"I'm now beginning to wonder whether, rather than turn out to be the superbly priced generator of free cash flow that I had thought Woodmark to be, it will instead morph into an object lesson in the perils of giving too much business to a single (or even two) customer(s)."
-- "Foolish Forecast: American (Needs) Woodmark(-et Share)"
Egads. Well, it's certainly starting to look that way now, isn't it? American Woodmark (Nasdaq: AMWD) reported its fiscal first-quarter 2008 earnings yesterday, and not only did the news confirm the company's failure to supplement lagging sales at Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) with new accounts -- the free cash flow up and went missing as well! (Or, at least, most of it did.) Here's a quick rundown of the quarter:
Total sales plunged 25% in comparison to fiscal 2007's first quarter, including a 19% drop-off in sales of "core" products (presumably, those high-margin goods that American Woodmark (AWC) has been favoring as it cuts down on its low-margin offerings).
Profits dropped even faster, down 59% to $0.34 per share, as switching to "high-margin" goods failed to save the firm from the inefficiencies of production attendant on the loss of sales volume. This eroded 130 basis points of gross margin. Add on 370 basis points' worth of higher operating costs as AWC upped its advertising budget to try to capture market share, and the firm ended up with a full 5-percentage-point reduction in operating margin, to 4.5%.
Free cash flow, which management calculated from operating cash flow minus all "Net Cash Used by Investing Activities," as opposed to just capital expenditures, evaporated to a $5.8 million trickle, less than a fifth of last year's Q1 $31.4 million. Primarily, the firm's lower sales (and higher costs as a percentage of those sales) are to blame for this.
But I suspect the fact that AWC depends on just two customers for most of its sales isn't helping matters. Simply put, AWC needs Home Depot and Lowe's more than they need AWC right now. If they decide to delay payment to shore up their own cash flow at AWC's expense, there's little AWC can do about it. And indeed, as sales declined 25% last quarter, accounts receivable declined at just half that rate -- suggesting that it's taking longer for AWC to collect on its bills.
The fact that AWC is spending more on marketing costs shows that it's trying to address this issue, and to broaden its customer base along the lines of more diversified rivals such as Fortune Brands (NYSE: FO), Armstrong World Industries (NYSE: AWI), and Masco (NYSE: MAS). But in the midst of an industry downturn, I have to wonder whether the effort comes too little, too late.
What did we expect to see at American Woodmark last quarter, and what did we get? Find out in:
Home Depot is a
Motley Fool Inside Value
recommendation. Masco is an
Income Investor
pick.
Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is perfectly square.
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