"Lakeland Industries. Please hold."
I imagine that's what a customer would hear when phoning safety first-clothier Lakeland Industries (Nasdaq: LAKE ) on a particularly busy day. It's certainly what investors heard when Lakeland announced its fiscal second-quarter 2007 earnings last week.
Previewing the earnings announcement last Tuesday, I discussed how the company had been buying up enormous quantities of Tyvek material at bargain-basement prices from supplier DuPont (NYSE: DD ) , in hopes of expanding its margins, and how that plan was knocked off track last quarter. In light of that setback, I suggested that last week we wanted to see Lakeland's:
They say two out of three ain't bad
Except when it's two misses. As it turned out, Lakeland's inventories continued to climb -- up 30% year over year; and its sales fell -- down 4%. Of the three bits of hoped-for good news, Lakeland managed to produce just one: a 370-basis point boost in its gross margin, driven, as predicted, by the low-cost raw materials that Lakeland has been stockpiling.
Unfortunately, Lakeland gave back all of that margin expansion, and more, as operating expenses surged 22%, primarily as a result of higher labor costs and increased expenses at the firm's Mifflin Valley acquisition and new foreign operations in India, Chile, and Japan. As a result, operating margins contracted 15 basis points to 8.6%. Combine lower sales with fewer profits on those sales, and lower profits are sure to follow. In Lakeland's case, the damage worked out to a 17% decline in per-share profits to $0.25. What's more, it seems the disappointment won't end this quarter. Lakeland promised additional gross margin expansion fiscal Q4, but although that sounds good, it also suggests that fiscal Q3 (the one we're in now) won't look particularly impressive.
So where does that leave us this fiscal year? The first and second quarters have both disappointed, and the third quarter looks likely to do the same. And now, CEO Christopher Ryan promises that the really good news will arrive only in fiscal 2008, as the company's international operations in India, Chile, and Japan (which contributed to this quarter's lower operating margins) begin to emerge into operating profitability.
In principle, I understand Ryan's call for patience when he says: ".Our long range growth strategy . does not happen in one or two quarters' time; but rather in one or two years' time." The problem is that Lakeland investors have already been patient -- but with inventories still rising, sales again falling, and the share price down 16% over the last year against a 6% rise in the S&P, so far, they've been waiting for nothing.
What lies beneath Lakeland's troubled waters? Find out in:
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Fool contributor
Rich Smith does not own shares of any company named above.
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