Updated from 12:13 p.m. EST

Shares of

Williams-Sonoma

(WSM) - Get Report

plunged 38.5% on Monday after the upscale retailer of kitchenware announced that its fourth-quarter earnings would fall sharply below Wall Street's consensus estimates despite record sales growth.

W. Howard Lester, chairman and chief executive of the San Francisco-based company, estimated that fourth-quarter earnings would amount to 81 to 82 cents a diluted share because of higher-than-expected expenses. Analysts forecast earnings of 94 cents a share, according to a survey conducted by

First Call/Thomson Financial

.

"The company recorded a reserve to reflect expected sales returns in 2000 associated with both direct-to-customer and retail sales recorded in 1999," Lester said in a statement announcing preliminary earnings. "This charge was larger than expected due to the substantial growth of our direct-to-customer business and accounted for approximately one-half of the decline in earnings vs. the company's earlier guidance."

Williams-Sonoma shares fell 11 7/8 to close at 19 Monday.

Sales grew 21.8% in the quarter to $537.2 million. But the growth failed to trickle down to the bottom line as Williams-Sonoma encountered increased costs from its direct-to-customers initiative and from efforts to develop its sales and delivery infrastructure.

Ralph Jean, an analyst with

First Union Securities

, said he was concerned about the company's failure to stem costs, particularly since the problem has persisted for the past few years.

"Managing the back end has been an issue with the company for a number of years," said Jean, adding that his strong buy rating for the share was currently under review. "This reserve seems unusually large."

Jean, whose firm has not done any underwriting for Williams-Sonoma, said he was encouraged by February sales. Comparable store sales for the month exceeded 9%, while direct-to-customer sales growth was up 50% compared with the previous year, although Jean noted that sales have not been the problem behind the company's flagging performance.

Williams-Sonoma is scheduled to announce its fourth-quarter earnings on March 15.