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SAN FRANCISCO-Williams-Sonoma Inc. reported a smaller-than-expected quarterly loss on Wednesday while it continues to negotiate with landlords to lower its fixed occupancy expenses. Company executives told analysts that the company is being “aggressive” in that regard and will close some stores if it cannot renegotiate the associated leases. The locally based company operates 627 stores under the Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home names.

Chairman/CEO Howard Lester and other executives told analysts they have reduced expenses by lowering inventory, reducing its catalog circulation, and refining its product assortment. Going forward, Lester says the company also will focus on the elimination of excess distribution and corporate office space. On the distribution front, company CFO/COO Sharon L. McCollam says that the company will be able to get out of some 1.2 million square feet, the inventory from which will be consolidated into other facilities.

“While we believe that all of these initiatives will improve profitability in 2009, there is still tremendous fixed cost pressure in our under-performing stores that we are working aggressively with our landlords to address,” says David DeMattei, group president of the company’s namesake brands and West Elm.

During the company’s fourth quarter conference call company executives said it was able to secure rent reductions for 15 of its 600 stores. When asked for an update on the initiative, Lester said it’s an area the company has been spending “an awful lot of time on,” visiting with its major landlords across the country.

“We are being very aggressive with [under-performing stores],” Lester said. “We are trying to work with our landlords. It’s a difficult problem for all of us, certainly as renewals come up we are able to negotiate much better lease terms than we had before. Obviously we’ve got to bring our occupancy costs in line with our sales at something close to historical levels and that’s our goal and there’s several ways to get there.

“We would prefer to get there by keeping our current store base and readjusting our expense structure and if we can’t, then we’ll have to get there by closing some of our stores and driving those sales into the remaining stores in those markets, so we’ll see how it plays out over the next few months to a year.”

Steve Zimerman, managing director of brokerage at the Dallas-based Retail Connection, recently weighed in on the situation from the landlord’s perspective in an interview with GlobeSt.com. It’s absolutely the norm that retailers are asking for renegotiations of their leases almost across the board, he said, but it’s not the norm for all of them to do so in a convincing, forthright way, and it’s not the norm for all of them to get what they want.

“If you want us to help, we want to know that you’re really doing everything you can,” he said. “We like to look at their business plan and their financials. If they’re a franchisee, have they gone to the franchiser or the bank for help? What kind of rent reduction are you looking for and how long? You need to get really specific about it.

“We’re willing to listen and help if we can, but they have to understand it’s a two-way street. We’re willing…if they’re willing to make it up on the back end or if you’re willing to give up some contingency clauses that will allow us to lease to someone else. There are a lot of them just sending out a form letter saying they want a rent reduction, when in fact, the particular store they’re asking for a reduction on is doing great.”

Williams-Sonoma posted a first quarter net loss of $18.7 million, or $0.18 per share, compared with a year-earlier net profit of $10.4 million, or $0.10 per share. The company’s first quarter ended May 3. Net revenue fell approximately 22% to $611.6 million.

Backing out asset impairment and early lease termination charges related the closing of underperforming stores; the loss was $0.14 per share, which beat analyst estimates by several pennies per share. Citing the potential need to lower prices to compete with competitor liquidations, the company maintained a wide full-year estimate, saying it could produce anything from a profit of $0.11 per share to a loss of $0.07 per share on revenue of between $2.81 billion to $2.94 billion.

Retail net revenues decreased 18%, including a comparable store sales decline of 21%. Direct-to-customer revenues decreased 27% on circulation reductions of 17% and 23% respectively for catalogs and catalog pages. Internet revenues decreased 23%. Gross margin as a percentage of net revenues decreased 540 basis points to 30.1% in the first quarter.

“This decrease was primarily driven by the deleverage of fixed occupancy expenses due to declining sales and an increase in cost of merchandise sold, including the impact of increased markdowns,” McCollam said. “Occupancy deleverage contributed over 75% of the 540 basis points year-over-year margin decline.”

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