What happened

On Tuesday, ServiceMaster Global Holdings (NYSE:SERV) spinoff Frontdoor, Inc. (NASDAQ:FTDR) -- which is now the new parent company to home warranty service American Home Shield -- announced Q3 earnings that showed the company generating more revenue than Wall Street had expected, but earning less profit on that revenue.

Frontdoor reported pro-forma profits of $0.58 per share -- one penny short of estimates -- but $377 million in quarterly sales -- better than the $370 million expected. In response to the news, investors have sold off Frontdoor stock by 30% as of 1:30 p.m. EDT.

A broken door in someone's home

Image source: Getty Images.

So what

And it's no wonder. Although Frontdoor sales increased 9% year over year, this increase had no (good) effect on profits. "Gross profit," "net profit," "pro-forma" profit, and even EBITDA -- whatever flavor of profit you fancy, they all declined year over year. Gross profit margins in particular dropped five full percentage points, to 47%, "as a result of higher claims costs."

Free cash flow, too, has declined over the first nine months of this year, as compared to the equivalent period from last year -- down 18% to just $104 million.

Now what

After breaking the bad earnings news, Frontdoor proceeded to give new guidance. Through the end of this year, Frontdoor expects to record more than $1.25 billion in total sales (slightly ahead of estimates). Management did not say how much profit it hopes to earn on these sales; however, it did give gross margin guidance, warning of a likely further decline into the 43% to 44% range -- so, even worse than Q3's margin.

Given the worsening margins picture, I fear that whatever Frontdoor ends up earning this year, it won't be "enough" for Wall Street.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.