American Woodmark Nails It

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Over the past six months, Virginia cabinetmaker American Woodmark (Nasdaq: AMWD) seemed to have everything working against it. There were the worries about rising interest rates hurting home sales, with the result that home furnishers like American Woodmark would suffer. There was the margin compression caused by rising costs for raw materials and greater pricing power in the hands of major customers Home Depot (NYSE: HD) and Lowe's (NYSE: LOW).

As a result, the company was admirably conservative in making its earnings predictions last quarter, calling for sales and earnings growth to both come along briskly, but at no greater rates than the upper teens. Boy, oh boy, did American Woodmark ever call that one wrong -- and how happy its shareholders must be today that it did. American Woodmark's sales rang in at a 21% increase over the first quarter of 2003, and profits, at $1.16 per diluted share, showed a 29% improvement. That's just superb.

What's more, the fundamental situation facing American Woodmark didn't change -- the company simply took what it had to work with and hammered it into the desired shape. Gross margins down year on year? "Fine," said American Woodmark, and gamely shaved 1.5% off of its operating margin. Big customers still have us in a vise on prices? "We can work around that, too," said American Woodmark, and tweaked its inventory management a bit. Result: Despite having 21% more sales to manage, the company reduced its accounts receivable number and reduced its level of inventory, thereby also reducing its days sales outstanding number from 28.1 to 21.3 and increasing its inventory turns from 2.2 to 2.8.

All in all, this was one crackerjack performance by American Woodmark. And Wall Street acknowledged that fact by boosting its shares nearly 9% higher by the closing bell Wednesday to just less than the company's 52-week high.

For more Foolish coverage of the company, see:

• American Woodmark's Hard-Knock Q3, by Rich Smith
• American Woodmark Chopped, by Jeff Fischer

Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.