Tic-tac-toe, investors want to know: When La-Z-Boy (NYSE:LZB) reports its fiscal Q2 2006 numbers tomorrow afternoon, will they make it three-in-a-row for earnings misses?

What analysts say:

  • Buy, sell, or waffle? Eight analysts still track La-Z-Boy, but they've turned more negative on the furniture maker since last quarter. Rankings now stand at two buys, four holds, and a pair of sells.
  • Revenues. On average, they're looking for a 5% decline in sales, to $433.6 million.
  • Earnings. But they also expect $0.02 per share in profits to replace last year's Q2 loss.

What management says:
Less than one month ago, La-Z-Boy updated investors on the bad news to expect tomorrow. While the firm is still expecting to see better results than it did when reporting last year's loss, "better" will prove highly relative. Instead of the previously guided profits range of $0.11 to $0.15 per share, CEO Kurt Darrow now thinks earnings will max out at no more than $0.04 per share. He also predicted that sales would be flat year over year.

All of which sets up quite a conundrum, because the analysts are looking for worse results still -- the abovementioned sales decline, and profits in the midrange of La-Z-Boy's new guidance. Whoever to believe: Wall Street's Wise men, or the company's own boss?

What management does:
As you can see below, Darrow has certainly delivered on his promise to keep growing his firm's gross margins in spite of the oft-noted "weaker-than-anticipated retail environment." The improvements may be tiny, but they are consistent, and have been for nearly a year now. On the other hand, rolling operating and net margins have been deteriorating for even longer.

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

23.2

23.5

23.3

23.5

23.9

24.0

Op.

3.6

3.7

3.0

2.9

2.5

2.4

Net

1.8

2.2

1.5

1.4

(0.2)

(0.2)
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:
Begging your pardon, but I'm going to punt on this question. After all, we'll know who's right soon enough. What's more, a company's long-term performance is more important than whether it "hits its numbers" in any given quarter.

In La-Z-Boy's earnings guidance walk-back, Darrow noted that the main problem at La-Z-Boy is that sales volume continues to wane. And as we all know, fewer sales in a business like this means that its fixed costs don't get spread out across as large a volume of goods sold -- ultimately depressing the profitability of all sales. On one hand, that's clearly a bad thing, because it makes La-Z-Boy exponentially less profitable the longer and deeper the sales decline lasts. But on the other -- long-term, at least -- it promises markedly better days once sales begin to turn around.

In the meantime -- meaning tomorrow -- we'll just be looking for signs that La-Z-Boy is doing the best it can in a lousy furniture industry environment: restraining inventory growth, collecting bills on time, and keeping margins as high as can reasonably be expected.

Competitors:

  • Stanley Furniture (NASDAQ:STLY)
  • Hooker Furniture (NASDAQ:HOFT)
  • Furniture Brands (NYSE:FBN)
  • Flexsteel (NASDAQ:FLXS)
  • Ethan Allen (NYSE:ETH)
  • Bassett Furniture (NASDAQ:BSET)

What did we expect to find under the cushions at La-Z-Boy last quarter, and what did it reveal? Find out in:

Stanley and Hooker are Motley Fool Hidden Gems selections, while La-Z-Boy is a Motley Fool Income Investor recommendation.

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