Cabinetmaker American Woodmark (NASDAQ:AMWD) is scheduled to report its fiscal second-quarter 2006 earnings sometime Tuesday. And Fools want to know: Has it finally gotten its inventories under control?
Because on reviewing the company's earnings report last time around, I was less impressed with the company's 15% increase in sales, and considerably less impressed with its 22% decline in earnings per share (year-over-year), than I was with the company's rapid buildup in inventories.
Perhaps "impressed" isn't quite the right word there. It's more accurate to say I was dismayed by the inventory increase. Analysts, of course, continue to focus on the easier-to-gauge sales gains that Woodmark has managed to rack up: last quarter's 15%; Tuesday's expected 11%; the third quarter's expected additional 11%. Despite the earnings slump back in Q1, Woodmark shares netted a 14% increase in value as analysts praised the company's strength in sales.
But Fools think differently. We don't look just at the sales and earnings numbers for products pushed out the doors -- we peek behind the doors to see what's happening back at the factory. And in Woodmark's case, all is not well. For instance, last fiscal year (ending April 30, 2005), Woodmark grew its sales by 16% and its inventories by 19%. Worse, its inventories of finished goods (cabinets and such, completely built but sitting unsold on warehouse shelves), leapt 70%. Back at the time of Woodmark's earnings report on fiscal Q1 2006, not having yet seen the company's breakdown of inventories contained in its 10-Q filing with the SEC, I advised that the rate at which inventories were piling up faster than sales were growing "might very well be a problem, if most of that increase was again in the finished goods category."
In preparation for tomorrow's earnings report, I've just reviewed the company's last 10-Q filing, and it shows that total inventories increased 27%. Moreover, finished goods increased 62%, with raw materials up 21% and work in progress, 20%. It was easy to miss the finished goods' increase, because Woodmark only gave inventory numbers comparing fiscal Q1 2006 to fiscal Q4 2005, showing a 9% sequential increase. But if you dredge through last year's SEC filings, as I did, you can dig up the numbers for fiscal Q1 2005 and run the apples-to-apples comparison yourself.
What this tells us is pretty simple: As of three months ago, Woodmark was still building more stuff than it could sell -- tying up its cash in unsold inventory. Damming up its free cash flow (which plunged by more than half, to just $5.1 million for the quarter). Tuesday, we'll be hoping to see that change.
For past Foolish coverage of American Woodmark, read:
- American Wood Markup
- Scratches on American Woodmark
- American Woodmark Hammered
- American Woodmark Nails It
Fool contributor Rich Smith has no position in American Woodmark.
