What a difference six months can make. When last we checked in on Virginian cabinetmaker American Woodmark (NASDAQ:AMWD) in August, the company was industriously sawing through a host of problems that had afflicted it in previous quarters. As the cost of raw materials degraded its gross margins, American Woodmark tightened the efficiency of its operations to compensate. When customers such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) demanded price concessions, American Woodmark increased its inventory turnover to make more money on volume.
But just as you can shave only so much wood off a warped 2x4 without turning it into a 2x3, cost-cutting can only do so much to fix problems that outside factors impose on a business. For more than a year now, many such problems have plagued American Woodmark. At various times in various quarters, the company has cited high costs in overhead, labor, and energy as hurting its margins. By speeding up its business and making productivity improvements, the company managed to stay one step ahead of these problems over the past six months and managed to log two decent quarters in the process.
In fiscal Q3 2005, however, American Woodmark's luck ran out. Sales grew 12% in comparison to one year ago, but they declined 8% sequentially. While the previous quarter's all-time record sales were sufficient to offset high overhead costs and rising expenses for transportation of its products, that was no longer the case in Q3. Gross margins tumbled 200 basis points compared with Q3 2004. Profits fell 7% to $0.42 per diluted share.
Judging from American Woodmark's balance sheet, the company is still striving mightily, and working on better efficiencies, to get back ahead of the curve. Its inventories grew just 7.3% -- far slower than its sales. The company even slashed its receivables by an incredible 18.4% despite rising sales. But here's the lesson for investors on this quarter: This company can try to cut costs all it wants, but if it's unable to keep its sales in the vicinity of $200 million per quarter, then some combination of overhead, raw materials, and transportation costs will eat it alive.
For past Foolish coverage of American Woodmark, read:
- American Woodmark Nails It
- American Woodmark Is Shellacked
- American Woodmark's Hard-Knock Q3
- American Woodmark Chopped
Fool contributor Rich Smith has no position in any of the companies mentioned above.
