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Brand Improvement Bolsters Williams-Sonoma

Shares surge after the retailer handily tops second-quarter profit estimates.
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Updated from 9:53 a.m. EDT

SAN FRANCISCO -- Improvements in

Williams-Sonoma's

(WSM) - Get Williams-Sonoma, Inc. Report

key brands helped the retailer post second-quarter earnings that beat expectations, though profits were still down from a year ago amid the ongoing housing market slump.

The company's Pottery Barn chain, which hit a rough patch last year, managed to improve its merchandise in the second quarter while also fixing problems with lead times and shipping charges.

Emerging brands such as West Elm and Williams-Sonoma Home, which had gone through some initial growing pains, now finally seem to be taking off.

For the quarter ended July 29, the San Francisco-based company earned $26 million, or 23 cents a share, down from $35.6 million, or 30 cents a share, a year earlier.

Excluding certain items in both years, earnings per share slipped to 24 cents from 25 cents in the year-earlier period. That was better than the company's guidance for earnings of 13 cents to 17 cents a share, and it topped Thomson Financial's average analyst estimate of 16 cents.

The earnings beat sent shares of Williams-Sonoma up $2.57, or 8.7%, to $32.14 in recent trading.

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Williams-Sonoma said revenue rose 4.1% to $859.4 million from $825.5 million last year. Analysts, on average, projected sales of $862 million.

"While the home furnishings macroenvironment continued to be challenging in the second quarter, the strength of our brands and strong execution once again allowed us to deliver better-than-expected earnings," said Chairman and CEO Howard Lester in a statement.

At the Pottery Barn chain, same-store sales, or sales at stores open at least a year, rose 1.8% in the second quarter. Wedbush Morgan Securities analyst Joan Storms attributes the climb to better merchandise.

Storms says that for a while, Pottery Barn had been only making minor changes to its offerings, giving customers little incentive to come into stores.

"They had gotten away from newness factors that they'd introduced historically," she says.

Now, Storms says, Pottery Barn's merchandise looks fresh. The division has also reinstated its entry-level pricing and learned to manage its inventory better, although it is still growing faster than sales.

Same-store sales also climbed at the Williams-Sonoma chain, by 1.1%. But they fell 3.8% at Pottery Barn Kids. The company's outlets stores recorded a 9% rise in same-store sales.

Williams-Sonoma raised its full-year guidance to reflect the stronger-than-expected second-quarter showing, but it maintained its forecast for the third and fourth quarters, citing continued macroeconomic challenges.

For the full fiscal year, Williams-Sonoma anticipates earnings of $1.82 to $1.90 a share, up from its prior view of $1.73 to $1.81. Wall Street expects full-year earnings of $1.78 a share.

Earlier this year, Williams-Sonoma shares were lifted by rumors of a buyout, but that speculation has dissipated. The company has repeatedly stated that it is not in talks to discuss strategic alternatives, and recent turmoil in the credit markets has nearly halted leveraged buyouts by private-equity firms. Storms says a buyout is unlikely.