, driving today's negative reaction.

• Starting with the good, WSM's B2B business again shone brightly in Q3. This business is one of WSM's primary competitive advantages, highlighted by another quarter of double-digit gains yr/yr, this time jumping 17% despite lapping nearly 100% growth in the year-ago period.
• Another plus in Q3 was WSM's global business, which exhibited strength in franchise and company-owned channels. WSM continues to see India as its most significant overseas opportunity, focusing on expanding its presence throughout 2023.
• A few other notable highlights were sales of $2.19 bln, topping analyst expectations driven by the Pottery Barn banner, which delivered +19.6% comp growth. WSM's West Elm banner also performed nicely in the quarter, boasting a +4.2% comp as inventories continued to improve.
• However, speaking of inventories, this is where things take a slight turn. Supply issues are keeping backlogs at historically high levels and leaving sales on the table. Management noted that the problem will persist into Q4 (Jan) and the first half of 2023 but should normalize sometime after.
  • It is unclear how firm WSM's backlog is, so given the current environment, WSM may see increasing cancellations if it does not resolve the situation quickly.
• At the same time, the demand backdrop is souring. WSM endured deceleration and choppiness in demand in Q3 and is finding it challenging to accurately predict where things are headed.
  • In the meantime, the company is controlling costs by not running site-wide promotions as it did before the pandemic. WSM is also in discussions with its vendors to reduce other costs to keep merchandise margins stable, which in Q3 remained flat yr/yr.
• With one quarter remaining in FY23, WSM did have enough insight into Q4 to reiterate its FY23 guidance of $8.56-8.99 bln in revs and operating margins relatively in line with FY22. The upcoming quarter is typically WSM's biggest, given the holiday season, which is partly why management was confident in reiterating its FY23 outlook.

We were nervous heading into WSM's Q3 report after Leggett & Platt (LEG), a major furniture hardware supplier, reduced its FY22 forecast last month. Even though Wayfair (W) alleviated some of these fears with its Q3 beat earlier this month, the uneasy demand backdrop still lingered. Still, WSM could have also alleviated fears had it shown more confidence in its FY24 guidance, which it reiterated just three months ago. Finally, we do not like what WSM's results could mean for competitor La-Z-Boy (LZB), which reports OctQ earnings on November 30.