Say so long to cocooning.

Investors sold shares of trendy home decor chain Williams-Sonoma ( WSM) Thursday after the company reported better-than-expected second-quarter earnings but sounded a cautious note about the second half of the year. The company's stock, which has risen steadily since Sept. 11 as home-oriented companies showed strong growth, slid 8%.

Given Williams-Sonoma's modest outlook, some investors were fretting that the yearlong rally in home-furnishing stocks could be on the wane. Pier 1 Imports ( PIR), another big beneficiary of the post-Sept. 11 excitement for home stocks, sold off modestly Thursday.

Hinting

On Thursday Williams-Sonoma gave hints that it expects a slowdown, even if it boosted full-year earnings guidance because of the strong second quarter. It lowered same-store sales-growth guidance for the third quarter to 2% to 4%, from prior guidance of 5% to 6.5%, and lowered full-year comp-growth guidance to 2% to 3%, from 3.5% to 4.5%.

"We've been cautious all year about the third and fourth quarters," said Dale Hilpert, the company's CEO, in a conference call with analysts and investors. "But we are confident that even if the economy remains volatile we can deliver the EPS guidance we promised shareholders."

The stock was off lately $2.11, or 8%, at $24.54, but is still up about 20% on the year. Pier 1, which is up slightly on the year, was off lately 48 cents, or 2.7%, at $17.51.

Williams-Sonoma left its earnings guidance for the third and fourth quarters intact, even as it lowered its same-store sales outlook. It still expects earnings of 9 cents to 10 cents in the third quarter, and 66 cents to 67 cents for the fourth quarter. It raised full-year guidance to $1 to $1.02 per share, up from prior guidance of 95 cents to 98 cents. The company earned 66 cents per share last year.

Sales in the quarter rose 15.5% to $495.6 million, but were about $6 million short of what analysts were projecting.

Disappointment

"It was a good quarter, but clearly the top line was disappointing to some," said Kristine Koerber, who covers the company for W.R. Hambrecht. On the bottom line, however, she said, "I think they are being conservative, and I'm confident they'll make their earnings targets going forward."

Koerber kept her buy rating on the stock and doesn't expect a big falloff in home-related spending. Her firm does not have an investment banking relationship with Williams-Sonoma.

"I think what they're experiencing is what many other retailers are seeing," she said. "I think there was a cooling-off period in July.

"But I think consumers will continue to spend on their home I think that will continue for the foreseeable future," she added.

Investors were thinking otherwise.

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