Don't say you weren't warned.
Last week, whilst previewing Furniture Brands' (NYSE: FBN ) Q4 earnings report, we pointed out that the firm was encountering significant problems moving goods from warehouses to consumers' houses. That inventories were mounting, and that the firm intended to "discount[] aggressively on selected slow-moving products," and "tak[e] downtime in several domestic manufacturing facilities" in the quarter. And that this would "weigh on operating margins, and Furniture Brands' net profitability could look ugly indeed come Wednesday."
True, true, and true.
And yet ...
Management correctly called its earnings for the quarter, predicting $0.04 per share in quarterly profits in its December earnings warning, and nailing that number last week. Meanwhile, in what you might call a pyrrhic victory, the firm trounced analyst estimates for its quarterly sales, moving $586.5 million worth of merchandise where only $561.9 million had been predicted. The cost: significantly constricted margins, as the firm "promoted aggressively and took additional discounts on selected slower moving products," in the words of CEO Mickey Holliman. As a result, here's where annual margins ended the year:
- Gross: 20.0% -- down 310 basis points (b.p.) from the 2005 quarter
- Operating: 0.6% -- down 400 b.p.
- Net: 0.4% -- mercifully down just 250 b.p.
Aside from that, Mrs. Lincoln, how was the play?
Well, the news wasn't all bad -- just mostly bad. Furniture Brands' success in trouncing sales estimates probably clued you in that the firm made some progress in selling down its inventories. (Factory downtime helped out here, producing fewer goods to replace what got sold.) Sequentially, inventories declined 3% from last quarter's $516.8 million, even as sales grew 3%. That said, there's still plenty of work to be done on this front; from a more apples-to-apples perspective, inventories are still running 16% ahead of where they were one year ago, even as sales declined 1%.
Combine that with Holliman's ominous observation that Q1 2007 sales will likely fall a further 10% year over year, and I think it's practically a given what we'll be seeing in the next quarter's (and maybe more than one) earnings news: falling sales, falling inventories (probably not falling fast enough), and falling margins as the firm tries to rectify that situation.
And if I might venture out on a limb and guess at one further development: I wouldn't be at all surprised to hear Furniture Brands announce additional factory closures and downsizings, following in the footsteps of rivals like Stanley (Nasdaq: STLY ) and Hooker (Nasdaq: HOFT ) .
What did we expect out of Furniture Brands last quarter, and what did it produce? Find out in:
Stanley Furniture and Hooker Furniture are both
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Fool contributor Rich Smith does not own shares of any company named above.
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