<PAGE>


                                                                EXHIBIT 10.39


                     [LETTERHEAD OF WILLIAMS-SONOMA, INC.]


January 9, 2003

Dale W. Hilpert
3 Nina Court
Mill Valley, CA 94941

By Fax and Federal Express

        Re:     Separation Agreement

Dear Dale:

        This letter (the "Agreement") summarizes the terms of your separation
from employment at Williams-Sonoma, Inc. ("WSI").

1.  This Agreement will be effective upon its execution by both you and WSI
    (the "Effective Date").  By executing this Agreement, you agree to, and
    hereby do, voluntarily resign as an officer and a director of WSI, and any
    subsidiary or affiliate of WSI.  This Agreement supersedes any employment
    contract that has existed between WSI and you, specifically including the
    agreement made as of February 5, 2001 (the "2001 Employment Agreement"), and
    that contract, or any other such contract, is hereby canceled.

2.  Your employment with WSI terminated on January  8, 2003.  In exchange
    for the promises given by you to WSI as described in this Agreement:

        a)  WSI will accelerate to the Effective Date the vesting of the 800,000
            unvested stock options (reflecting the stock split with the record
            date of April 29, 2002) that were granted in connection with the
            2001 Employment Agreement; and

        b)  WSI will cause to be vested at the Effective Date the 500,000 shares
            of Restricted Stock granted to you in connection with the 2001
            Employment Agreement; and

        c)  WSI will pay you a lump sum, consistent with the terms of the 2001
            Employment Agreement and the WSI Incentive Bonus Plan, reflecting
            a percentage of your base salary (and as though you were employed
            for the entire 2002 fiscal year), as approved by the Compensation
            Committee of the WSI Board of Directors, and in accordance with the
            Bonus Plan approved by the Compensation Committee in April 2002.
            This amount will be paid as soon as practicable after the close of
            the WSI fiscal year and the meeting of the Compensation Committee.


                                     -1-
<PAGE>



     Upon your separation, you will be eligible to continue medical coverage
     pursuant to COBRA.

     From and after January 8, 2003, you will not be entitled to any further
     payments or benefits of any kind, other than as stated in this Agreement.
     Notwithstanding anything to the contrary in this Agreement, in the event
     of a breach by you of any of the terms or conditions in this Agreement, or
     of a breach or violation of any of the terms or conditions of the agreement
     referred to in paragraph 5 below, all payments due under this Agreement
     will immediately cease, and WSI will have no further obligation to you
     under this Agreement.

3.   You acknowledge that at termination you will be paid $14,615.39, less
     applicable withholdings which represents your final pay.  You also
     acknowledge that at termination you will be paid an amount $59,375.01,
     less applicable withholdings, which represents accrued but unused vacation
     time and floating holidays.  You will also be reimbursed for business
     expenses already incurred and approved.  You agree that prior to the
     execution of this Agreement, you were not entitled to receive any further
     monetary payments from WSI, and that the only payments or benefits that
     you are entitled to receive from WSI in the future are those specified in
     paragraph 2 of this Agreement.

4.   You understand that you must exercise all stock options pursuant to the
     provisions in the applicable plans and notices. The vested portion of
     such stock options may only be exercised during the period of 90 days
     following January 8, 2003.  Failure to exercise any vested options during
     that period will result in the forfeiture of those options.

5.   At all times from and after the Effective Date, you agree to continue to
     be bound by WSI's Corporate Ethics Policy and Agreement, a copy of which is
     attached.

6.   At no time after the Effective Date will you disclose any Confidential
     Information gained during or as a result of your employment by WSI or
     service on the Board of Directors of WSI. Confidential Information means
     any information that is, or should reasonably be understood to be,
     confidential or proprietary to WSI.  Confidential Information includes but
     is not limited to all information, whether in written, oral, electronic,
     magnetic, photographic or any other form, that relates to WSI's: past,
     present and future businesses, products, product specifications, designs,
     drawings, concepts, samples, intellectual property, inventions, know-how,
     sources, costs, pricing, technologies, customers, vendors, other business
     relationships, business ideas and methods, distribution methods,
     inventories, manufacturing processes, computer programs and systems,
     employees, hiring practices, operations, marketing strategies and other
     technical, business and financial information. Confidential Information
     also includes the identity, capabilities and capacity of vendors and of
     former vendors or others that were considered but rejected.

7.   You agree that you will not disparage WSI or any officer, director,
     shareholder or employee of WSI or otherwise make any statement that could
     injure the personal or

                                      -2-
<PAGE>



     business reputation of any of them, nor will you take any action that is
     inconsistent with the best interests of WSI. You also agree not to make
     any statement regarding your departure from WSI that is inconsistent with
     the press release issued by WSI on January 9, 2003.  In addition to the
     foregoing, you agree, upon one or more requests from WSI, to deliver to
     it all documents and materials, of whatever nature, relating to WSI, its
     products and/or its services, including reports, files, memoranda,
     records, software, credit cards, door and file keys, computers, computer
     access codes, disks and instructional manuals and other physical or
     personal property which you received, prepared or helped prepare in
     connection with your employment with WSI or service on the Board of
     Directors of WSI.  You further agree that you will not keep any copies or
     excerpts of any of the above items.

8.   Except for claims arising out of the promises contained here, any and
     all Claims (as defined below), which you may have against WSI (as defined
     below) arising out of your employment with WSI or the termination of that
     employment, are fully and completely settled, and all liability or
     potential liability arising out of any such Claim is hereby released.
     "Claims," as used in this paragraph 8 and in paragraph 9 shall include but
     not be limited to those based upon or arising out of any alleged violation
     of your civil rights, wrongful discharge, breach of contract, tort, common
     law, statutory and constitutional claims, or any state, local or federal
     statute including those prohibiting race, sex, sexual orientation, national
     origin, disability, or perceived disability discrimination.  "WSI," as used
     in this paragraph 8 and in Paragraph 9, shall include, in addition to
     Williams-Sonoma, Inc., any predecessor, successor, parent, subsidiary or
     affiliate of Williams-Sonoma, Inc. or any officer, director, employee,
     shareholder or affiliate of it.

9.   You acknowledge that it is your intention to fully and finally resolve
     and release any and all Claims, known or unknown, which may exist against
     WSI and recognize that you may later discover facts in addition to or
     different from those which you now know or believe to be true.  In
     furtherance of this intention, and to finally resolve all matters between
     yourself and WSI, you agree to waive and relinquish any and all rights and
     benefits afforded by Section 1542 of the Civil Code of the State of
     California which provides as follows:

        A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
        KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
        RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
        SETTLEMENT WITH THE DEBTOR.

10.  In addition to the release set forth in paragraphs 8 and 9 above, you
     voluntarily and knowingly waive all rights or claims arising under the
     Federal Age Discrimination in Employment Act.  This waiver is given only
     in exchange for consideration in addition to anything of value to which
     you are entitled. This waiver does not waive rights or claims that may
     arise after the date of execution of this Agreement.  You acknowledge that
     (a) this paragraph is written in a manner calculated to be understood by
     you, (b) by reviewing this paragraph you have been advised in writing

                                     -3-
<PAGE>



     to consult with an attorney before executing this Agreement, (c) you are
     being given a period of twenty-one days within which to consider this
     paragraph, and (d) to the extent you execute this Agreement, including this
     paragraph, before the expiration of the twenty-one day period, you do so
     knowingly and voluntarily.  You will have the right to cancel and revoke
     this Agreement during a period of seven days following your execution of
     it. In order to cancel and revoke this Agreement, you must deliver to WSI,
     prior to the expiration of the seven-day period, a written notice of
     cancellation and revocation.

11.  You understand and agree that to the fullest extent permitted by law,
     you are precluded from filing or pursuing any legal claim of any kind
     against WSI at any time in the future, in any federal, state or municipal
     court, administrative agency or other tribunal, arising out of any of the
     claims that you have waived by virtue of executing this Agreement.  You
     agree not to file or pursue any such legal claims.

12.  You agree that you will not, for a period of twelve months from the
     Effective Date, directly or indirectly recruit, solicit or induce, or
     attempt to induce, any employee, consultant or vendor of WSI to terminate
     employment or any other relationship with WSI.  You agree that you will
     not at any time use Confidential Information to recruit, solicit, retain
     or hire any of WSI's employees, consultants or vendors.

13.  You agree that except as may be required by law, neither you nor any
     member of your family will disclose to any individual or entity (other
     than your legal, tax or financial advisors) the terms of this Agreement.
     In the event that such disclosure is made, any outstanding obligations of
     WSI under this Agreement will immediately terminate.

14.  You agree to cooperate with WSI in connection with any currently pending
     or future litigation, including, without limitation, by making yourself
     reasonably available to testify in any action as reasonably requested
     by WSI.

15.  You acknowledge that money damages are an inadequate remedy for any
     breach by you of any of the provisions of paragraphs 5, 6, 7 or 12 of this
     Agreement, and therefore WSI shall be entitled to injunctive relief for any
     such breach.

16.  The provisions of this Agreement are severable.  If any provision is held
     to be invalid or unenforceable, it will not affect the validity or the
     enforceability of any other provision.

17.  Each of the parties has received, or had the opportunity to receive,
     independent legal advice from legal counsel of such party's choice with
     respect to the advisability of making the settlement provided for in this
     Agreement and with respect to the advisability of executing this Agreement.

18.  This Agreement is governed by California law without regard to conflict
     of law principles.

                                      -4-
<PAGE>


19.  Any controversy, dispute, or claim between the parties to this Agreement,
     including any claim arising out of, in connection with, or in relation to
     the formation, interpretation, performance or breach of this Agreement
     shall be settled exclusively by arbitration, before a single arbitrator,
     in accordance with the rules of the American Arbitration Association.

20.  This Agreement fully sets forth the terms of your separation of
     employment from WSI and supersedes any prior discussions or agreements
     whether verbal or written with regard to that subject.  Please indicate
     your agreement to such terms by signing the extra copy of it and returning
     it to me.

                                                Sincerely,

                                                /s/ Howard Lester

                                                Howard Lester
                                                Chairman, Board of Directors
                                                Williams-Sonoma, Inc.








ACCEPTED AND AGREED TO:

 /s/ Dale W. Hilpert
_______________________
Dale W. Hilpert

   01/13/03
_______________________
Date






                                     -5-