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Williams-Sonoma in Woeful Slump

Williams-Sonoma Inc. experienced progressively declining comp-store sales throughout the second quarter, as well as net revenues declining by greater-than-expected rates, the six-nameplate upscale home furnishings retailer reported during its earnings call last week.

Pottery Barn proved the poorest performer and Williams-Sonoma the best.

Howard Lester, chairman and ceo, outlined the results. Among the company's brands, net revenues decreased 7.6% — "this decline driven by an 11.5% decrease in the Pottery Barn brand and an 8.1% decrease in the Pottery Barn Kids brand, partially offset by a 1% increase in the Williams-Sonoma brand," he said.

On the flip side, at Williams-Sonoma Inc.'s emerging brands — West Elm, Williams-Sonoma Home and PB Teen — net revenues increased 15.9%, "despite the softening in overall economy," he added.

Overall, diluted earnings per share for the quarter ended Aug. 3 fell 26.1% to 17 cents (including a 9 cent benefit on the sale of a corporate aircraft), vs. 23 cents in the same period one year ago. Excluding the one-time benefit, EPS plunged 65.2%.

Quarterly net revenues fell 4.6% to $819.6 million from $859.4 million last year. Comps were down 11.7%, and worsened through the quarter: "To put this in perspective," said Lester, "comparable-store sales declined from negative 8.6% in May to negative 14.0% in July."

In August, Pottery Barn suffered a continuation of the trend in declining comp-store sales, which in July came in at -18.6%, "noticeably weaker than other months in the quarter," said Laura Alber, president.

Pottery Barn's merchandising suffered with year-over-year sales declines across all major categories. "Interestingly, no one category was significantly better or worse than another, with the exception of furniture, which benefited from the success of new product introductions and strong upholstery business," she said.

The related Pottery Barn Kids brand proved another sore spot for the period. "We continue to believe the macro-economic environment is having a significant impact on this brand, particularly in discretionary categories like textiles and decorative accessories," Alber explained.

Only the PB Teen segment boasted a healthy increase in net revenues, 25.1% in the quarter, "delivering the best year-over-year growth in the company," she said, adding that all of its key merchandising categories — furniture, textiles and decorative accessories — saw strong growth.

Alber said, "Even PB Teen saw deterioration in growth rate at the beginning and end of quarter."

To reverse the trend, the brand is undertaking several initiatives: leveraging the August launch of its upgraded ecommerce website; testing PB Teen merchandise for the first time in one Pottery Barn Kids store in November; and expanding its selection of holiday gifts to serve a broader range of teens' interests.

At Williams-Sonoma Home, softness in textiles and furniture offset strength in home furnishings and tabletop, said Dave DeMattei, group president — Williams-Sonoma, Williams-Sonoma Home and West Elm.

"Still, [the Williams-Sonoma Home brand] is expected to be more resilient than our other home furnishing brands due to its target demographic and relatively small store space," he continued, adding that the brand going forward will be leveraging the strength of the Williams-Sonoma Kitchen brand to include a cross-branding of the two catalogs and the testing of a store-within-store in New York City in the near future.

While West Elm saw net revenue up, driven by incremental growth from new stores and increased traffic in e-commerce, this was partially offset by weaker sales in existing stores of which about 30% are located in "housing-affected" markets, namely Florida, Nevada and California, DeMattei said.

West Elm's expanded offerings in textiles, decorative accessories and furniture generally performed well. By yearend, West Elm plans to expand with 10 new units, including its first in Canada. The nameplate will also enhance its e-commerce and refine its merchandise assortment.

The corporation has restated its 2008 earnings outlook.

"We are projecting net revenues for the year on a 52-week to 53-week basis to decline in the range of 7.8% to 9.5% and diluted earnings per share to decline in the range of 34.7% to 41.5%, resulting in annual earnings in the range of $1.03 to $1.15 per share," Lester stated.

The previous guidance had called for EPS of $1.45 to $1.58; in 2007 EPS was $1.76.

Looking to 2009, Williams Sonoma Inc. expects a continued softness in the economy, and is bracing for it.

"Our approach in this environment is not and will not be business as usual, and we are not expecting a quick turnaround," he said. "Consistent with our economic perspective on 2008, we are looking forward to 2009 with a very cautious outlook. Accordingly, decisions we are making today are reflective of that sentiment, particularly on the areas of retail lease square footage growth, capital spending and inventory."

The supporting efforts to this outlook include: a reduction in retail lease square footage from 7% in 2008 to a 4%-to-5% range in 2009; a reduction in capital spending from as much as $220 million in 2008 to as much as $170 million in 2009; and a continuing reduction in inventory levels through managed receipt flow and turn-optimization initiatives.

"We believe we are in a cycle, somewhat like the '80s and early '90s," Lester said. "But like those cycles, we believe it will pass and people's homes are still their most material assets. So they are going to want to continue to invest in them. We also believe it is only a matter of time before housing demand catches up with supply, and when it does there will be a revitalization in the home furnishings market again."

Williams-Sonoma Store Count
End of second quarter 2008

Source: Williams-Sonoma Inc.
Williams-Sonoma 260
Pottery Barn 200
Pottery Barn Kids 95
West Elm 32
Williams-Sonoma Home 9
Outlets 17
Total 613


Williams-Sonoma, Inc.

Qtr. 8/3 ($millions) 2008 2007 %change
(loss)
a. Includes one-time benefit of $0.09 on sale of corporate aircraft.
Sales $819.6 $859.4 (4.6)%
Oper. Income (EBIT) 25.4 42.9 (40.8)
Net income 18.4 26.0 (29.2)
Per share (diluted) 0.17a 0.23 (26.1)
Average gross margin 34.0% 37.2%
SG&A expenses 30.9% 32.3%
Six months
Sales $1,601.4 $1,675.4 (4.4)%
Oper. Income (EBIT) 42.3 71.3 (40.7)
Net income 28.8 44.1 (34.7)
Per share (diluted) 0.27 0.39 (30.8)
Average gross margin 34.7% 37.1%
SG&A expenses 32.0% 32.9%


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