Grade: A — Strong Financial Health
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-03-26, FY ended February 1, 2026) + Yahoo Finance
Auditor: KPMG LLP — Unqualified opinion
One-line verdict: Williams-Sonoma is one of the cleanest companies to pass through this screening. Zero red flags. One minor watch item — cash of $1.0B covers 70% of $1.5B in total debt. Gross margins at 46.2%, free cash flow of $1.1B equaling 97% of net income, Debt/EBITDA of 0.9x, an M-Score of -2.61 well inside safe territory, and an accruals ratio of -4.2% all point to genuine, cash-backed profitability. Per the filing, "earnings per share was $8.84 versus $8.79 in fiscal 2024" — and this is a company that has sustained 46%+ gross margins for three consecutive years through disciplined in-house design and direct-to-consumer distribution.
| Metric | Result |
|---|---|
| ❌ Red Flags | **0** |
| ⚠️ Watch Items | **1** (cash covers 70% of total debt) |
| Checks Completed | **17/18** (1 N/A: impairment data) |
| Beneish M-Score | **-2.61** (clean; threshold is -2.22) |
| Altman Z-Score | **4.24** (safe zone) |
| Auditor | KPMG LLP — Unqualified opinion |
The World's Largest Digital-First Home Retailer
Per the filing, Williams-Sonoma is "the world's largest digital-first, design-led and sustainable home retailer." The company operates brands including Williams Sonoma, Pottery Barn, Pottery Barn Kids, Pottery Barn Teen, West Elm, Rejuvenation, Mark and Graham, and GreenRow. As of February 1, 2026, the company had approximately 19,800 associates.
The business model is distinctive: "Our in-house design capabilities and vertically integrated sourcing organization allow us to deliver high-quality, lasting products at competitive prices." The company designs its own products, sources them directly, and sells through both e-commerce and approximately 600 retail stores.
| Metric | FY2023 | FY2024 | FY2025 | FY2026 | Trend |
|---|---|---|---|---|---|
| Revenue | $8.7B | $7.8B | $7.7B | $7.8B | Stabilized after 2023 decline |
| Net Income | $1.13B | $0.95B | $1.13B | $1.09B | Stable ~$1.1B |
| Gross Margin | 42.4% | 42.6% | 46.5% | 46.2% | Step change in FY2025 |
| EPS | — | — | $8.79 | $8.84 | Slight increase |
| CFFO | $1.1B | $1.7B | $1.4B | $1.3B | Healthy |
Per the MD&A, "Gross margin decreased to 46.2% from 46.5% in fiscal 2024. This decrease in gross margin of 30 basis points was driven by (i) the out-of-period freight adjustment in the first quarter of fiscal 2024 and (ii) higher occupancy costs and higher shipping costs." The slight gross margin decline is fully explained by non-recurring items and cost inflation — the underlying margin structure remains strong.
Revenue stabilized at $7.7-7.8B after declining from the pandemic peak of $8.7B in FY2023. The home furnishings market cooled as post-COVID renovation spending normalized.
Cash Flow: Exceptional Quality
| Metric | FY2024 | FY2025 | FY2026 |
|---|---|---|---|
| Operating Cash Flow | $1.7B | $1.4B | $1.3B |
| Net Income | $0.95B | $1.13B | $1.09B |
| **CFFO / Net Income** | **1.79** | **1.24** | **1.21** |
| CapEx | ~$0.2B | ~$0.3B | ~$0.3B |
| **Free Cash Flow** | **$1.5B** | **$1.1B** | **$1.1B** |
| **FCF / Net Income** | **1.58** | **0.97** | **0.97** |
Per the filing, "net cash provided by operating activities was $1.3 billion compared to $1.4 billion in fiscal 2024, and was primarily attributable to net earnings of $1.09 billion." FCF/NI of 0.97 means the company converts virtually every dollar of reported earnings into free cash flow. The accruals ratio of -4.2% confirms minimal reliance on accrual-based income. Capital intensity is very low — CapEx is only about $0.3B against $7.8B in revenue.
Balance Sheet: Near-Fortress
| Metric | Value | Assessment |
|---|---|---|
| Cash | $1.0B | Healthy |
| Total Debt | $1.5B | Low |
| Cash/Debt | 70% | Watch item (below 80%) |
| Debt/EBITDA | 0.9x | Excellent |
| Goodwill + Intangibles | $0.1B | 4% of equity, negligible |
| Z-Score | 4.24 | Safe zone |
The watch item — cash covering only 70% of total debt — is marginal. Total debt of $1.5B includes operating lease liabilities for approximately 600 retail stores. With $1.1B in annual free cash flow, the entire debt could be retired in 16 months. Debt/EBITDA of 0.9x is one of the lowest among retailers. Near-zero goodwill eliminates impairment risk entirely.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 6 days, unchanged YoY |
| A2 | AR vs Revenue Growth | ✅ | AR +7.8% vs revenue +1.2% |
| A3 | Revenue vs CFFO | ✅ | Revenue +1.2%, CFFO -3.3% |
DSO of 6 days reflects the direct-to-consumer model. AR grew somewhat faster than revenue (+7.8% vs +1.2%), but at an absolute DSO of 6 days, this is immaterial.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | Inventory +9.8% vs COGS +1.8% |
| B2 | CapEx vs Revenue | ✅ | CapEx +17.1% vs revenue +1.2% |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 60.7% |
| B4 | Gross Margin | ✅ | 46.2%, -0.3pp |
Per the filing, "Gross profit is equal to our net revenues less costs of goods sold. Cost of goods sold includes (i) cost of merchandise, tariffs, inbound freight, and distribution center costs, (ii) occupancy costs, (iii) shipping costs." The 46.2% gross margin — among the highest in home furnishings retail — reflects the vertical integration and in-house design model.
Inventory growth of 9.8% versus COGS of 1.8% is within normal bounds for a seasonal retailer building stock for the next selling season.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.21 |
| C2 | Free Cash Flow | ✅ | FCF $1.1B, FCF/NI = 0.97 |
| C3 | Accruals Ratio | ✅ | -4.2% |
| C4 | Cash vs Debt | ⚠️ | Cash $1.0B covers 70% of $1.5B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ✅ | $0.1B = 4% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 0.9x |
| D3 | Soft Asset Growth | ✅ | Other assets +14.1% vs revenue +1.2% |
| D4 | Asset Impairment | — | No data |
Acquisition Risk & Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF positive |
| E2 | Goodwill Surge | ✅ | Goodwill unchanged |
| F1 | Beneish M-Score | ✅ | -2.61 (clean) |
Every check passes. The M-Score of -2.61 is safely below the -2.22 threshold. Williams-Sonoma is an organically grown business with minimal acquisition history.
Key Risks from the 10-K
1. Housing Market Sensitivity
Williams-Sonoma sells home furnishings. The filing acknowledges "the housing market" as a risk factor. When existing home sales decline, the furniture and home accessories market contracts. The revenue decline from $8.7B (FY2023) to $7.7-7.8B already reflects this dynamic.
2. Tariff Exposure
The filing warns about "tariffs, inbound freight" as a component of cost of goods sold. Home furnishings are globally sourced, and tariff escalation could compress the 46.2% gross margin. The filing notes "the effect the global supply chain disruption has had and may have on our results of operations."
3. Seasonality Concentration
Per the filing, "Historically, a significant portion of our net revenues and net earnings have been realized during our peak selling season, the period from October through January." A weak holiday season could disproportionately impact annual results.
4. E-Commerce Competition
The filing warns of "the continued shift to e-commerce" which "has encouraged the entry of many new competitors, including those with new business models and discount retailers selling undifferentiated products at reduced prices." Williams-Sonoma's defense is brand authority and proprietary design — but the competitive moat requires continuous investment.
Summary
Grade: A. Zero red flags, one minor watch item. Clean across every dimension.
Williams-Sonoma passes 16 of 17 checks (one N/A) with a single marginal watch item on cash-to-debt coverage. The company delivers 46.2% gross margins, converts 97% of net income to free cash flow, carries near-zero goodwill, maintains Debt/EBITDA of 0.9x, and earns an M-Score of -2.61. This is what clean earnings quality looks like.
The risks are all qualitative and forward-looking: housing market dependence, tariff exposure, and e-commerce competition. The books are pristine, the cash flow is real, and the balance sheet is strong.
**Disclaimer**: This report is based on Williams-Sonoma's FY2026 10-K filed with SEC EDGAR on March 26, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: KPMG LLP (Unqualified opinion)
Fiscal year ended: February 1, 2026