Aug. 28 (Bloomberg) -- Williams-Sonoma Inc., the biggest U.S. gourmet-cookware chain, said second-quarter earnings dropped 29 percent and reduced its annual forecast amid the worst housing slump since the Great Depression.

Full-year profit and sales will decline more than it thought as it cuts prices to woo cash-strapped shoppers, the retailer said, sending the shares down 7.8 percent.

Net income fell 29 percent to $18.4 million, or 17 cents a share, from $26 million, or 23 cents, a year earlier, San Francisco-based Williams-Sonoma said today in a statement. Revenue dropped 4.6 percent to $819.6 million from $859.4 million, trailing analysts' estimates.

Sales worsened through the quarter as the ``macro-economic environment deteriorated,'' Chief Executive Officer Howard Lester said. Williams-Sonoma cut prices to attract shoppers to its Pottery Barn and other stores as slumping U.S. home prices and higher gasoline costs curb spending on house improvements, furniture and décor.

``They continue to cut costs, but the sales weakness and the discounting, the gross-margin weakness, are offsetting that cost-cutting,'' David Weiner, an analyst with Deutsche Bank Securities Inc. in New York, said today in a phone interview. Traffic trends and sales trends got worse through the quarter, he said.

`Progressive' Decline

Full-year profit will be $1.03 to $1.15 a share, Williams- Sonoma said, lower than its June forecast of $1.45 to $1.58. Nine analysts estimated net income of $1.47. Revenue may decrease to $3.57 billion to $3.64 billion for 2008, lower than the $3.74 to $3.8 billion range projected earlier, the company said.

Williams-Sonoma fell $1.43, or 7.8 percent, to $17.01 at 4:02 p.m. in New York Stock Exchange composite trading. The retailer has dropped 34 percent this year.

Sales at stores open for more than a year showed a ``progressive'' decline in the second quarter, the company said, falling 14 percent in July compared with an 8.6 percent retreat in May.

Weakening sales trends have continued through August and are worst in cities most affected by the housing slump, Lester said today on a conference call. At Pottery Barn and West Elm, for example, purchases have suffered in Southern California, Nevada and south Florida, he said.

Comparable-store sales will drop by as much as 15.5 percent in the third quarter, nearly twice the 8.5 percent decrease Williams-Sonoma previously expected. For the full year, sales will slide as much as 12.5 percent compared with the company's previous forecast for a decline of 8.3 percent at most.

Pottery Barn

``That's going to speak to other home-furnishing names as well,'' Deutsche Bank's Weiner said. ``People are going to look at this and see, especially on the higher-end, that traffic is weak and weakening.''

Sales at Pottery Barn are falling faster than at Williams- Sonoma, President Laura Alber said on the call. Purchases of pillows and bedding have declined more than furniture, she said, as people carefully ``invest'' in longer-lasting pieces.

Excluding a 9-cent gain from the sale of a company aircraft, Williams-Sonoma earned 8 cents a share. Twenty-one analysts surveyed by Bloomberg estimated net income excluding items of 7 cents, on average, and 20 said sales would be $832.9 million.

Gross margin, or profit as a percentage of sales, slid to 34 percent, from 37.2 percent in the same quarter a year ago. Joan Storms, a Los Angeles-based analyst with Wedbush Morgan Securities, predicted gross margin of 34.1 percent.

Fewer Store Openings

Third-quarter gross margin may be 33.9 percent to 34.3 percent, a decline from 38.2 percent last year, the company said today. For the full year is may be 36.1 percent to 36.3 percent, from the 36.8 percent to 37 percent last forecast.

``It is extremely difficult to know how the consumer will respond in the back half of the year,'' Lester said in the statement. ``We are also looking forward to 2009 with a very cautious outlook.''

Lester plans to cut capital spending to $145 million to $170 million, from $200 million to $220 million. Williams-Sonoma will continue to reduce inventory, he said.

``In this kind of environment, we're not too keen on opening stores. We're trying to focus on getting all of our current businesses really working,'' he said on the call.

(Visit www.williams-sonomainc.com/webcast to hear Williams- Sonoma executives discuss earnings.)

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

Last Updated: August 28, 2008 16:19 EDT