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.
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.
