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We don't know what went wrong, and there's not a lot we can do about it.

That's about the worst thing a CEO can tell the Street -- particularly a CEO of a retailer right before the start of the all-important holiday shopping season. But it's just about what


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

CEO Howard Lester said Monday. The upscale home-goods retailer said third-quarter earnings will be significantly below expectations due to slackening demand at both its catalogs and stores. Investors responded to Lester's news by sending Williams-Sonoma shares down about 30%.

The parent of

Pottery Barn


Hold Everything

, as well as its namesake kitchenware chain, said earnings during the quarter ending Oct. 29 will be 4 cents to 6 cents per share, not the 18 cents expected by analysts surveyed by

First Call/Thomson Financial

. It blamed poor consumer response at all of its major catalogs as well as increased discounting at its retail stores and higher freight costs. But it had no clear idea of what -- besides a slowing economy -- might have caused the lack of interest among consumers.

Williams-Sonoma shares were off $8, or 30%, to $18.88. Before Monday's decline, the shares had fallen 38% since Sept. 15. "We had noticed the drop in the stock, but we don't comment on that and don't understand it half the time," said Lester on a conference call with investors and analysts. (


explored the lead up to Williams-Sonoma's announcement in a separate story.)

Betting Big

Lester said that following catalog sales growth of 50% in the first half of 2000, the company planned for a 40% gain during its fiscal third quarter. Instead, sales growth is tracking at something more like 30%, he said, which means advertising costs ate up a greater percentage of sales. Sales were running about 2% below plan during early September but then the shortfall worsened to 10% below plan by early October.

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"We have to believe the economic environment is having some impact," he said. Not since 1983 has he seen such a dramatic falloff in demand across all catalogs, he said. "We're searching here," he said, sounding bewildered at the decline.

At the company's retail stores, slower demand meant it had to discount merchandise to meet its target of 4% to 5% sales growth at stores open at least a year and avoid being stuck with piles of extra inventory. Problems were most severe at Pottery Barn, Lester said, especially in furniture. Lester said that while he was hesitant to give much guidance about the fiscal fourth (and most important) quarter, earnings would almost certainly be above the 82 cents per share the company earned in the fourth quarter last year. Like most retailers, Williams-Sonoma's fiscal year ends in January.

September of My Years

Williams-Sonoma isn't the only company to have a nasty September.


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recently warned that fiscal fourth-quarter earnings will fall short of expectations due to a sudden -- and widespread -- slowdown.

Eastman Kodak




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, among others, have also warned. All of that reinforces Lester's contention that some real slowdown in consumer demand is occuring -- and that it's hurting sales of higher-end goods like computers and Cuisinarts. But it all seems to have happened so suddenly -- Williams-Sonoma gave little clue that its problems were this severe at an analysts' meeting less than two weeks ago.

At this point, there's not a lot Williams-Sonoma can do to reverse the problems. Holiday catalogs have already been printed, giving the company little leeway to make merchandising changes that might boost future sales. Instead, it will continue to mark down goods and has intensified its cost-cutting efforts.

There are, however, no plans to reduce the number of stores it opens this year. Williams-Sonoma will end the fourth quarter with 386 stores, said Lester. "We're optimistic about the long term," he said.

and three new

Pottery Barn Kids

retail stores are all doing well, he said. "We know this is a significant problem for our shareholders, but we consider it a temporary problem and we're going to fix it. Don't bury us."

On Monday, at least, investors didn't listen.