When Williams-Sonoma Inc. bought Pottery Barn from Gap Inc. in 1986, the chain was one of a kind in the fragmented home-furnishings field. Soon the “Pottery Barn Look” had become a decorating style all its own. The casual, modern leather club chairs and slipcovered sofas it offered became so ubiquitous that it even won an appearance on the television show “Friends.”
(Rachel: “Oh-oh, Pottery Barn! … . Look at these little drawers! Oh look-look. It says that it holds 300 CDs.”
Chandler: “Ahh, just like the apothecary tables of yore …”)
Since then, however, the home-furnishing field has become crowded with competitors, and slowing housing sales have reduced the number of homeowners making large purchases. When it reports fiscal fourth-quarter earnings later this month, Williams-Sonoma is expected to post its worst annual same-store sales growth in more than six years.
The San Francisco retailer’s fiscal 2007 earnings are also expected to rise only 4 percent, well below the company’s five-year growth rate of about 22 percent, according to Thomson Financial. And in the past year, Williams-Sonoma’s shares have lost about a quarter of their value.
“They used to be trendsetters with Pottery Barn, and that’s no longer the case,” says JMP Securities analyst Kristine Koerber.
Some of the challenges are a byproduct of Pottery Barn’s success and maturation as a retailer, according to industry analysts and consultants. Pottery Barn generates about half of Williams-Sonoma’s sales and operating profit, but other retailers are going after Pottery Barn’s lucrative customers, many of whom have household incomes of $75,000 or more. Morgan Stanley research found Pottery Barn shoppers spend about $2,800 a year on home furnishings and accessories, compared with the average consumer, who spends about $1,045.
Restoration Hardware Inc.’s recent steep discounts have lured some customers. Target Corp. and even Wal-Mart Stores Inc. have increasingly offered similar but cheaper products. Indeed, Williams-Sonoma recently filed a lawsuit against Target alleging a longstanding pattern of copying its designs.
Pottery Barn itself has created new chains of stores, catalogs and Internet sites selling products for children and teenagers; Williams-Sonoma, a kitchen-related retailer, last year launched a new line targeting living rooms and bedrooms. And the company’s West Elm brand began selling lower-price decor with a more urban flair in 2002.
“They’ve got a bunch of different brands that are focusing on the same space,” says Stephen Hoch, a marketing professor at the University of Pennsylvania’s Wharton School.
Williams-Sonoma says newer brands aren’t taking share from older ones, but Mr. Hoch and other outsiders don’t buy that. Retail stores may not overlap much, but close to 45 percent of the company’s sales are from catalogs and the Internet. “When it comes right down to it, the catalogs come through the same slot in your front door,” he says. Last year, the company mailed 385 million shop-by-mail catalogs — enough for every American to get at least one.
Williams-Sonoma declined to comment for this article, but company executives have acknowledged that competition, pricing, shipping costs and, more recently, its product lineup have hurt sales. The retailer is testing ways to lower shipping fees and plans to offer more products at entry-level prices. And executives during recent investor conferences said they are working hard on new products and on improving store setup.
Levering up its balance sheet for a buyout would leave the company with a hefty debt-service payment in a tough business environment and probably would force it to halt expansion of its newer brands.
Even critics of Pottery Barn’s recent performance admire the company and its industry-beating track record. For instance, after a stumble similar to Pottery Barn’s, Williams-Sonoma’s housewares business is doing its best in years. Mr. Hoch, the marketing professor, believes Pottery Barn needs to close underperforming stores and revitalize others but will eventually get back on track.
“They have some very strong brands and clearly some strong marketing talent and merchandising talent, and real knowledge about the direct-mail and Internet challenges,” he says. “It’s just that when you grow up and become middle aged, it’s a little bit different than when you’re the hot new kid on the block.”