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Williams-Sonoma's Ottoman Empire

By Louise Lee Ed Mueller is constantly tweaking the recipe at retailer Williams-Sonoma (WSM), known primarily for high-end kitchenware like $200 toasters and $250 countertop mixers.ncreasingly, the CEO of the San Francisco-based company is adding furniture to the blend, hoping to capitalize on demand for thousand-dollar sofas and armoires.

It disclosed in an Aug. 25 conference call that furniture sales already account for a hefty 25% of sales. "Furniture is a key strategy for them, and they've improved quality, sourcing, and shipping," says Claire Gallacher, research analyst at Caris & Co. Sales of furniture "could move significantly north," she adds.

SLIMMER MARGINS Indeed, most of Williams-Sonoma's budding initiatives focus on furniture. It's completing a new distribution center in New Jersey dedicated to furniture, and it plans to launch its newest catalog, Williams-Sonoma Home, in mid-September. It will sell furniture created by in-house designers aiming for "European-inspired casual elegance," according to the company.

The new catalog is also expected to sell custom upholstered pieces and other high-end furnishings. And in the works for the current quarter is the addition of three retail stores under the West Elm brand, which sells moderately priced furniture aimed at urban twentysomethings.

Analysts point out that while pushing into furniture offers Williams-Sonoma the opportunity to boost revenue growth with sales of big-ticket items, profit margins on furniture are generally lower than they are on such items as blenders and picture frames.The slimmer margins largely reflect costs associated with handling and shipping those bulky sofas and bookshelves.

STRONGER FORECAST. Still, pushing into varied segments of the furniture business allows it to expand without undermining its more-established operations, in particular its flagship Williams-Sonoma kitchenware brand and the Pottery Barn mainstream home-furnishings chain.

Strong sales at Pottery Barn contributed to better-than-expected second-quarter earnings, announced Aug. 25. Williams-Sonoma posted net income of $27.6 million, a 55% jump from the prior year. Revenue rose 18.8%, to $689.6 million, including an increase of 5% at stores open at least a year. It also boosted revenue projections for both the third and fourth quarters by 1% to 2% over previous forecasts.

Looks like Williams-Sonoma is already counting on plenty of customers to fall in love with that fabulous sofa and gorgeous dining-room set. Lee is a correspondent in BusinessWeek's San Mateo bureau

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