Updated from 9:43 a.m. EST

Williams-Sonoma's

(WSM) - Get Report

fourth-quarter profits beat analysts' earnings expectations, but the company warned that its first quarter will come in far below Wall Street's projections.

In its quarter ended Feb. 2, the specialty retailer earned $79.8 million, or 67 cents a share. That was up from the year-ago quarter, whenWilliams-Sonoma earned $69.4 million, or 59 cents a share.

In the quarter, the company's revenue jumped more than 10% to $859 million. Meanwhile, its gross profit margin, the difference between what it charges consumers for its goods and what it pays suppliers for them, rose 100 basis points to 44% of sales.

Analysts surveyed by First Call/Thomson Financial were expecting the company to earn 66 cents a share on sales of $852.8 million.

Flash in the Pan

But the San Francisco-based company has little hope that its strong fourth quarter results will carry into the first quarter. Williams-Sonoma expects to post earnings between 7 cents and 8 cents a share in the quarter as its same-store sales, which compare like outlets open for more than one year, range from a 2% decline to 1% growth.

Analysts had been expecting the retail chain to earn 15 cents a share in the quarter. In the year-ago quarter, Williams-Sonoma posted profits of 13 cents a share.

Meanwhile, not all went well in the fourth quarter. Despite the strong increase in net revenue, for instance, the company's same-store sales tapered off in the quarter.

Williams-Sonoma's overall comparable-store sales increased 2.4%, compared with a 6% gain in the year-ago quarter. A more than 10% gain in same-store sales at the company's outlet stores helped make up for declining same-store sales at its Pottery Barn, Pottery Barn Kids and Hold Everything chains.

The slump in same-store sales at the Pottery Barn division was due in part to new stores cannibalizing sales from older ones and poor sales of postholiday products, said Sharon McCollam, the company's chief financial officer, during a conference call with investors and analysts.

Attributing the comparable-store sales decline in part to low inventorylevels as well, McCollam said the company is making a concerted effort to beef up inventory across all of its divisions.

At the end of the company's fiscal year, Williams-Sonoma held $321.2 million worth of inventory, which was up 29% from the end of fiscal 2001. Much of the increase was attributable to increasing inventory at its core Williams-Sonoma stores, which helped boost same-store sales in that division, she said.

Despite the surge in inventory, the Pottery Barn division won't be fully stocked until the end of the second quarter, McCollam said.

The San Francisco-based company also lost some ground on its sales, general and administrative costs. Such expenses increased 60 basis points to 29% of sales.

In the quarter, Williams-Sonoma reduced some discretionary expenses and decreased its credit card fees through increased use of its private label credit card, McCollam said. But these cost cuts were offset by higher incentive bonuses and a $4 million payout to former Chief Executive Dale Hilpert, who left the company in January.

The company made up for the rise in sales and administrative costs in the quarter with its gross margin increase. A decrease in returns, inventoryloss and product costs all helped boost Williams-Sonoma's top line, McCollam said. Additionally, the company was able to drive greater profits fromshipping.

Another highlight for the company in the quarter was its Internet operation. In the quarter, Internet sales comprised 27.2% of the company's $255.2 million in direct sales. That was up from the year-ago period,when Internet sales contributed 20.8% of the company's $233.5 million in direct sales.

Put another way, nearly 96% of the year-over-year increase in Williams-Sonoma's direct sales in the fourth quarter came from its Internet operation.