Earnings season can be difficult.
Four times a year, in a frantic rush to comply with SEC regulations, thousands and thousands of companies attempt to pile their quarterly earnings news into the space of a few short weeks -- about 30 business days in all. Keeping up with the rush is tough for an investor. Putting the results in context can be even tougher. Sometimes, companies in an industry report all in a bunch. Other times, peer companies may publish their results days or weeks apart, making it difficult to tell if one firm's results more resemble an isolated "tree," specific to the company, or a "forest" -- part of an industrywide trend.
Today, we're going to look at two earnings reports from a pair of companies I've previously addressed in Foolish Forecasts, to see whether the whole of their news makes up more than the sum of its parts.
Ladies and gentle-Fools, let me introduce Hooker Furniture (NASDAQ:HOFT) and La-Z-Boy (NYSE:LZB). Before we get started, you may want to refresh your memory on the companies' respective earnings announcements:
- Hooker Furniture's Sturdy Quarter: Fool by Numbers
- La-Z-Boy Sales Lost in the Cushions: Fool by Numbers
Hooker Furniture
Hooker reported its earnings Thursday afternoon, Feb. 8. Since then, investors have bid the shares up nearly 22%, so Mr. Market was clearly pleased with the results. Quarterly sales climbed 1%, and net profits fell 13% -- not terribly impressive at first glance. But then again, one-time restructuring and asset-impairment charges weighed heavily on the net.
The market, however, is forward-looking. Now that Hooker has no more wood furniture factories left to sell, it seems investors are willing to believe that the series of one-time charges that has plagued the company over the last few years is finally over. Because the firm's operating results should better predict its net performance going forward, investors focused on the 80-basis-point improvement in operating margins for the year (to 8.5%, which excludes restructuring charges), and are expecting Hooker to maintain or improve upon that going forward.
La-Z-Boy
Five days after Hooker, La-Z-Boy reported its own earnings. Today, one week later, the stock is up a grand total of $0.03 -- suggesting that Mr. Market was far less taken with La-Z-Boy's news. Why? Well, in contrast to Hooker's rising sales, La-Z-Boy's sales fell 10% for the quarter. The company posted a net loss for the quarter (thanks to $0.28 per share in losses from discontinued operations), and even excluding that charge to focus on operating profit shows us a decline of 32% year over year. Ugh.
Contrast ...
Other comparisons follow a similar line. La-Z-Boy CEO Kurt Darrow boasted that La-Z-Boy did an "excellent job" reducing its inventories. And indeed, compared to this time last year, inventories declined 13%, which was faster than the 10% decline in sales. Hooker matched this performance, drawing its own inventories down 1% in comparison to this time last year, while growing sales 1%.
Darrow sounded less credible, however, when he said that La-Z-Boy also did an excellent job "generating cash." In fact, for the quarter, La-Z-Boy's operating cash flow declined 13%. For the year, the decline mounted to 97% (subtract capital expenditures to arrive at free cash flow and the quarter showed a 13% decline, while the year showed negative free cash flow). Meanwhile, Hooker closed out its fiscal year with $18 million of free cash flow generated -- up 12% versus last year, and in line with its GAAP earnings growth.
... and compare
Where the two companies come together is on their predictions about the future. Citing "industry forecasts," as well as its own 5% to 6% decline in new orders last quarter, Hooker CEO Paul Toms expects that "business conditions will remain challenging at least through the first half of 2007." La-Z-Boy's Darrow echoed that sentiment, describing a "challenging sales environment pervasive throughout our industry," and predicting that La-Z-Boy's own sales would "be down 8% to 10%" in the current quarter.
And speaking of coming together
On the same day Darrow issued this ominous forecast, he announced that one of the three "discontinued" business divisions, whose operating losses pushed La-Z-Boy into a net loss for the quarter, was being sold to Hooker. La-Z-Boy provided few details on the sale of "upscale occasional chair" maker Sam Moore -- and indeed, as the two companies have only entered into a "non-binding letter of intent," the details on price and method of payment may not even be finalized.
What we know so far is that:
- The firms currently plan for the transaction to take the form of an asset sale, with Hooker acquiring Sam Moore's "property, plant, equipment, inventories and accounts receivable," including a 325,000-square-foot factory and corporate offices in Bedford, Va.
- Sam Moore sells about $100 million worth of furniture per year.
- The acquisition is expected to close by mid-2007.
- Sam Moore President Mike Moldenhauer would stay on after the acquisition to run the company for Hooker.
Wood furniture and forests
Big-picture time. We've covered most of the relevant trees, but what larger trends are at play here? La-Z-Boy is selling Sam Moore for a reason. Its "discontinued operations," of which Sam Moore is one, made La-Z-Boy unprofitable last quarter, and that looms large as a likely reason for its selling. La-Z-Boy also gets better profits out of its casegoods sales than its upholstered products; that might be another. Last quarter, La-Z-Boy improved operating margins in casegoods to a whopping 9.1%, even as sales fell 15%. Meanwhile, a smaller drop-off in upholstered sales yielded stable operating margins of 7.6%.
But here's what's interesting about La-Z-Boy's upholstered sales: Darrow specifically cited the firm's "transitioning our [casegoods] business to primarily an import model with a heavily variable cost structure" as helping boost its profitability. Similarly, Hooker credits the rising proportion of its own import business as improving its margins on wood furniture sales.
The common factor here appears to be: The more a furniture "maker" imports, the bigger its profit margins. The more it produces domestically, the more ... it feels compelled to close factories, sell off divisions, and switch to importing! (It's not just La-Z-Boy and Hooker doing this, remember. Stanley (NASDAQ:STLY) is downsizing, too. And Furniture Brands (NYSE:FBN) just closed a factory of its own.)
Which makes me wonder. Investors seem to be rewarding Hooker for snagging extra domestically produced upholstered-goods sales in the form of Sam Moore. The firm's success in getting good margins on domestically produced upholstered goods argues in favor of that move -- but then again, Hooker used to get good margins on domestically produced wood furniture, too.
Longer-term, however, I fear that we're going to see the pro-import trend expand from wood furniture and casegoods to threaten domestically produced upholstered furniture as well. If that happens, then spending good money to expand this business stateside might not look like such a smart move.
For more on the ongoing furniture industry fiasco, read:
Hooker Furniture and Stanley Furniture are Hidden Gems recommendations. You can find out why with a 30-day free trial of the newsletter. La-Z-Boy is an Income Investor selection.
Fool contributor Rich Smith makes his own wood furniture. He has no position, short or long, in any company named above. The Motley Fool's disclosure policy thinks that rug really ties the room together.
