UPDATE 1-Williams-Sonoma shares fall on weak gross margin, outlook

Wed Aug 28, 2013 4:37pm EDT

By Dhanya Skariachan

Aug 28 (Reuters) - Upscale home furnishings chain Williams-Sonoma Inc on Wednesday reported a drop in quarterly gross margin on bigger discounts and its outlook pointed to weaker sales trends in the back half of the year.

The news overshadowed better-than-expected results in the second quarter and pushed its shares down 4 percent. The stock had already risen 36 percent before Wednesday.

"The promotional activity that we saw during the month of July was up a lot year-over-year," said Wedbush analyst Joan Storms, who prefers shares of rivals Pier 1 and Bed Bath & Beyond over Williams-Sonoma heading into the holiday season mostly due to valuation.

The operator of Williams-Sonoma cookware stores and Pottery Barn furnishing stores reported net earnings rose to $48.9 million, or 49 cents a share, in the fiscal second quarter ended Aug. 4, from $43.4 million, or 43 cents a share, a year earlier.

Analysts were looking for a profit of 47 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 12.3 percent to $982 million and topped the analysts' average estimate of $940 million as Americans spent more on their homes.

Comparable brand revenue rose 8.4 percent in the second quarter. Despite the strong number, the company did not raise its earlier outlook calling for a 4 to 6 percent increase in comparable brand revenue for the year.

Comparable brand sales includes sales at established stores open at least a year operated by the company and direct-to-customer sales, as well as shipping fees, sales returns and other discounts associated with current period sales.

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