As we head into the weekend, furniture investors turn their eyes to Monday and the third-quarter earnings report due out from Stanley Furniture (NASDAQ:STLY). We've still got a few days to kill before the news is released, though, so pull up a chair and let's talk over what we might see.

What analysts say:

  • Buy, sell, or waffle? Six analysts still track Stanley, but they're a bit less optimistic today than in the past. One rates the stock a buy; the rest all say hold.
  • Revenues. On average, they're looking for an almost 4% decline in sales to $82.5 million .
  • Earnings. . and a 36% decline in profits to $0.28 per share.

What management says:
As subscribers to Motley Fool Hidden Gems already know (because we told them), Stanley issued an earnings warning last month, in which it advised that third-quarter sales this year could fall as much as 10% shy of last year's strong Q3 performance. Moreover, profits are expected to fall even faster, perhaps down as much as 39% from last year, and about $0.10 per share less than previously promised. CEO Jeffrey Scheffer made clear, however, that these weak results are due more to "overall industry conditions" than to any failings on Stanley's part.

Incidentally, I have to point out that fellow Fool Bill Barker, who penned the Daily Update breaking Stanley's bad news to our readers, was right on the money when guessing that Stanley's earnings warning would translate into similarly weak results from co-Hidden Gems pick Hooker Furniture (NASDAQ:HOFT). If you're a glutton for punishment, you can read that bad news right here.

What management does:
As you'd expect, margins are suffering at Stanley. The company has managed to keep its selling, general, and administrative costs (SG&A) flat over the last six months, however (in comparison with last year), so most of the damage has been contained to the gross margin line. Although that tends to cascade into lower operating and net margins as well, at least the company isn't getting any less profitable as we move down the income statement.

Margins %

4/05

7/05

10/05

12/05

4/06

7/06

Gross

24.9

24.7

24.5

24.5

24.2

23.8

Op.

11.4

11.3

11.2

11.2

11.0

10.2

Net

6.9

6.9

6.9

7.0

6.8

6.4
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:
Weakness in the furniture industry isn't exactly news. We've been watching many of these companies struggle for well over a year now. In response to what he thinks is an industry-wide rough patch that will "persist for a while," Scheffer advised last quarter that the company is trying to stay "lean," and to continue to sell down its inventories now rather than be stuck with them for the aforesaid "while."

Over on the balance sheet, the numbers show that Stanley is doing a fine job on this front. Against a 4% average decline in sales in the first half of this year, inventories have been sold down an impressive 12%, which should alleviate pressure to mark down inventories if this industry slowdown continues as long as Scheffer seems to think it will. If next week's news tells of the expected double-digit slowdown in sales, however, then keeping inventory reductions moving faster than sales declines will get trickier. Let's make sure to check up on this.

Well aware that Stanley's business is going to be rocky for a while, co-lead Hidden Gems analyst Tom Gardner sees no reason to drop it from our portfolio. In fact, if you read his most recent update on the company, it actually looks like it might be an attractive purchase at its current price. Want to know why? All you need to do to find out is take a free trial of the newsletter.

Competitors:

  • Bassett Furniture (NASDAQ:BSET)
  • Ethan Allen (NYSE:ETH)
  • Furniture Brands (NYSE:FBN)
  • La-Z-Boy (NYSE:LZB)
  • Masco (NYSE:MAS)

La-Z-Boy is a Motley Fool Income Investor recommendation.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.