Home goods retailer Williams-Sonoma Inc said heavy discounting to attract bargain-hungry holiday shoppers would eat into its fourth-quarter earnings, sending its shares slipping as much as 15 percent.

Williams-Sonoma also outlined plans to return money to shareholders and shore up its stock, but the news failed to soften the blow of the weak outlook.

We recognize that WSM is putting their cash to work in the form of a buyback as well as an increased dividend, but we simply believe investors will not 'pay up' for a margin-challenged business, Piper Jaffray & Co analyst Neely Tamminga said in a client note.

Retailers, in general, have been resorting to profit-sapping discounts to lure shoppers in a still fragile economy.

The 'daily deals' strategy, which was planned and intentional, did not drive the adjacent product sales, said Tamminga, who downgraded the stock to neutral from overweight.

Tamminga also lowered her price target on the stock to $37 from $45 and said margin-squeezing discounts will remain a theme for the company in the future, with shoppers trained to seek value.

The operator of Williams-Sonoma cookware stores now expects to earn $1.10-$1.15 a share for the quarter, down from its previous forecast of $1.15-$1.20 a share. It projected revenue of $1.24-$1.26 billion for the period.

Analysts, on average, had expected earnings of $1.19 a share, on revenue of $1.26 billion, according to Thomson Reuters I/B/E/S.

San Francisco-based Williams-Sonoma, which also runs the Pottery Barn furnishings chain, hiked its quarterly cash dividend by 29 percent to 22 cents a share. The company also set aside $225 million for a new share buyback program in 2012.

Williams-Sonoma shares were trading down 12 percent at $34.30 on Thursday morning on the New York Stock Exchange. They earlier touched a low of $33.30.

(Reporting by Arpita Mukherjee in Bangalore; Editing by Viraj Nair)

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