Williams-Sonoma (NYSE:WSM) will report third quarter results for fiscal 2014 on Thursday.  The company owns its kitchen-focused namesake chain of stores as well as the more home goods focused Pottery Barn and West Elm. The company was hit hard by the recession but its home goods companies have rebounded with the housing market. However, there are still signs of weakness in the main stores amid increasing competition from retailers such as Amazon (NASDAQ:AMZN).    

Here's what to look for in the third quarter report.  

Quarter estimates to beat 
Williams-Sonoma predicts third quarter revenue of $1.02 to $1.04 billion with diluted earnings per share between $0.51 and $0.54. Analyst consensus estimates come in a bit higher with revenues of $1.08 billion and EPS of $0.54. The company has beat quarterly revenue and EPS estimates for the past five quarters.

In the second quarter, Williams-Sonoma reported revenues of $982 million and EPS of $0.49. 

Strengthening Williams-Sonoma comps
Comparable store sales is the metric to watch in the third quarter.  Williams-Sonoma shares rose over 8% in January after the first quarter report beat profit estimates and included a dividend increase. However, the second quarter was less optimistic and caused an over 4% share drop. Comps were one of the weakest metrics from that quarter -- particularly those of the mothership. 

Here's a look at the comps for the second quarter compared to the previous year:


Q2 2013

Q2 2012




Pottery Barn



Pottery Barn Kids






West Elm



 Source: Company press release

Pottery Barn stores and West Elm are benefiting from the improved housing market and people having some disposable income to decorate their houses. However, Williams-Sonoma offers luxury kitchen items that customers may find cheaper online at Amazon. So customers need added incentives to come into Williams-Sonoma stores for reasons other than showrooming. 

The company has slowly built the Williams-Sonoma comps back up through promotions. However, those promotions might not work long-term. They also run the risk of further eroding gross margins, which dropped 70 basis points in the second quarter. http://online.wsj.com/article/PR-CO-20130828-910535.html

Williams-Sonoma stores gained a new brand manager, Janet Hayes, earlier this year who replaced 30-year veteran Richard Harvey. Hayes' comps improvement plans include more innovative and proprietary products and an increase of in-store cooking classes which are built around stocked products. 

DTC growth
Williams-Sonoma breaks its revenue into two categories: retail, which covers in-store sales, and direct-to-customer, or DTC. The DTC sales come from e-commerce and catalog sales for each brand. In the second quarter, DTC sales accounted for 48% of overall revenue after year-over-year growth of more than 15%. 

DTC growth offers the company a way to potentially keep customers from going straight to Amazon when shopping online. But Williams-Sonoma has to increase incentives to keep shoppers from going elsewhere. 

Williams-Sonoma is doing a fairly good job of matching Amazon's prices on high priced electronics such as the Vitamix Blender or KitchenAid mixers.And the website is offering an increasing number of specials. At the time of writing, Williams-Sonoma was offering 20% off products from the Cuisinart line and the store's own line of stainless steel cookware. Amazon offers the occasional discount but doesn't run sales. Customers who visit the Williams-Sonoma site might return if the sales pop-up often and prove worthwhile. 

Foolish final thoughts   
Williams-Sonoma's home goods brands have shown strength in recent years but the core brand has struggled to find its footing. An improvement in Williams-Sonoma comps would go a long way to inspire confidence when the company reports earnings on Wednesday.