In last week's Foolish Forecast, we proffered the question: "Whoever to believe: Wall Street's Wise men, or [La-Z-Boy's] own boss?" As it turned out, the obvious answer was the correct one: When Wall Street predicts a company will report one number, but the company's own CEO says something different, listen to the guy who has the company's books sitting right in front of him.
On Tuesday, La-Z-Boy (NYSE: LZB) reported the $0.04 in profits per share that CEO Kurt Darrow had promised (admittedly, in the firm's guidance walk-back), rather than the $0.02 per share that Wall Street's analysts were predicting. Similarly, firmwide sales of $440.5 million topped the Street's estimated $433.6 million.
But enough with playing Wall Street's earnings game. La-Z-Boy won; Wall Street lost; case closed. What about the big picture? In that same Foolish Forecast, I noted that the same weak furniture industry that has sunk the earnings of companies ranging from Ethan Allen (NYSE: ETH) to Furniture Brands (NYSE: FBN), and Bassett (Nasdaq: BSET) to Stanley (Nasdaq: STLY), poses three main challenges to La-Z-Boy as it tries to make the best of a bad situation. First, the company needs to keep a lid on its inventory growth. If customers aren't buying La-Z-Boys, the company shouldn't be tying up its working capital in building more of them. Second, for those items that do get sold, La-Z-Boy needs to collect the bills right quick. Third and finally, the company should try to keep its margins as high as possible. (These elements are, of course, all interconnected. For example, if a firm builds too much inventory, eventually the day comes when it must discount the wares to move them out of the warehouse -- torpedoing margins.)
Judging from Tuesday's news, the firm is doing a fine job on all three tasks. Inventory-wise, La-Z-Boy slashed inventories 11% in comparison to this time last year. Accounts receivable declined about 2%.
Finally, as sales rose about 2% year over year, La-Z-Boy cut the cost of goods sold by 4.4%, continuing a year-long trend of growing its gross margins. When combined with operating margin improvements in the firm's upholstery and casegoods segments, that yielded the firm a tidy $4.1 million operating profit in contrast to last fiscal year's Q2 loss -- despite the continued weakness (and operating loss) at La-Z-Boy's retail stores.
Speaking of retail
In closing, someone's got to ask the question, and it might as well be me. With its retail stores continuing to lag, and Darrow preemptively blaming the division for the firm's likely 50%-plus decline in profits next quarter: Why is La-Z-Boy still clinging to this business? The firm appears to know how to turn a profit in wholesale. Perhaps it's time to leave the retailing to someone who can do a better job of it.
What did we expect to find under the cushions at La-Z-Boy last quarter, and what did it reveal? Find out in:
La-Z-Boy is a Motley Fool Income Investor recommendation. Stanley is a Hidden Gems pick. You can try any of our newsletters free for 30 days.
Fool contributor
Rich Smith
does not own shares of any company named above. The Fool has a disclosure policy that really lets you put your feet up.
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