SAN FRANCISCO-Williams-Sonoma Inc. cited tough economic conditions Wednesday in reporting lower earnings and sliding comparable store sales, saying that the “macroeconomic” environment was working against it as well as others in the home furnishings segment of retailing. Howard Lester, chairman and CEO, commented that the “macro-environment in the home furnishings sector in the first quarter of 2007 continued to be very challenging,” although Lester said that Williams-Sonoma managed to do better than expected in light of prevailing economic conditions.

Lester and other Williams-Sonoma executives, commenting during a conference call with financial analysts, said the company was “particularly pleased with the performance of our emerging brands, which include PBteen, Hold Everything, West Elm, and Williams-Sonoma Home. He also praised the company’s efforts to implement strategies, such as improving its supply chain and technology operations. Although the retail environment for home furnishings and related products “continued to be difficult,” the company remained focused on its most important initiative, the revitalization of the Pottery Barn brand, Lester said.

The company reported an increase in its retail net revenues in the first quarter, saying that the increase resulted mainly from a 6.3% year-over-year rise in retail leased square footage, including 15 net new stores. The company’s plans for expansion call for retail leased square footage to increase in the range of 5% to 6%, versus Williams-Sonoma’s previous guidance in the range of 4% to 5%.

What that means for store count is about 11 net new locations for the year, seven of them in emerging brands. In addition to expanding by adding stores, the company plans to expand the square footage of 19 of its locations and to remodel three of its stores.

For the 13-week first quarter ended April 29, the San Francisco-based firm earned $18.15 million and 16 cents per diluted share, versus $23.1 million and 20 cents per share in the first quarter of 2006.

First-quarter net revenues climbed 2.7% to $816.1 million, but comparable store sales dipped in all of its retail concepts except its outlet stores, which posted a 9.3% increase. The company said, in its guidance regarding future comparable store sales, that it expects the comps to run from flat to minus 2%, mainly because of the “challenging” conditions that Williams-Sonoma and other retailers in its category are facing.

Lester said that Williams-Sonoma is remaining cautious in its outlook for the rest of the year, especially regarding the short term. “We continue to see higher inventory levels among our competition, and are concerned about the ongoing pressure of industry-wide markdowns and rising raw material costs,” he said. Both of those factors “could lead to a further deterioration in the overall macro-environment and lower gross margins.”

Williams-Sonoma Inc. markets through through 584 stores, seven mail order catalogs and six e-commerce websites. Its brands include Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home.

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