As the American consumer feels the heat from the fallout on Wall Street, job losses, high gas prices, declining stock portfolios and lower home values, this sure doesn’t look like a great time to be investing in retailers specializing in non-essentials.

Let’s face it, even the upper-end customer is beginning to think twice about making discretionary purchases.

The constant barrage of negative news has had a psychological effect on a lot of people, and their first instinct is to pull back on spending, whether it is on cutting back on the frequency of visits to a favorite restaurant (see, “Consumers Spending More Time in The Kitchen“) or putting-off shopping for that new wardrobe. Visits to places that people can make do without are dropping, and that does not bode well for many of the nation’s retailers

Williams-Sonoma, Inc. (WSM) is one such place. The company is the premier specialty retailer of home furnishings in the United States. It markets its products through its 600-plus stores, catalogs and on the Internet. The company sells items for every room in the house under the Pottery Barn, Pottery Barn Kids, Williams-Sonoma, Williams-Sonoma Home and West Elm brands. The stores are a joy to walk through and are tailor-made for the upscale consumer.  Even the middle-class consumer can appreciate the goods in WSM stores.

Unfortunately the price tag for purchasing such goods is too high for most in the current environment, and that has a negative impact on WSM’s performance.

Earnings are falling fast. For the second quarter (ending on August 3, 2008) WSM had a profit of just eight cents per share. Last year, the company earned 23 cents per share in Q2. Comparable store sales showed a 14 percent decline from the previous year, on top of an 8.6 percent decline in Q1 comps.

Chairman and CEO Howard Lester expects consumers to continue to pull back and forecast earnings per share for the full year to be between $1.03 to $1.15 per share, a significant 35 to 42 percent drop from last year. In June, Williams-Sonoma said it expected earnings per share to be in the $1.31 to $1.44 range.

Mr. Lester says the company’s history suggests that trends will improve, but "what we’re seeing today does not support that premise." Indeed these are historical times. Gone are the days of easy financing that allowed new homeowners (and existing ones) seemingly unlimited funds to purchase the furniture, beds and kitchen gadgets that WSM peddles. "The home décor business is proving to be the retail segment most impacted by the economic downturn," wrote a Goldman Sachs (GS) analyst in a note to investors.

In addition to the weak operating environment, there is also any number of formidable competitors out there, such as Bed, Bath and Beyond and Target (TGT) that offer similar products at lower prices (see, “Why are Target Shares Off Target?“).

Many furniture makers have also marked down the inventory in their showrooms to very attractive prices. Williams-Sonoma is an American success story to be sure. From its humble beginnings of just one store in San Francisco that specialized in selling French cookware, the company has grown to one of our best-known retailers.

There will be a time to own this stock, but that time hasn’t arrived yet. I could see the stock dropping another 20% without much resistance.  I would avoid WSM until further notice.

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.