Furniture maker Furniture Brands (NYSE:FBN) reports its Q2 2006 earnings tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Eight analysts follow Furniture Brands. One says buy; one sell; and all the rest hold.
  • Revenues. Analysts are looking for nearly flat year-over-year sales of $602.5 million.
  • Earnings. Profits are predicted to be up 6% at $0.35 per share.

What management says:
CEO Mickey Holliman cautioned investors back in June that the firm remains in a "seasonally challenging period." That said, he noted that with the quarter nearly complete, sales were up "slightly" in comparison with Q2 2005.

This assessment echoed the outlook expressed in the firm's Q1 2006 earnings report one month earlier. Back then, Holliman had predicted Q2 sales growth "in the low single digits" and $0.29 to $0.33 per share in expected earnings. Note that these earnings projections include $0.03 in restructuring, impairment, and severance charges, and another $0.03 from "increased interest expense due to the upfront recognition of the accounting gain on a cash flow hedge."

What management does:
The good news on margins is that the erosion of the gross margins appears to have halted. Rolling gross margins now stand 100 basis points lower than they were 18 months ago, but over the past six months, sales growth and growth in the cost of goods have each equaled 1%. The bad news is that the same isn't true about operating costs, which have grown 7% over the past six months. Those higher costs continue to eat away at operating and net margins, both of which have fallen significantly over the past year and a half.

Margins %

12/04

3/04

6/05

9/05

12/05

3/06

Gross

23.9

23.2

22.8

22.4

22.9

22.9

Op.

6.7

6.3

6

5.5

5.1

4.9

Net

3.7

3.4

3.2

2.8

2.6

2.8

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:
Fortunately, better news is to be found on Furniture Brands' balance sheet. There, we see evidence of responsible management of working capital. With sales rising, albeit at an exceedingly slow pace, we'd be happy to see inventories and accounts receivable just sit flat.

But in fact, inventories are down a fraction of a percent, and Furniture Brands has reduced its accounts receivable by 4% on average year over year for the past six months.

As a result, the firm's margins may be declining, and its sales may be stagnant, but the stock's price looks to have more than incorporated these negative factors. Furniture Brands boasts trailing free cash flow of $131 million against an enterprise value of just $1.18 billion, giving it an enterprise value-to-free cash flow ratio of 9. If the firm ultimately lives up to analysts' expectations of 11% long-term growth, I'd say it looks more than fairly priced today.

Competitors:

  • Bassett Furniture (NASDAQ:BSET)
  • Ethan Allen (NYSE:ETH)
  • Hooker Furniture (NASDAQ:HOFT)
  • La-Z-Boy (NYSE:LZB)
  • Stanley Furniture (NASDAQ:STLY)

Read more about Furniture Brands and its peers in:

The Fool has a newsletter -- and a free trial -- for almost every type of investor. Hooker Furniture and Stanley Furniture are Motley Fool Hidden Gems recommendations, and La-Z-Boy is an Income Investor selection.

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