Updated from 10:20 a.m. ESTSAN FRANCISCO -- Based on the assumption that things will get worse before they get better, home-furnishings retailer Williams-Sonoma ( WSM) provided a cautious outlook for the year ahead while also lowering its profit forecast for the fourth quarter. Shares of Williams-Sonoma were sliding 9.7% Tuesday after the company reported weak traffic at its stores during the holidays -- a trend that it expects to continue through January and beyond. The owner of the Williams-Sonoma, West Elm and Pottery Barn chains anticipates profit of $1.11 to $1.14 a share for the fourth quarter, down from its prior guidance of $1.19 to $1.25. The San Francisco-based company predicts revenue of $1.36 billion to $1.39 billion, compared with its previous view of $1.39 billion to $1.42 billion. Analysts polled by Thomson Financial projected earnings of $1.21 a share and a top line of $1.39 billion. Same-store sales, or sales at stores open at least a year, are expected to be down 1.5% to flat for the quarter. Previously, Williams-Sonoma predicted a 0.5% to 2.5% increase. For the nine-week holiday period ended Dec. 30, same-store sales fell 0.4%. The news comes on the same day that a report from the U.S. Commerce Department showed that retail sales fell 0.4% in December, worse than expectations for a 0.1% increase. The S&P Retail Index was down 2.7% Tuesday, with giants such as J.C. Penney ( JCP) and Sears Holdings ( SHLD) tumbling more than 5%. "As we indicated in our third quarter earnings release, we entered the fourth quarter with a heightened sense of caution due to our belief that the macro environment was weakening and that retail traffic was slowing," said Williams-Sonoma chief executive Howard Lester. "In fact, the macro environment did weaken and traffic slowed even further than we anticipated, particularly in our home furnishings businesses." Williams-Sonoma anticipates that gross margin for the fourth quarter will be 41.8% to 42%, worse than its prior outlook of 43% to $43.2%, signaling that it required greater-than-expected markdowns to move product. David Strasser, an analyst for Bank of America Securities, gleaned some good news from the report. "First glance tells us they were pretty successful at clearing out holiday merchandise," he wrote in a research report. "We still anticipate inventory coming down to accommodate lower sales estimates for 2008, but it could have been much worse." The weakness comes as the ongoing U.S. housing slump has slammed home-goods purveyors such as Home Depot ( HD) and Bed Bath & Beyond ( BBBY). For its part, Williams-Sonoma has been struggling for the past two years amid the downturn, with the stock sliced by more than half from its highs of around $45 in January 2006. The company said it believes that 2008 will be "increasingly challenging," and projected a flat to low-single-digit decrease in revenue and a mid-to-high single-digit increase in earnings. David Magee, an analyst for Suntrust Robinson Humphrey, says that Williams-Sonoma may be able to gain some ground by opening more West Elm stores, which the company still sees as having potential to expand. Williams-Sonoma and Pottery Barn are considered mature brands with fewer options. Beyond that, Magee sees little room for top line growth and says Williams-Sonoma will have to ride out the storm like everyone else. Shares of Williams-Sonoma recently were down $2.16 to $20.04.