Kurt Darrow, CEO of La-Z-Boy (NYSE:LZB), holds a black belt in the ancient art of understatement. After reporting a 12% decline in net sales and a $0.19-per-share loss yesterday, he observed: "Improvements we have made in our business model are not clearly evident in our results."

Do tell.

Looking for bright points in a sea of darkness, Darrow noted that if nothing else, the firm "posted reasonable operating margins in each of our wholesale businesses on significantly lower volume." For the quarter, sales were down 21% in casegoods (industry-speak for "wood furniture") from last year, though the operating margin for the segment remained positive at 6.1%. Moreover, the company's more famous upholstered-goods segment managed to add 50 basis points' worth of operating margin, arriving at 7.1% for the quarter by adopting a "lower operating cost structure." This despite a sales decline of 11%.

What really ruined the quarter for La-Z-Boy (aside from all the one-time charges) was the company's retail segment. La-Z-Boy stores moved 12% less product this Q2 than last and posted a negative-20% operating margin. Ouch.

Doom, gloom, and ...  boom?
The news wasn't all bad, however. On the contrary, one trend that I noted in our pre-earnings Foolish Forecast is still going strong: superb cash-flow management. Even after the whippin' that La-Z-Boy got last quarter and this quarter, it has done an admirable job collecting its bills on time, dropping accounts receivable a full 15%. And management isn't just complaining about the "challenging" sales environment. It's taking active steps to cut production even faster than sales are falling, to ensure that no inventory glut develops -- husbanding those "reasonable operating margins" Darrow was speaking of. That's my long-winded way of saying that inventories dropped a full 20%.

So, class: What do you get when you collect your bills on time, and avoid tying up cash in unsold inventory? That's right: free cash flow! In contrast to last year's Q2, in which La-Z-Boy held a cash bonfire, this time around the company generated a whopping $8.3 million in greenbacks. That still leaves it in negative territory for the year, but it's a start, Fools. It's a start.

Side note: On a hunch, I ran a quick check on the most recent balance sheets from a few of La-Z-Boy's competitors. Inventories are dropping almost across the board: Down at Hooker Furniture (NASDAQ:HOFT), Furniture Brands (NYSE:FBN), and Bassett (NASDAQ:BSET), stable at Ethan Allen (NYSE:ETH), and rising only slightly at Stanley (NASDAQ:STLY). When this industry slump ends, be ready to expect a major supply crunch that should do wonders for everyone's margins ... assuming anyone survives.

Related Foolishness:

Did you miss our interview with La-Z-Boy CEO Kurt Darrow earlier this year? Kick back and enjoy "Sitting Down with La-Z-Boy." La-Z-Boy is an Income Investor pick. Hooker and Stanley are Motley Fool Hidden Gems recommendations.

Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.