Foolish Forecast: Lifesaving La-Z-Boy?

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After 14 straight quarters of year-over-year earnings declines, La-Z-Boy (NYSE: LZB) broke its streak -- and stunned the Street -- last quarter, reporting not just a year-over-year rise in net profits, but three times the profits predicted by Wall Street's Wise Men. Was it a fluke, or the beginning of a new trend? The next bit of evidence on this question arrives Tuesday afternoon, with La-Z-Boy's Q3 2006 numbers.

What analysts say:

• Buy, sell, or waffle? Wall Street remains unconvinced. Of the seven analysts following the stock, only one rates it a buy. Four others say hold, and two say sell.
• Revenues. On average, they're looking for a 9% decline in sales to $456.5 million ...
• Earnings. ... and a return to declining earnings. Projections call for a 62% drop to $0.08 per share.

What management says:
Reviewing the company's Q2 performance back in November, CEO Kurt Darrow confirmed that things haven't changed much at La-Z-Boy. Darrow was "encouraged by our ability to improve wholesale margins on essentially flat volume." On the other hand, the firm's retail business remains stubbornly discouraging, losing money yet again despite growing its sales 7% year over year. Thus, Darrow says that in Q3, La-Z-Boy's "focus remains on our efforts to improve the performance of our company-owned proprietary store system" -- primarily by opening new stores and closing or relocating existing, underperforming stores.

In more recent news, La-Z-Boy announced in December that it has received a $3.4 million payment from its petition under the Continued Dumping and Subsidy Offset Act of 2000 -- legislation aimed at compensating U.S. furniture manufacturers who have been harmed by below-market-price sales of wood furniture from China. As a cash payment, this should make La-Z-Boy's cash flow look pretty good this quarter.

What management does:
The firm continues to expand its gross margins, and building on this success, it succeeded last quarter in reversing the downward trend in operating and net margins as well. The reversal owes entirely to the firm's ability to push its cost of goods sold down farther than sales have fallen, however. Operating costs, in contrast, continued to outpace sales growth by roughly five percentage points in the last two quarters.

Margins	7/05	10/05	1/06	4/06	7/06	10/06
Gross	23.5%	23.4%	23.6%	23.9%	24.0%	24.7%
Operating	3.7%	3.0%	2.9%	2.5%	2.4%	2.8%
Net	2.2%	1.5%	1.4%	(0.2%)	(0.2%)	0.2%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Because La-Z-Boy is a Motley Fool Income Investor pick, let's take a moment to see what Income Investor lead analyst James Early had to say about last quarter's news: "Virtually all furniture makers are suffering from weak sales as the bursting of the housing bubble hits home. On certain metrics, La-Z-Boy continues to impress, reducing inventories by 11% and accounts receivable by 2%, while cutting costs and increasing gross margins by two percentage points. Guidance for the third quarter remains weak, so the stock is probably dead money short term."

Two other things stand out in James' write-up:

• First, a story of how La-Z-Boy saved one customer's life: "In Walnut Creek, California, a suburb of San Francisco, a husband and wife were arguing during Thanksgiving week when the wife allegedly decided to have the last word by shooting her husband. Luckily for the husband, the wife tried to shoot him by firing a bullet through the back of his La-Z-Boy recliner. The recliner was so solid that it slowed down the bullet and saved the life of the husband, who was only superficially hurt."
  
  
• Second, James updated his advice on the shares' attractiveness at current levels. To find out whether he thinks La-Z-Boy is a buy -- and at what price -- just claim a one-month free trial to the service, which includes full access to James' December update.

Competitors:

• Stanley Furniture (Nasdaq: STLY)
• Hooker Furniture (Nasdaq: HOFT)
• Furniture Brands (NYSE: FBN)
• Flexsteel (Nasdaq: FLXS)
• Ethan Allen (NYSE: ETH)
• Bassett Furniture (Nasdaq: BSET)

What did we expect to find under the cushions at La-Z-Boy last quarter, and what did it reveal? Find out in:

• Foolish Forecast: La-Z-Boy Lags Behind
• A Prescient but La-Z-Boy
• La-Z-Boy Lagging Less: Fool by Numbers

Fool contributor Rich Smith does not own shares of any company named above. Stanley Furniture and Hooker Furniture are Motley Fool Hidden Gems recommendations. The Fool's disclosure policy can also stop a bullet.