Williams-Sonoma May Be Shy One Whiz


By Amey Stone As if retailers aren't having enough trouble keeping investors happy while consumer spending sputters, Williams-Sonoma (WSM), high-end retailer of home furnishings and kitchenware, also is in the thick of a transition in top management that has renewed doubts about its ability to meet Wall Street's expectations.

New Chief Executive Dale Hilpert started on Apr. 2. He succeeds Howard Lester, who retains the chairman's office. As the former CEO of athletic retailer Venator Group (Z), Hilpert is considered top-notch on the operations side with the kind of big-company experience that should help Williams-Sonoma smooth out its quarterly results and provide Wall Street with the financial consistency it's clamoring for. Hilpert, through a company spokesman, declined to be interviewed during his first week on the job.

TOP TALENT. But gaining Hilpert has come at a steep price for Williams-Sonoma, which lost its gifted President and Chief Operating Officer Gary Friedman on Mar. 15. Friedman, who also was unavailable for comment, resigned to become CEO of Restoration Hardware (RSTO). He had been with Williams-Sonoma for 13 years and is given much of the credit for the success of the company's Pottery Barn brand. Friedman, considered one of the industry's top talents at predicting consumer tastes and putting together an enticing merchandise mix, has his work cut out for him at Restoration Hardware, which is struggling after several years of rapid growth.

Williams-Sonoma's stock, which slipped 6% the day after Friedman's resignation was announced, remains around the $25 a share level. In contrast, Restoration Hardware shares jumped 80% when it announced surprisingly strong fourth-quarter results and named Friedman CEO on Mar. 22. Financial analysts, for the most part, aren't pleased with the turn of events at Williams-Sonoma. Essentially, the retailer has gained an operations pro but lost a merchandising whiz. "What they needed was both," says Angela Auchey, co-manager of the Federated Large-Cap Growth Fund, "not one or the other."

This clearly isn't how Chairman Lester planned it. He was hoping Hilpert and Friedman would form a powerful duo. In the Feb. 12 announcement of Hilpert's appointment, Lester stated, "The combination of Dale's strong operational background and Gary's tremendous leadership of our brands creates a team that will support Williams-Sonoma's long-term growth strategy."

"HUGE SETBACK." The company should have done more to keep Friedman, who probably wanted the CEO position for himself, says Morningstar stock analyst Langdon Healy. "To bring in someone with good operational skills was clearly needed, but it should have been finessed with every attempt made not to lose Friedman," he says.

No doubt analysts see Hilpert as an asset, but they mourn the loss of Friedman. In a note to clients on Mar. 16, WR Hambrecht & Co. analyst Kristine Koerber called Friedman's departure "a huge setback for the company." Wedbush Morgan analyst Joan Bogucki-Stroms downgraded the stock that day. "In the near term, the loss of Gary Friedman leaves a real hole," she says.

Friedman's leaving comes on the heels of a rough six months for Williams-Sonoma, in which it had to temper Wall Street's expectations while sales growth slowed. On Mar. 14, the company reported fourth-quarter earnings of $44.5 million, or 79 cents a share, down from earnings of $49 million, or 82 cents a share, the same quarter a year earlier. Revenues grew in the quarter to $673 million, up from $566 million the year earlier, but discounting and inventory write-offs crimped profit margins.

The company is projecting weak results for the next six months before an upturn in the second half. And at least one analyst, Shelly Hale of Banc of America Securities, who rates Williams-Sonoma a strong buy, says the company will benefit from Friedman's departure. The timing allows for a "swifter, cleaner, smoother transition for a new CEO," she wrote in a Mar. 16 report.

FREQUENT MISSES. But investors aren't that confident. "Quarter-to-quarter performance has been very spotty," says Auchey, who believes frequent earnings misses have hurt the company's credibility. "Investors are looking for a bit more consistency." That's what Hilpert is there to do. At Venator, he was able to turn the company around by focusing on its key Foot Locker brand and divesting noncore businesses.

On the other hand, Hale upgraded Williams-Sonoma to a strong buy on Feb. 13 on news of Hilpert's appointment, calling him an "exceptional CEO." She predicts he'll concentrate on the Pottery Barn and Williams-Sonoma brands, postpone the company's Elm Street launch (a new concept targeting a younger audience for a line of products priced lower than Pottery Barn), and possibly divest the company of its Hold Everything and Chambers brands.

But like any new CEO, he'll have to prove himself. "It is going to be a 60- to 90-day learning curve for him," Koerber says. Friedman fans point out that operational improvements won't be enough to keep the company growing if it loses its edge with customers. "Clearly, merchandising has been the key to store traffic," Auchey says.

"A VISIONARY." Friedman has a rare talent at merchandising, according to analysts. "Gary is very much a visionary," says Cody McGarraugh, an analyst at St. Louis brokerage Stifel, Nicolaus who initiated coverage of Williams-Sonoma on Apr. 4 with a tepid accumulate rating. "He has some genius to him in his ability to merchandise, and he is very responsible for an awful lot of William-Sonoma's success in the past."

To be sure, Friedman had strong talent underneath him that also was key to Pottery Barn's success. But McGarraugh worries the popular Friedman will bring the choicest Williams-Sonoma staff to Restoration Hardware, particularly since both companies are headquartered in the San Francisco area. "While [Hilpert] coming is definitely a positive," McGarraugh says, "[Friedman]'s departure is probably more of a negative in my mind."

Of course, transitions at the top are rarely smooth or risk-free. But for Williams-Sonoma, the shakeup comes amid worries about whether the economic slowdown will turn into a recession and a further slide in consumer spending. Bogucki-Stroms says the combination of factors make her concerned that Williams-Sonoma won't be able to meet its near-term forecasts. "There is a lot of risk in the numbers out there," she says.

Over the long term, analysts aren't worried. "I'd like to see this management situation play itself out and the company get through the first couple of quarters [under Hilpert]," McGarraugh says. "Longer term, it is a great growth company." If Williams-Sonoma can maintain its merchandising strength post-Friedman and Hilpert can improve execution, the company's growth prospects could look much stronger in just a few months. But for now, investors might consider sticking to window-shopping when it comes to Williams-Sonoma shares. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

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