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Williams-Sonoma Retrenches Again on Pottery Barn

Retailer to Re-embrace Lower Prices

With its largest brand, Pottery Barn, having suffered sorely over the fourth quarter and this past year, 588-store multi-platform retailer Williams-Sonoma Inc. is working quickly and continually to restore the brand, the company said during its earnings call last week.

Fourth-quarter sales were $1.26 billion, up 3.3% from the same period one year ago, while fiscal 2006 revenues were $3.73 billion, up 5.3%. Earnings for the quarter were up 3.9% to $1.06 per diluted share — but for the year fell 1.1% to $1.79 per diluted share, largely due to "implementation of new accounting procedures" and costs related to the closure of the Hold Everything division.

For the year, comparable-store sales edged up a scant 0.3%, held back by Pottery Barn's comp-store drop of 2.1%. The Pottery Barn effect accelerated during the fourth quarter, when its negative 5.3% comp drop forced the whole-company comp down by 0.6%.

Laura Alber, W-S president, said the company was "very disappointed" with Pottery Barn's results over the period. She noted that while the significant softening in the home-centered macro-economic environment negatively impacted the brand, she also placed blame on "brand-specific merchandising and operational issues that are within our control."

"In 2006, the brand's positioning was not as differentiated as it had been in past," she continued. "Our product assortment was too formal, we reduced the number of opening price point skus we offered, and many of the programs were redundant to past successes."

To recoup, the company is conducting ongoing customer research and, Alber said, "We are well underway with our brand revitalization strategy to reposition ourselves as a leader in America's casual home furnishings market."

This five-pronged "brand revitalization strategy" was kick-started earlier this year, partly as seen in the winter catalog and e-commerce website. "We are encouraged by the initial results. We need more time to fully implement the entire strategy … but are confident … we will reposition the Pottery Barn brand," Alber said.

The five facets of the strategy are:

  • Product, which includes new assortments that are poised to be "differentiated and relevant to our core customer," Alber said. "We're improving our speed to market so we can capture trends and bring them to customers before the competition. And we're also improving our marketing and visual merchandising for a more exciting customer experience."

  • Value, which is being "reinstated," Alber said, as a "key competitive advantage." New shipping charges are being tested and the company is reviewing its product offering to ensure the "right balance of quality and price."

  • Presentation, now being reworked at the chain's mid-sized units. This includes remixing the assortment, re-allocating floor space among categories, and improving in-store merchandising.

  • Direct-to-customer, which is centered on refining the brand's contact strategy to reach more customers and optimize circulation with customer-specific "versioning."

  • Testing and building on the success of new concepts, such as the Outdoor Book and the Bed + Bath stores. "To date, both have met expectations and we see them as viable growth opportunities," Alber said.

Of these initiatives, pricing is at the forefront, and improvements are being made on a quarterly basis from now through 2008.

"We had significantly decreased our opening price point, and it's a very important part of our new customer acquisition strategy — to have price points that appeal to younger customers," she said. "You will see that as you go, even in the current spring catalog in homes today, more opening price points than you've seen in past."

Related to pricing have been issues with Pottery Barn's shipping rates — "an emotional hot-button for some customers," research has found. Therefore, starting in this spring's catalog, adjustments are underway.

The Pottery Barn Kids concept, which posted a positive year-over-year sales growth, has been a bright spot for the brand. All major merchandise categories drove this strong performance. "Particularly impressive was growth in textiles and decorative accessories," Alber said, adding that the bedding program was a driver at the retail store level.

Real estate was another hot topic during the earnings call. Chairman and ceo Howard Lester noted, "No question, our new store footprints have slowed … as our brands have matured from a real estate perspective." However, he said, "We don't want to over-build our store locations and create cannibalization and lack of special-ness about our brands."

In 2007, the company will add 13 net new retail locations and expand the square footage in an additional 17 locations.

More specifically, Williams Sonoma Home will open two additional stores — Dallas and St. Louis. It will also reduce its catalog circulation, "until we can improve the overall productivity of the direct-to-customer business," Lester said.

West Elm will open five new stores, including its largest location, in Washington, D.C.

"In 2008, we're looking to be more aggressive in our new store rollout," Lester said of West Elm. "We're much closer to understanding the correct strategy in terms of locations, but they are hard to come by." The plan is to experiment with stores that are smaller than the average existing unit of 17,000 square feet.

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