Scanning Williams-Sonoma’s (NYSE:WSM) website today, you’ll see an ad for a Bialetti Mukka Glass Cappuccino Maker. The gadget is made in Italy and features a see-through stovetop glass pot. Sounds pretty impressive, doesn’t it? Well, it might be, if our economy weren't in such a slump right now. And looking at the company’s fourth-quarter earnings results is enough to confirm that in this financial environment, folks just aren’t willing to fork over premium dollars for their cup of joe in the morning -- or for any other home product.

It’s not that people are necessarily heading to Starbucks (NASDAQ:SBUX) for a fresh double latte, or that they’re buying their cappuccino makers from competitors such as Bed Bath & Beyond (NASDAQ:BBBY), Pier One (NYSE:PIR), or Macy’s (NYSE:M) -- those companies have seen their share of trials and tribulations, too. No, people simply aren't buying at all; the economy is just tough right now. Unfortunately for Williams-Sonoma, the bad news isn’t just for this quarter -- it looks to be ongoing.

Williams-Sonoma’s meager net sales increase of 3.4% (on a comparable 14-week basis) and comparable-store sales drop of 0.1% for the quarter would have been bad enough. But that wasn’t all; gross margins dropped 160 basis points on higher markdowns and raw material costs, painting a picture not fit for a silver frame. Even with the cited markdowns, year-over-year inventories were up by 13.6%. Not great results for a quarter that included the Christmas season.

Even worse, though, is the 2008 outlook that Williams-Sonoma provided along with the earnings release. The outlook called for negative single-digit revenue change and a negative double-digit drop in earnings per share, projected to be between 11.4% and 19.3%. Ouch!

Of course, the poor economy is cited as the main contributor for the lackluster guidance. The company does plan to continue to “revitalize” the Pottery Barn brand while focusing on e-commerce and operational efficiencies. E-commerce was the one bright spot for Williams-Sonoma in the fourth quarter, with an 18.7% jump in Internet revenue. Internet sales are lumped in with catalog sales to form the direct-to-consumer group, which only improved by 3.4% for the quarter. Williams-Sonoma stated plans to cut back on catalog circulation, which should cut direct costs in this segment.

With stalling revenue, compounded by increases in the cost of goods sold that are outpacing sales, there is reason for concern. Williams-Sonoma says it plans to aggressively manage inventory in the coming year, which would certainly be a good thing considering the inventory increases the company has seen recently. The company is planning for 29 new stores, which may or may not add to its troubles. With a price drop of almost 5% today, the market seems to agree with Williams-Sonoma that the outlook for a comeback is fairly gloomy for the near term.

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