After the market closed Tuesday, Motley Fool Hidden Gems pick Stanley Furniture (NASDAQ:STLY) reported mixed results for the first quarter. The company beat revenue estimates, growing by 0.7% on a year-over-year basis -- down from double-digit growth for the same quarter in each of the last two years. However, it missed consensus earnings estimates by $0.02 per share, matching the year-ago number of $0.43.

Net income actually dropped more than 6% compared with 2005's first quarter. The only reason earnings per share stayed even is because the company has been buying back shares, most recently to the tune of $1.3 million in the first quarter.

The earnings miss was partly blamed on higher costs of sales from raw materials and energy. "Operational inefficiencies" was the primary reason, though, according to Stanley Furniture's management. I might have expected more and more companies to cite rising energy costs as hurting margins, as oil prices hover at or around all-time highs. Oddly enough, during the conference call, company officials said that energy cost inflation has been relatively stable over the last quarter, resulting in a fairly muted impact on overall results. Nevertheless, the end result falls to the relative state of flux within commodity markets.

Per the phrase "operational inefficiencies," the conference call gave some insight. Among them are items such as days to ship a sale, wasted space in manufacturing, and inventory management -- all of which are reportedly targets as the company implements lean manufacturing principles.

These inefficiencies and the effects of reversing them, such as lowering inventory, affected operating margin, reducing it from 11.4% in the fourth quarter -- and 11.2% for all of 2005 -- to just above 10% in the first quarter and a projected level of 9% next quarter. To the best of my observation, inefficiencies in operations usually don't show up in just a single quarter's time, barring some extraordinary turn of tides or a change in the business climate. While it is good to hear that Stanley Furniture is focusing on these, the issues have likely existed for a longer time.

Management has commented before on an industry slowdown that began in the last half of 2005 and is projected to continue through the rest of this year. With the prospect of some decline in housing activity or more serious fallout, Stanley Furniture could very well be looking at declining sales and profit as fewer homes are purchased and furnished.

And to the extent this actually proves to be the case, Stanley and competitors Hooker Furniture (NASDAQ:HOFT), Furniture Brands (NYSE:FBN), and Ethan Allen (NYSE:ETH) could face more difficult times. While people still upgrade furniture or buy new sets as children grow older and tastes change, Stanley might not experience the same levels of growth as it has in the recent past as the number of homes sold levels off or even declines. In fact, management said as much in the conference call -- that sales growth was returning to more historical rates.

In Tuesday's release, management reduced earnings guidance for 2006 to $1.78 to $1.84 from the $1.84 to $1.90 given in January -- still slightly higher than last year's $1.77. Don't be surprised if Stanley lowers guidance again as the year progresses. Just as those operating inefficiencies likely took time to develop, resolving them will also take time. And with slowing sales growth, it will take time for improvements to affect the bottom line.

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Hooker Furniture is another Hidden Gems selection. Join Tom Gardner as he looks for small caps that could grow into big winners in the market.

Fool contributor Jim Mueller did his part for the furniture industry last year. He does not own shares in any company mentioned. Read the Fool disclosure policy here.