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The High End Pays Off for Williams-Sonoma

Earnings jump 55% as retailers that market to higher-income consumers -- ready to buy big items for their homes -- prosper.

August 26, 2004|Debora Vrana | Times Staff Writer

Call it the Love Seat Economy.

On Wednesday, Williams-Sonoma Inc. reported a better-than-expected 55% jump in its fiscal second-quarter profit, fueled by sales of furniture and other household goods at its Pottery Barn chain.

It was the latest sign that retailers marketing to higher-end consumers are prospering while major discount stores and mainstream apparel chains struggle.

In recent weeks, Wal-Mart Stores Inc. and Gap Inc. have reported soft sales apparently because a sharp rise in gasoline prices squeezed lower-income Americans, who are more likely to cut back on spending when pump prices go up.

Consumer spending accounts for about two-thirds of U.S. economic activity, and analysts are watching sales reports closely to gauge the effect of higher oil prices on the economy. The market is watching, too, and apparel stocks slumped anew Wednesday when a Merrill Lynch analyst downgraded Gap on concerns about the company's fall clothing line.

But Coach Inc., which sells high-fashion handbags and accessories, reported a 113% jump in profit in its latest quarter while jeweler Tiffany & Co. reported an 11% increase in U.S. sales.

Sales at Pottery Barn stores open at least a year climbed 10.2% in the second quarter.

"It appears that the higher-end retailers like Pottery Barn, Tiffany and Coach are all doing well," Claire Gallacher, a retail analyst who noted that Pottery Barn targets consumers with a $75,000 annual income level and above.

Added Kurt Barnard, head of Barnard's Retail Consulting Group: "The upscale consumers can pay more for gas and not blink an eyelash."

Analysts said Pottery Barn stores were better stocked than usual this year and that the product lines were more popular with consumers. Its line of Chesapeake outdoor furniture and PB Basic sectional couches have all been selling well, a spokeswoman said.

"They've got very attractive merchandise, very well displayed," Barnard said. "It says to the consumer, 'You need me. Buy me.' "

Mortgage refinancings and the record pace of home sales also have helped drive sales of home furnishings.

"Home is hot and that's where Williams-Sonoma is marketing their products," said Britt Beemer, head of America's Research Group, a South Carolina consumer-behavior marketing firm.

Williams-Sonoma Chief Executive Edward Mueller, who joined the San Francisco-based company in January 2003, has expanded furniture offerings at Pottery Barn, and is expanding the brand lines.

"While continuing to invest in our long-term growth initiatives -- including our emerging brands -- we ... continue to be excited about the opportunities that lie ahead in the third and fourth quarter," Mueller said.

Williams-Sonoma, which also owns the Hold Everything and Pottery Barn Kids brands, reported net income of $27.6 million, or 23 cents a share, during its fiscal second quarter, which ended Aug. 1. That compared with earnings of $17.8 million, or 15 cents, a year earlier.

The latest profit beat analysts' expectations of 19 cents. Revenue jumped 19% to $689.6 million.

The company's stock jumped 10%, rising $3.14 a share to $34.64 in New York Stock Exchange trading.

The 55% profit increase in the latest quarter follows a 60% profit increase in the first quarter. However, the company isn't raising its profit estimates for the year because of economic and geopolitical uncertainties, company officials said.

Later this year, Mueller is expected to unveil the Williams-Sonoma Home catalog, featuring upscale furniture. It will join Pottery Barn Teen and West Elm catalogs aimed at teenagers and young adults.

"We have seen an improvement in the merchandise quality at Pottery Barn," wrote Kristine Koerber, an analyst with WR Hambrecht, who has a "buy" rating on the stock. "We believe the fall merchandise looks good."

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