Williams-Sonoma shares drop on weak outlook

By Martinne Geller

NEW YORK (Reuters) - Home goods retailer Williams-Sonoma Inc <WSM.N> reported a decline in its holiday same-store sales on Tuesday and gave a weak outlook for the current quarter and upcoming fiscal year, sending its shares down as much as 13 percent.

The owner of the Williams-Sonoma, Pottery Barn and West Elm chains said sales at stores open at least a year fell 0.4 percent in the nine weeks ended December 30, hurt by weak demand for home furnishings.

Net revenue for the period rose to $1.02 billion from $977.8 million a year earlier, but the increase was less than expected.

"We entered the fourth quarter with a heightened sense of caution due to our belief that the macro environment was weakening and that retail traffic was slowing. In fact, the macro environment did weaken and traffic slowed even further than we anticipated," said Chief Executive Howard Lester.

The combination of higher gasoline and food prices, resetting mortgage rates, a credit crunch and U.S. housing decline hurt holiday sales for all retailers. But chains that specialize in home goods, like Williams-Sonoma, Pier 1 Imports Inc <PIR.N> and Bed Bath & Beyond Inc <BBBY.O>, have been especially hurt as the housing decline significantly weakened demand for new furniture and decor.

Williams-Sonoma, which said the weakness has continued into January, cut its outlook for its fourth quarter, which ends on February 3. It now expects earnings of $1.11 to $1.14 per share on revenue of $1.36 billion to $1.39 billion.

Analysts, on average, were expecting $1.20 per share on revenue of $1.39 billion, according to Reuters Estimates, based on the company's prior forecast for earnings of $1.19 to $1.25 per share on revenue of $1.39 billion to $1.42 billion.

The San Francisco-based company said it expects same-store sales to be flat to down 1.5 percent in the fourth quarter, down from its prior expectation that they would be up in a range of 0.5 percent to 2.5 percent.

The company affirmed its merchandise inventory expectations, saying it still expects inventory at the end of the fourth quarter to be in the range of $665 million to $690 million, which would be 8.9 percent to 13 percent higher than at the same time last year.

For the current fiscal year, Williams-Sonoma said it expects to earn $1.75 to $1.78 per share, excluding a 3-cent-per-share impact from a higher tax rate. That compares to its prior range of $1.84 to $1.90 per share.

"Williams-Sonoma's holiday results were at the low end of previously lowered expectations," said Bernstein analyst Colin McGranahan in a research note. "With over 70 percent of the quarter behind the company, the fourth-quarter guidance could prove modestly conservative."

"Of greater concern is the very weak fiscal 2008 guidance," McGranahan continued. "Clearly consensus and ... our estimates embedded a recovery in fiscal 2008, while the current consumer environment and Williams-Sonoma's initial outlook suggest a deteriorating trend."

For the next fiscal year, the company said it expected net earnings per share to decline at a mid-to-high single-digit percentage rate, with net revenue flat to down in the low single digits.

Excluding the impact of an extra reporting week in the current fiscal year, the company said net revenue next year should be flat to up in the low single digits, while earnings per share should decline at a low-to-mid single-digit rate.

Separately, the company increased its stock buyback authorization by $150 million.

Williams-Sonoma shares were down $2.55, or 11.5 percent, at $19.65 on the New York Stock Exchange at midday.

Before Tuesday's decline, William-Sonoma shares had fallen more than 36 percent over the last year, underperforming its peers on the Dow Jones Retail Index <.DJUSRT>, which fell about 16 percent over the same period.

(Additional reporting by Aditi Samajpati in Bangalore; Editing by Brian Moss and Dave Zimmerman)