How did La-Z-Boy (NYSE:LZB) disappoint us this week? Let me count the ways.

  • The firm reported $418.9 million in fiscal first-quarter 2006 sales, a 2% decline from last year and a full 7% lower than the company's own sales predictions.
  • Its operating margin deteriorated, falling 90 basis points to 0.7%.
  • The $0.02 in profits per diluted share (from continuing operations), although within the firm's predicted range of a penny to a nickel per share, were down 60% from what La-Z-Boy earned last year.

In response, investors dropped the stock 4% after the earnings report. But did they perhaps overreact? I say yes.

Dig deeper
On the surface, sure, things aren't looking so hot at La-Z-Boy. Sales down, margins down, profits down -- not much good news in that. But let's dig a little deeper, burrow past the income statement (where market pundits too often stop), and see what we can see happening within La-Z-Boy's stuffing.

On the balance sheet, for example, we can see that the firm continues to keep a tight rein on its working capital. With sales down 2%, we'd have liked to see La-Z-Boy reduce its inventories and accounts receivable (A/R) in tandem. As it turned out, though, La-Z-Boy did us several points better, dropping its A/R by 7%, and working down its excess inventories of foam (built up last year to deal with the industry's well-publicized foam shortage -- ask Select Comfort (NASDAQ:SCSS) shareholders about it) so as to reduce total inventories by 10%. Nice.

Also on the balance sheet, we see that the company has been putting its cash to work in paying down $36.6 million in debt over the last year, and reducing its outstanding share count by about 0.5%.

Getting ready for winter?
In reviewing Stanley Furniture's (NASDAQ:STLY) disappointing July earnings report, fellow Fool Seth Jayson opined that Mr. Market's pessimism over the furniture makers may be a bit overblown. And indeed, many La-Z-Boy rivals, including Bassett (NASDAQ:BSET) and Ethan Allen (NYSE:ETH), Furniture Brands (NYSE:FBN) and Hooker (NASDAQ:HOFT), reported "up" sales quarters last month. La-Z-Boy, meanwhile, foretells a difficult sales environment continuing. If it's right, and if Mr. Market is right that the slowdown in housing sales will make itself felt in the furniture industry, then La-Z-Boy's efforts to shore up its balance sheet ahead of time may be just what's needed to cushion the fall in the quarters to come.

For all its troubles, La-Z-Boy remains an active recommendation of Motley Fool Income Investor. Find out what dividend guru Mathew Emmert has to say about the company when you take a free trial of the service.

Stanley , Hooker, and Select Comfort are Motley Fool Hidden Gems recommendations.

Fool contributor Rich Smith does not own shares of any company named above.