Hannibal Smith said it best: "I love it when a plan comes together."
On Tuesday, while previewing the fiscal Q3 2006 earnings results that cabinetmaker American Woodmark
I then contrasted those expectations to the company's own promises: to achieve 0% to 4% sales growth, but aim for higher margins on the sales it did make. As it turned out, the company knew its business better than the analysts did. As a result, American Woodmark exceeded expectations on every front but the least important one -- total sales.
Even there, fourth-quarter sales maxed out the company's own expectations of 4% growth. Meanwhile, American Woodmark began to "transition out of certain low-margin products." This move to turn down low-profit sales enabled the company to check its profits decline, holding it to just 12% instead of the anticipated 40%, and to top profits expectations by earning $0.37 per share.
Hey, you forgot to sand this one
That said, American Woodmark still has its work cut out for it. Gross margins kept sliding year over year as high raw materials and energy costs continued to bite. Although the company stabilized the drop in operating margins, its net margin continued to erode to 3.2% for both the quarter and the year to date. The net margin was hurt by sales, distribution, and marketing costs that outstripped sales gains.
Additionally, inventories rose 13% year over year (although it's true that they declined sequentially). That increase, compared to just a 4% rise in sales, suggests that the company's optimistic predictions for next quarter should be viewed with a little skepticism.
On one hand, if American Woodmark sticks with its plan to sacrifice low-margin sales in favor of profits, it could well achieve its promised gains of 2% to 14% next quarter. But on the other, unsold inventory has a way of winding up in the discount bin. American Woodmark needs to keep tighter reins on its inventories if it wants to maintain the higher margins it seeks.
For more advice on remodeling your portfolio, read:
- Foolish Forecast: American Woodmark
- Woodmark Scuffed Again
- Foolish Forecast: American Woodmark Surplus
- American Wood Markup
Fool contributor Rich Smith does not own shares of American Woodmark.