As we look forward to yet another weekend that seems just out of reach, out of the corner of my Foolish eye, I glimpse something perhaps even more attractive. Yes, on just the other side of the weekend lies the fiscal third-quarter 2007 earnings report for office furniture specialist Steelcase (NYSE:SCS). I can hardly wait for the weekend to end.

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts still follow Steelcase, down one from last quarter, bringing us back to four buy ratings and two holds.
  • Revenues. On average, analysts expect Steelcase to post 7.5% sales growth to $807.4 million.
  • Earnings. Profits are predicted to rise 19% to $0.19 per share.

What management says:
Reviewing the company's fiscal Q2 performance back in September, CEO James Hackett pronounced himself "pleased with our progress across all business segments." Then-CFO James Keane (who shifted managerial chairs in October; the new CFO is David Sylvester) added that the firm achieved both sales growth and "significant improvements in profitability in our North America segment," which helped the firm to roughly double its quarterly profits, year over year. Keane highlighted "fixed cost reductions and productivity gains" as keys to the improved profitability.

What management does:
The trends revealed in Steelcase's margins support those glad tidings. Rolling gross margins have now held steady for three quarters running. Lower down the income statement, the operational improvements Keane mentioned continue to pay off in the form of rising operating and net margins.

Margins %

5/05

8/05

11/05

2/06

5/06

8/06

Gross

29.4

29.8

30.4

30.7

30.7

30.7

Op.

2.2

2.8

3.9

4.3

4.4

4.6

Net

0.9

1.2

1.4

1.7

2.1

2.4
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:
Getting down to brass tacks, here's how Steelcase has been making these margin improvements happen:

First off, it's growing its sales, to permit economies of scale. Year to date, we've seen sales rise 10% versus the first fiscal half of 2006. Moderating raw materials costs then helped Steelcase to hold its cost of goods sold to a similar 10%. Finally, the firm is keeping its selling, general, and administrative costs in check, holding them to less than a 7% year-over-year increase and unleashing the operating and net margin improvements you see above.

If I were to find one bone to pick with Steelcase, however, it would be located on the balance sheet rather than the income statement. That's where we've seen inventories rise 15% on average, outpacing sales growth significantly. Worse, this outpacing comes in the form of "negative inventory divergence" -- meaning that finished goods rose even faster than inventories overall, at 21% year over year by the end of the second quarter. In contrast, raw materials increased only 6% year over year. Generally speaking, that suggests that the firm is having trouble selling the goods it's already produced; and isn't seeing strong sales growth down the road (so isn't stocking up on raw materials to meet the demand).

We'll definitely want to look at this in quarters going forward, but will need to review the 10-Q filings to get the necessary data; don't look for it in tomorrow's news.

Competitors:

  • Design Within Reach (NASDAQ:DWRI)
  • Herman Miller (NASDAQ:MLHR)
  • HNI Corp (NYSE:HNI)
  • Kimball (NASDAQ:KBALB)
  • Knoll (NYSE:KNL)

Relive the excitement of last quarter's furniture news in:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy makes your office both attractive and functional.