Foolish Forecast: Navigating Lakeland

Protective clothing maker and Motley Fool Hidden Gems "Tiny Gem" designee Lakeland Industries (Nasdaq: LAKE  ) reports its fiscal Q2 2007 earnings tomorrow afternoon. Here's what the Street has to say about it (not much), plus some (hopefully more helpful) advice from us.

What analysts say:

• Buy, sell, or waffle? Only one analyst tracks Lakeland, and rates it a hold.
• Revenues. The analyst has not published a sales estimate ...
• Earnings.... but does estimate that quarterly profits declined a penny to $0.29 per share.

What management says:
There are two stories at Lakeland today -- first, a business story, and next, what I view as mainly a public-relations story. On the business side, Lakeland has been buying up large quantities of Tyvek, since DuPont (NYSE: DD  ) offered very attractive prices on the material. This swelled Lakeland's inventories, but management argues this is a good thing. Down the road, today's cheap purchases of Tyvek may yield fat margins when resold as lab smocks, chemical suits, and so on. However, Lakeland was rendered (temporarily, one hopes) unable to capitalize on this strategy last quarter when DuPont unexpectedly dumped large quantities of its own protective clothing lines on the market. On the PR front, if actions speak louder than words, then Lakeland shareholders could well be confused by the nonsense Lakeland is spouting. In July, the company issued a "10% dividend payable in stock" -- an 11-for-10 "stock split," in plain English. As we've stated innumerable times, stock splits in general are meaninglessnon-events.

What management does:
Back on the business story, Lakeland has been doing a good job of improving gross, operating, and net margins, leaving the firm 15% more profitable today than it was just 18 months ago. Whether this can continue will depend on how well Lakeland manages its now top-heavy inventories.

Margins %	1/05	4/05	7/05	10/05	1/06	4/06
Gross	21.4	21.9	22.3	23.0	24.2	24.2
Op.	8.0	8.3	8.4	8.4	9.6	9.1
Net	5.3	5.6	6.0	6.1	6.4	6.1

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:
Over the last six months, Lakeland's materials buying binge has driven inventories up, on average, 44% higher than they stood one year ago. Weighed against the average 7% sales growth we've seen during the same period, that looks, well, frightening.

Lakeland's explanation, that it's been buying inventories now, when they're cheap, in order to sell them as high-margin value-added products in later quarters, sounds great in theory. But as last quarter's results showed, it remains to be proven in practice. Management argued convincingly that last quarter's "DuPont dump" was a one-time event, and that its long-term strategy of opportunistically buying raw materials at dirt-cheap prices will bear fruit if given time. But tomorrow, we'll be checking the tree closely for said fruit. We want to see:

• Inventories falling
• Gross margins rising
• Now that DuPont's fire sale is out of the way, resurgence in sales

If those things don't happen, Lakeland had better have as good an excuse as it produced three months ago.

Competitors:

• Alpha Pro Tech (AMEX: APT  )
• Hidden Gems pick Mine Safety (NYSE: MSA  )
• Kimberly-Clark (NYSE: KMB  )

Suppliers:

• Honeywell (NYSE: HON  )

Lakeland hasn't always been so silly with how it multiplies its shares. Read about one dilution event that actually served a purpose, in "Fulfilling Float for Lakeland."

Try out any of the Fool's newsletters for free by clicking here.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a well-protected disclosure policy .