Williams-Sonoma Grew Comps 6.2% and Raised Full-Year Guidance. Here’s the Catch.

Williams-Sonoma (NYSE: WSM), the high-end home furnishings retailer that also owns Pottery Barn and West Elm, delivered strong results in its second-quarter earnings report on Wednesday morning.

In a challenging market for home improvement and home furnishings, Williams-Sonoma posted comparable sales growth of 6.2%, easily outpacing its peers.

The company also beat estimates on the top and bottom lines and raised guidance, but the stock still edged lower, showing that the results may not be as strong as they seem. Let's take a closer look.

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Williams-Sonoma impresses in its Q2

In addition to growth in comparable sales, Williams-Sonoma posted overall revenue growth of 6.7% to $1.96 billion, topping expectations of $1.93 billion.

The retailer also benefited from IEEPA tariff refunds, which helped drive gross margin up from 47.1% to 51.6%. However, adjusting for the refund, Williams-Sonoma's gross margin would have fallen 160 basis points to 45.5% due to merchandise margins falling by 230 basis points, which the company blamed on other tariff-related expenses.

Williams-Sonoma recorded a $167.8 million reduction in cost of goods sold in the quarter from the tariff refund, and said it had collected nearly all of its $197.8 million refund claim.

It did gain leverage on selling, general, and administrative expenses from comparable sales growth, as adjusted SG&A expenses as a percentage of revenue fell 100 basis points to 27.2%.

Adjusted earnings per share, which excludes the impact of the tariff refunds, rose 5% to $2.10, which edged out the consensus at $2.07.

Williams-Sonoma raised its guidance for the full year, calling for revenue growth of 4.7%-7.2% and comparable sales growth of 4%-6.5%, and an adjusted operating margin of 17.8%-18.2%.

The company reaffirmed its long-term guidance of mid-to-high single-digit annual net revenue growth and an operating margin in the mid-to-high teens.

Why investors shrugged it off

You'd expect a retailer that just delivered 6.2% comparable sales growth, which the company said was all market-share gains, to move higher on the report, and Williams-Sonoma did crawl back its losses over the course of Wednesday's session, finishing up 1.2%.

However, the initial sell-off shows that investors were underwhelmed by the results. Williams-Sonoma trades at a premium at a price-to-earnings ratio of 26.6, which is expensive for a retailer in a struggling sector.

Despite the strong results and guidance hike, investors seem to believe the stock is fully valued, meaning strong quarters like today's are priced in.

Additionally, there's still uncertainty around tariffs, which is visible in the latest trade war between the U.S. and Canada. Williams-Sonoma's guidance assumes that all tariffs currently in place remain in place through the end of the year, including the latest U.S.-Canada tariffs, but the trade environment remains fluid. Excluding the IEEPA refund, tariffs are weighing on the business as adjusted operating margin fell from 17.9% to 17.3%.

In order for the stock to break out of its current range, investors will need to see margin expansion, an improvement in the housing market, or a relaxation of tariffs.

Still, after a quarter with at least 5% comparable sales growth at its three major banners, the stock continues to look like the best-in-class player in home furnishings. After more than tripling over the last three years though, the stock may need to digest a few more quarters like this one before moving higher.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Williams-Sonoma. The Motley Fool has a disclosure policy.