Analyst: Williams-Sonoma could breach covenant

CHICAGO - Shares of home decor chain Williams-Sonoma may trade lower in the coming months amid growing concern that the parent company of the Williams-Sonoma and Pottery Barn brands may violate a financial covenant, a Barclays Capital analyst says.

Analyst Michael Lassert said the San Francisco-based home decor retailer could encounter problems with its $300 million credit facility by the end of its fiscal fourth quarter in February.

"What this would likely pose more headline risk than actual liquidity risk, we believe the uncertainty would weigh on the shares in the near term," Lassert told investors in a research note published Tuesday.

At the end of August, Williams-Sonoma's balance sheet had $39 million in cash and $25 million in debt, he told investors.

Lassert said the company uses most of the credit facility to buy inventory and fund temporary working capital needs. He expects the chain will try to amend the covenant, which could increase borrowing costs.

Also Tuesday, UBS analyst Brian Nagal lowered his price target on the company to $7, down from his previous estimate of $12.

Last week, Williams-Sonoma said it would likely lose between 10 and 12 cents per share in the third quarter, down from its previous guidance of a break even showing to earnings of 4 cents per share. It also predicted revenue would be between $732 million and $742 million, down from its earlier estimate of $802 million to $820 million.

It also reduced its fourth-quarter forecast, saying it expected to earn 10 cents to 30 cents per share instead of a prior forecast of 76 cents to 86 cents per share. It now predicts revenue between $940 million and $1 billion, compared with its earlier outlook for sales of $1.17 billion to $1.22 billion.

Williams-Sonoma shares rose 20 cents, or 2.3 percent, to $9.41 in afternoon trading Tuesday.

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