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Williams-Sonoma Downshifts on Pricing Strategy

Feeling "potentially out-priced and out-marketed" by its competitors, Williams-Sonoma Inc. is moving down to a new bracket of opening price point levels and expanding its assortments of these more promotional items in 2009.

At the same time, the company is "continuing to assess" its Williams-Sonoma Home brand, which for the past year or so has "depressed" Williams-Sonoma's earnings by "well over 10 cents a share," the company reported during its fourth quarter and year-end earnings call.

For the year ended Feb.1, the 627-store retailer saw net earnings crash 84.7% to $30.0 million, down from $195.8 million one year ago. Per diluted share, earnings plummeted 84.1% to 28 cents, from $1.76 last year.

Net revenues of $3.36 billion for the year fell 14.8% from $3.94 billion in 2007. Comparable store sales dropped 17.2% on a 52-to-52 week basis (the previous fiscal year had 53 weeks).

Williams-Sonoma Inc. projected a very downbeat 2009, seeing a total revenue drop of 12% to 17%, or a range of $2.80–$2.95 billion.

The gloomy 2009 earnings guidance is a range from a net loss of 15 cents per share to earnings of 5 cents per share.

The new pricing initiative has been one year in the making, said Laura Alber, president.

"In all of our brands, we've been looking at competitive pricing across every category and researched our competition heavily to understand where they've moved down and are potentially out-marketing us or out-pricing us," she said. "Starting last year, we started making the necessary adjustments to compete in this new world of pricing and promotions."

The result of those efforts will take fruition this year when, Alber said, "you will see us introduce more opening price points."

Specifically, the company has reduced the actual opening price points at Pottery Barn, "so there are more and the starting price is lower," she continued, noting PB has added monthly promotions that are "organized and in print to bring our customers into certain categories that will drive repeat purchases in the future."

This strategy is showing positive results; Alber cited the recent Pottery Barn white sale, which she said was "successful," and gave the retailer encouragement about repeat purchases. "We believe the customer, when they buy our towels, will love them so much that they will come in and buy more towels later," she said. "We've seen that occur and give us payback on margin dollars."

While all major categories suffered decreases at Pottery Barn and Pottery Barn Teen, textiles were among the better performing categories at both brands.

Pottery Barn Kids, which also suffered significant declines, has its own 2009 plans. Among these are: a wider range of price points "by engineering value in key categories without sacrificing quality," Alber said, and expanded assortments in licensed programs with premium brand names. At the same time, the brand will close two of its test stores this year.

The company's most popularly priced nameplate, west elm, "continued to be more resilient than our other home furnishings brands," but still suffered net revenue declines in Q4 due to lower traffic and conversion.

To further emphasize its "Good design and great prices" marketing tag, the West Elm division is developing "a new opening price point merchandising strategy and emphasizing our value proposition through our brand marketing." At the same time, product mix is being refined so that more is in higher-margin categories.

Affordability has always been the ethos of the brand," said Dave DeMattei, group president for Williams-Sonoma, Williams-Sonoma Home and West Elm. "We are now playing that up more in our marketing."

In 2009, there are four new West Elm units planned — two that have already opened in Emeryville, Calif., and in Manhattan; as well as a new site in Scottsdale, Ariz., set to open this quarter; and the fourth in Austin, Texas, to open later in the year.

Following its earnings release, Williams-Sonoma again confirmed that "value is more important than ever" and, during last week's presentation at the Telsey Advisory Group 1st Annual Consumer Conference, reiterated its initiatives to pursue a new tier of lower price points across its six nameplates.

"Our strategy is not one of wholesale promotions, but rather communicating the value of our products and emphasizing items and categories with price points that will resonate and drive sales," said Patrick Connolly, evp and chief marketing officer. "In key categories we are increasing the percentage of introductory price points."

An example is this is the new West Elm initiative that markets the store's bedding and beds together. Dubbed Sleep Systems, this new approach "drives our higher margin bedding categories and reduces our furniture as a percent to total sales," Connolly said. "We executed this perfectly with our Pin-Tuck collection, a best seller featuring organic bedding."

Williams-Sonoma, Inc.

QTR. 2/1 ($millions) 2009 2008 %CHANGE
(loss)
Sales $1,008.0 $1,374.4 (26.7)%
Oper. Income (EBIT) 19.2 197.2 (90.3)
Net income 12.2 124.6 (90.2)
Per share (diluted) 0.12 1.15 (89.6)
Average gross profit 33.7% 41.6%
SG&A expenses 31.8% 27.3%
FISCAL YEAR
Sales $3,361.5 $3,944.9 (14.8)%
Oper. Income (EBIT) 42.2 313.4 (86.5)
Net income 30.0 195.8 (84.7)
Per share (diluted) 0.28 1.76 (84.1)
Average gross profit 33.8% 38.9%
SG&A expenses 32.5% 31.0%


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