Williams-Sonoma heads into its third-quarter report with something many home furnishings retailers would envy: accelerating sales in a housing market management describes as the worst in decades. The harder question is whether the margin damage from tariffs, which management said peaked last quarter, begins to ease as promised. Last quarter showed demand is holding up. This report needs to show that profits can recover alongside it.

Wall Street expects earnings of $2.17 per share on revenue of about $1.98 billion, which would be growth of roughly 10.7% and 5.2% over last year's $1.96 and $1.88 billion. That is solid but not spectacular, and the revenue estimate implies some cooling from the 6.2% comparable sales gain posted last quarter. The Earnings Whisper sits at $2.23, about 3% above consensus. That is a modest premium, but it signals that the more engaged part of the market expects a beat rather than a merely in-line print. The full-year setup is more telling. Management lifted its revenue outlook for the year ending January 2027 to $8.17 billion to $8.37 billion, yet consensus stands at $8.15 billion, just below the bottom of that range. Analysts are effectively doubting the raise, which leaves room for upside if the company delivers.

The previous call laid out a clear story. Comps accelerated for the third straight quarter, every brand turned positive, and Pottery Barn, the longtime laggard, swung to a 5.1% gain from a 2.3% decline two quarters earlier. Business-to-business sales grew a record 14.5%, led by a 20% jump in contract. Management raised its full-year comp range to 4% to 6.5% and its operating margin target to 17.8% to 18.2%, and it stressed that the raise excluded any benefit from the roughly $200 million tariff refund it received. Validating that narrative this quarter means Pottery Barn holding mid-single-digit comps rather than slipping back, B2B sustaining double-digit growth, and early evidence that AI shopping tools, such as the Olive assistant and the newly launched Otto across Pottery Barn, are lifting conversion.

Margins are where the story could break down. Gross margin fell about 160 basis points last quarter, with merchandise margin down roughly 230 basis points, a much steeper decline than the first quarter's 100-basis-point drop. Management called the second quarter the trough. If third-quarter merchandise margin compression narrows noticeably, the raised operating margin target looks credible. If it stays near second-quarter levels, investors will question whether higher fuel and transportation costs, which management flagged as a new pressure, are offsetting tariff relief. Commentary on the fourth quarter also matters, since a shrink accrual of about 150 basis points becomes a headwind then, and management must show how the year closes inside its range.

The stock already reflects much of the good news. Shares have climbed 13.4% since the last report while the S&P 500 slipped 1.4%, and at about $254 they trade well above the 200-day moving average near $217. Still, the stock has pulled back about 7% from its post-earnings high of $274.45, so it is not pressing against a breakout. Sentiment is firmly bullish at roughly 71%, essentially unchanged from last quarter, which suggests confidence has held steady rather than become euphoric.

The central issue is simple. Williams-Sonoma has shown it can grow sales without help from housing. To keep its narrative intact, it now needs to show that the tariff squeeze is easing and that the raised margin target holds, with enough demand momentum to persuade a skeptical Street that the top half of its revenue range is within reach.