Foolish Forecast: Turbochef Flames Out

Pull out your grills and pour on some charcoal, investors. It's cookout time, as oven maker TurboChef (NASDAQ:OVEN) returns to the public markets with news on its first quarter of 2006. The company reports after the market closes tomorrow.

What analysts say:

• Buy, sell, or waffle? Four analysts follow TurboChef, splitting their votes evenly between buy and hold.
• Revenues. Analysts expect to hear tomorrow that TurboChef's revenues plunged 40% year over year, coming in at $12.3 million.
• Earnings. Profits will be incinerated. Analysts project a $0.13-per-share loss.

What management says:
As bad as tomorrow is expected to be, TurboChef turned in an even worse quarter two months ago, when sales declined 75%, profits disappeared, and free cash flow ended the year at negative $0.83 per share. Despite the cornucopia of bad news, Chairman Richard Perlman put on a happy face and assured investors that the company is "well positioned to grow [its] commercial business in 2006 and beyond," and that it has "fixed [its] gross margin problem . [and has] a better handle on [its] costs."

CEO Jim Price added that one area where TurboChef can grow is in the home kitchen market, now that the firm has its first "residential product" ready for sale. However, my Foolish colleague Stephen Simpson took issue with the logic of trying to market four-figure, high-speed ovens to home kitchen cooks.

What management does:
Now, about that gross margin problem -- what was Perlman saying? Ah yes: Gross margins have fallen by more than half over the last 18 months. Meanwhile, operating and net margins have been running in the red for three quarters straight, although on a rolling basis, it took an extra quarter for the losses to drag trailing-12-month results into the red.

One Fool says:
With so much of its sales tied to a single customer, Subway (91% of all sales in 2004, for example), TurboChef is very much at the mercy of large orders that can lift its results far into the black when they come in, or plunge them deep into the red when they don't. One thing the company really needs to get a handle on, though, are its inventories. When sales plunge, a company needs to stop building stuff and wait for the orders to start coming in again -- otherwise, it's tying up working capital in finished goods, when that capital might be more profitably employed elsewhere. TurboChef has a real problem in this department: Over the last six months, for example, sales declined 69% on average, while inventories continued to pile up -- rising 52% year over year.

So with sales declines essentially a foregone conclusion tomorrow, and little hope of profits, I'd say the best chance of finding good news at TurboChef lies on the inventories line of tomorrow's balance sheet. If the company has started working those down, it's at least doing one thing right.

Fool contributor Rich Smith does not own shares of any company named above. Starbucks is a Motley Fool Stock Advisor pick, while Middleby is a Motley Fool Hidden Gems selection. The Fool has a disclosure policy.