After leaping more than 5% in anticipation of (one presumes) a strong quarterly report to end its fiscal year, shares of upholstered furniture maker La-Z-Boy
- Wall Street expected La-Z-Boy to report $408.8 million in sales. In fact, it reported $406.9 million -- missing the analysts' target by just a half of 1%.
- Profits were predicted to come in at $0.07 per share. On the one hand, the firm appears to have beaten that estimate in reporting $0.15 per share in net earnings. On the other, those earnings were heavily influenced by one-time items -- a $0.08 restructuring charge that depressed them, and a $0.14 per-share benefit from the sale of various properties that jacked them back up. Back out both of those big items, though, and you'd still be looking at $0.09 per share, which was better than expected.
Personally, I think the quarterly numbers were pretty good, and fulfilled my hopes expressed in the pre-earnings Foolish Forecast: La-Z-Boy did indeed "go three for three" for earnings beats, setting it apart in at least one respect from furniture-hawking rivals like Bassett
The long view
But enough about the quarterly earnings game -- and not just because I say so, but because La-Z-Boy's CEO so decrees. In a surprise announcement (and a pleasant one, to my view, that puts the focus where it should be -- on the long term), Kurt Darrow opted out of the guidance game yesterday. Citing "recent trends among other public companies," he advised that "we are moving to yearly guidance for sales and earnings and will no longer provide quarterly projections." In that spirit, let's consider what La-Z-Boy accomplished this year.
As sales fell 5% versus fiscal 2006, La-Z-Boy worked down its cost of goods sold (COGS) by 7%. That's good. On the other hand, operating costs continued to rise, with selling, general, and administrative expenses (SG&A) up 3% year over year. That's bad. And while it's true that La-Z-Boy got its SG&A down at the end of the year, relatively speaking, the problem here continues: Q4 sales declined 10%, COGS dropped 11%, but SG&A fell only 6%.
What does that mean to investors? It means that La-Z-Boy continues to depend on lower COGS to support its trend of rising gross margins, and to stabilize operating and net margins. A price spike in raw materials, or continued weakness in the furniture industry that, say, necessitates dropping prices to spur sales, would crimp those gross margins. And with SG&A continuing to lag sales trends, that would hurt both operating and net profitability at the company.
While that could mean further bad news for the company's new and improved "annual" forward guidance of $0.45 to $0.60 per share for fiscal 2008, the rising margins display management's ability to effectively manage costs in this sluggish retail environment. The company has reduced its inventory and debt and built up its cash levels in preparation for the weak sales trend expected to continue into the next year.
Did you miss our interview with La-Z-Boy CEO Kurt Darrow last month? Kick back and enjoy: "Sitting Down With La-Z-Boy."Hooker Furniture is a Motley Fool Hidden Gems recommendation. Want to know about more small companies poised for big returns? Take a 30-day free trial of the newsletter.
La-Z-Boy is a Motley Fool Income Investor pick.
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