Wednesday, May 30, 2007

Williams-Sonoma Posts 21% Fall (WSJ)

By KEVIN KINGSBURY

Williams-Sonoma Inc.'s fiscal first-quarter net income fell 21% and the retailer trimmed its second-quarter earnings forecast due to potential markdowns by competitors to clear growing inventories.

The San Francisco owner of home-products chains such as Pottery Barn reported net income of $18.2 million, or 16 cents a share, for the period ended April 29, compared with $23.1 million, or 20 cents a share, a year earlier. The latest quarter's results included a one-cent impact from adopting new income-tax accounting.

Revenue climbed 2.7% to $816.1 million from $794.3 million, as comparable-store sales dropped 0.8%. The revenue increase would have been 5.2% excluding sales from the since-shuttered Hold Everything chain.

Two months ago, Williams-Sonoma projected net income of 11 cents to 15 cents a share on revenue of $812 million to $830 million. The firm forecasted comparable-store sales excluding the small West Elm and Williams-Sonoma Home chains to be down 1% to 3.5%.

Gross margin fell to 37% from 38.5%, below the company's March forecast of 37.4% to 37.7%, amid increased markdowns at Pottery Barn and Pottery Barn Kids, and increased liquidations at the firm's outlet stores.

Chairman and Chief Executive Howard Lester said that despite the home-furnishing sector's macro-environment continuing to be "very challenging, we aggressively managed the rapid changes in our business and delivered better than expected earnings for the quarter. What we were particularly pleased with during the quarter was the performance of our emerging brands and our progress to date on our strategic initiatives."

Pottery Barn, which with Pottery Barn Kids has slightly more stores than the Williams-Sonoma brand, has had a tough time recently due to fewer home sales, which has reduced the number of homeowners making large purchases, and a home-furnishing field crowded with competitors. Revitalizing the brand has been Williams-Sonoma's most-important effort, Mr. Lester said.

He went on to say that executives are "remaining cautious in our guidance -- particularly in the short-term. We continue to see higher inventory levels among our competition, and are concerned about the ongoing pressure of industry-wide markdowns and rising raw material costs." Both could cut profit margins.

As such, the company lowered its earnings second-quarter forecast by two cents a share to 14 cents to 18 cents. But Williams-Sonoma reiterated its fiscal-year target of $1.76 to $1.84 a share due to the first-quarter results. The firm also backed its second-quarter revenue forecast of $855 million to $873 million and still sees comparable-store sales being flat to down 2%. Williams-Sonoma cut its gross margin forecast to 36.2% to 36.5% from 36.9% to 37.2%.

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