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Williams-Sonoma Goes Down-Home

Analysts say the nesting store for yuppies will reach out to the poor relations.

Williams-Sonoma

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

, the home specialty retailer synonymous with well-appointed tables for the well-to-do, is preparing to enter the discount arena with a new concept, say two analysts.

Last week, at a

Hambrecht & Quist

investor conference, Gary Friedman, chief merchandising officer and president of the company's retail division, made cryptic remarks regarding the potential for a new venture. "I can't tell you what our value plans are, but I can tell you there's a lot to learn from

Gap's

(GPS) - Get Gap, Inc. (GPS) Report

Old Navy

," Friedman said. "We are positioned to lever ourselves and our Williams-Sonoma service in the value-price category."

Translation: Williams-Sonoma plans to unveil, most likely within the next six to nine months, a new format that plays to a lower-income group of customers eager for branded home products, says Bonnie Kramer Tonneson, an H&Q analyst who rates Williams-Sonoma a buy. Her firm hasn't performed underwriting for the company. The new concept will likely take a moniker different from the San Francisco-based company's other brands.

Williams-Sonoma didn't respond to an inquiry about its plans.

To date, Williams-Sonoma's myriad divisions -- including its namesake cookware chain;

Pottery Barn

, which sells scented candles, pillows and other home furnishings; and

Hold Everything

, focusing on fashionable storage containers -- have played to the upper echelon of American nesters. That's left the hapless masses to make due with mix-and-match kitchenware passed down from one roommate to the next.

"Right now every concept they have is dealing in the top 10% to 20% of the U.S. economic bracket," Tonneson says.

The aging of baby boomers coupled with the prolific rise in the stock market has afforded many the luxury of second homes or refurbishing existing residences. Trend-spotters term the '90s the nesting decade. Sales of furniture, housewares, floor coverings, bath and linen products, as tracked by H&Q, are expected to reach $151 billion this year and climb 6% to $160 billion by 2000.

Feathering Your Nest
Size of the market for furniture, housewares, floor coverings, bath and linens

Source: Hambrecht & Quist

Those affluent Americans will happily fork over $279 for a toaster, making the 45-to-54 age group the biggest spenders in this category, says Tonneson, referring to an index compiled by

American Demographics

. Yet right behind them, the second biggest spenders are those ages 25 to 35, who are furnishing their homes for the first time.

"Why should

William-Sonoma leave money on the table?" Tonneson says. "This

new concept will play to the first-time nesters. They want the brand and the value and the endorsement of a purveyor like Williams-Sonoma, but they might not have as much disposable income."

What's more, the value category in home products is under-penetrated, says Brian Postol, an analyst with

A.G. Edwards

who rates Williams-Sonoma a buy. His firm hasn't performed recent underwriting for the company.

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Target

, the discount division of

Dayton Hudson

(DH)

, has been winning fans with its hip yet price-sensitive offerings. It recently unveiled a home collection by architect Michael Graves featuring products like whimsical picture frames and an oval-shaped colored toaster that sell from $3.99 to $119.99.

On the specialty store front, there is

Pier 1 Imports

(PIR) - Get Pier 1 Imports, Inc. Report

, which is similar to Pottery Barn but aims for a slightly less affluent customer who's still above the discount level.

"It's an area that's crying out for somebody to come in and put a merchandise classification on," Postol says.

Williams-Sonoma experimented with its first brand extension this year when it launched

Pottery Barn Kids

in January. The division is expected to contribute 4% to the company's total sales of $1.3 billion for fiscal 2000, according to Tonneson.

But extending a brand from one economic tier to another can be more challenging.

"You can't put a Williams-Sonoma label on this new concept and use discount pricing," Postol says. That would cheapen Williams-Sonoma's image.

Instead, the company will likely take a page out of Gap's book. That company entered the discount market under a different name, Old Navy, and markets the division separately from the more middle-tier Gap and upscale

Banana Republic

chains.

Going downscale has already allowed Williams-Sonoma, which opened its first cookware store for the upper crust in 1956, to capture a wider swath of the market. With 163 stores the Williams-Sonoma chain is the largest, and the priciest, of the company's divisions, yet it will account for just 34% of sales this fiscal year. In contrast, the 100-unit Pottery Barn, a division that appeals to a slightly lower income tier than its namesake chain and which the company acquired in 1986, will make up half the company's sales.

How the Williams-Sonoma House Is Divided
Estimated revenue for fiscal year 2000: $1.35 billion

Source: Hambrecht & Quist

William-Sonoma's overall sales have grown 35% to $1.1 billion in the year ended January '99 from $812 million three years ago. Earnings have more than doubled to 95 cents a share from 41 cents a share in the same period. A consensus of

First Call

analysts expect the company to earn $1.19 a share this fiscal year.

The company's stock, which had been on a tear earlier in the year, has suffered lately from uncertainty surrounding the

resignation of Dennis Chantland, chief administrative officer, who's winding up his last week with the company. Wednesday shares traded around 29, well off their 52-week-high of 40 3/4, last seen in January. Because Chantland had been largely responsible for the company's strong financial performance and served as a spokesman of sorts, conveying the company's message flawlessly to Wall Street, investors are eager to learn who will replace him.

Tonneson at H&Q says Williams-Sonoma is looking for two executives to fill his shoes -- a chief financial officer and a senior vice president of supply chain management. She says the company has extended an offer for the latter position. A company spokeswoman says an announcement should be forthcoming by the end of July.

Once on board, the new executives will likely have a broader message to convey to both Wall Street and consumers: a scented candle and crafted flatware for every home.

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