Retail Chain Cuts Forecast, Chilling Stock

Williams-Sonoma Inc. posted a 15% profit gain but reduced its annual earnings forecast Thursday, provoking the biggest one-day drop in the kitchenware retailer’s shares since August 2002.

Net income rose to $35.6 million, or 30 cents a share, for the second quarter ended July 30, the company said, citing gains from unredeemed gift cards and a legal settlement. That compares with a profit of $30.8 million, or 26 cents, a year earlier.

But full-year net income will be hurt by weaker sales at its home furnishings chain, Pottery Barn, the San Francisco-based company said in a statement.

Revenue increased 6.4% to $825.5 million, the smallest rise in more than nine years. Williams-Sonoma halved its projection for third-quarter growth at established stores, saying customers are spending less at Pottery Barn as housing prices fall.

“It’s a weak sales report but consistent with the softening consumer environment,” said Dan Popowics of Cincinnati-based Fifth Third Asset Management, which recently sold Williams-Sonoma shares.

“The guidance is appropriately weak given the slowdown that we’ve seen in the last quarter and the uncertainty that they expect for the balance of the year in terms of slower housing demand,” he said.

Unused gift cards added 7 cents a share to profit. A legal settlement with Visa International Inc. and MasterCard International Inc. added 1 cent. The company operated 256 Williams-Sonoma locations and 191 Pottery Barns as of July 30.

Shares of Williams-Sonoma fell $2.71, or 8.3%, to $29.89. The stock has dropped 31% this year.

The company also announced that its board had authorized the repurchase of as many as 5 million shares and it had completed its previous buyback of 2 million shares.

Chairman Howard Lester returned to the role of chief executive in July, after Edward Mueller relinquished the post. Lester, 70, had served as CEO from 1979 to 2001.

The company reduced its earnings forecast for the year ending January 2007 to $1.87 to $1.94 a share from as much as $2.01 and cut its sales projection to as much as $3.8 billion from as much as $3.9 billion, the same amount estimated by analysts surveyed by Thomson Financial.

Williams-Sonoma also lowered its third-quarter profit forecast to as much as 26 cents a share from as much as 35 cents.

Sales at stores open at least a year may increase as much as 2% this quarter compared with a previous forecast of as much as 4%, Williams-Sonoma said.

Sales slowed suddenly at Pottery Barn in July, after the retailer had set out its fall merchandise and mailed catalogs, President Laura Alber said on a conference call. That made it difficult to react quickly, she said.

The chain may increase markdowns to clear inventory, Chief Financial Officer Sharon McCollam said. Pottery Barn will have a sales and earnings shortfall this year, executives said. The chain’s typical customer is less affluent than customers of the company’s other units, Alber said.

Williams-Sonoma’s “revelation that the environment is starting to have an impact on their customer highlights the likelihood that we are entering a period of high uncertainty regarding consumer spending,” Brian Postol, an analyst with A.G. Edwards & Sons Inc. in St. Louis, wrote in a report. He rates the shares a “hold.”