They say that America is a land of couch potatoes. But judging from the second-quarter 2006 earnings results delivered by Italian sofa maker Natuzzi (NYSE:NTZ) last week, Americans have apparently taken up jogging en masse this summer.
Regaling investors with news that it traded in last year's loss for a $12.5 million profit, and an 18.1% increase in Q2 sales, Natuzzi also broke down its upholstery sales by region:
- Sales to the Americas were up a paltry 9.4%. "Paltry" is in the eye of the beholder, of course. Given their results last quarter, Hooker (NASDAQ:HOFT), Stanley (NASDAQ:STLY), and Furniture Brands (NASDAQ:FBN) may be looking on in envy.
- Sales to everywhere but the U.S. and Europe rose 22.2%
- Europe claimed the title of (chaise) lounge lizard, with a 31% increase in sales on a 35.6% bump in units shipped.
Wherever the buyers were located, Natuzzi succeeded in turning their sales into more cash this year. For the first six months of 2006, Natuzzi booked $20.6 million in profit. What's more, operating cash flow has already reached $43.8 million -- seven times what the company had generated by this time last year. Meanwhile, capital expenditures declined by about half, to $8.7 million, leaving the firm with a cool $35.1 million in free cash flow -- a good 70% more than its earnings.
Pricing power springs a coil
What else can we glean from Natuzzi's report? Let's look at some wrinkles in the sales trends. Natuzzi doesn't report just dollars (worth of goods) sold, but also units sold. Year to date (YTD), dollars sold increased 18% versus last year, while unit sales grew only 12%, creating a sizeable 600-basis point difference between the value of merchandise sold and its volume. But in Q2 in particular, that gap was only 380-basis points. Why? Sales of the firm's new Italsofa line of goods grew much faster than did sales of Natuzzi sofas, and the cheaper models helped fuel accelerating sales. They were up "only" 18% YTD, but 22% in Q2.
But beware. New CEO Ernesto Greco also cautioned that most of the quarter's sales came from fulfilling backlogged orders, and that new orders declined significantly during the quarter. He also mentioned that the declining trend in new sales proved that the company made the right call in launching its Italsofa line, which he described as "promotional." (That translates into "discounted." Per unit, Italsofas sell for about 55% the price of Natuzzi sofas.) I suspect the introduction of the Italsofa brand, and its relatively stronger unit sales growth, helped Natuzzi maximize its economies of scale last quarter, contributing to the firm's 490-basis point improvement in gross margins.
Investors need to ask how repeatable this performance will be if sales next quarter start trending downwards again. If they do, what will that do to margins going forward?
For further Foolish reading on Natuzzi, pull up a chair and read:
Hooker Furniture and Stanley Furniture are both Motley Fool Hidden Gems recommendations. To see where else Tom Gardner and Bill Mann are digging for small-cap treasure, take a free 30-day trial today.
Fool contributor Rich Smith does not own shares of any company named above.
