Cabinet maker American Woodmark's (NASDAQ:AMWD) turnaround finally hit its first speed bump last quarter, as the company "missed earnings" by a penny. On Tuesday, the firm will try to get back in Wall Street's good graces with its Q3 2007 report.

What analysts say:

  • Buy, sell, or waffle? American Woodmark's six analysts give the firm a total of one buy and five hold ratings.
  • Revenues. On average, analysts expect to see a 9% drop in sales, to $174.4 million.
  • Earnings. Profits are predicted to rise by a penny, to $0.38 per share.

What management says:
As we discussed last quarter, American Woodmark sits amidst several trends, only one of which is of its own making: the firm's strategic decision to exit low-margin business, sacrificing sales to improve the profitability of its remaining efforts. The other two trends are interrelated: The industrywide decline in homebuilding hurts the finances of firms that, like Woodmark, sell the furnishings that get installed in new homes. On the other hand, homeowners who fear "buying up," and instead remodel their existing homes, also need to install new cabinets and related fixtures.

As I've argued many times in the past, the first trend will work well for Woodmark in the long run. As for the two trends it cannot control, the firm is riding them as best it can -- suffering high-single-digit declines in sales to the new-home market, offsetting these lost sales with double-digit growth in sales to the remodeling market, and trying to grab market share in the process. That's what happened last quarter, and the company predicted we'll see much the same again in Tuesday's news. It's expecting "double digit remodeling sales increases," but also "a double digit decline in new construction sales."

Crunching the numbers, Woodmark predicted that in the second half of 2007, total sales will fall 6% to 10% year over year, gross margins will average 21% for the full year, and the firm will close out fiscal 2007 with $2.40 to $2.50 per share in net profits.

What management does:
As the table below illustrates, a 21% full-year gross margin would be an improvement over past results, as well as the continuation of a trend of improving gross margins. I wouldn't be at all surprised to see higher operating and net margins as well.

Margins

7/05

10/05

1/06

4/06

7/06

10/06

Gross

18.7%

17.2%

17.0%

17.9%

19.2%

20.4%

Operating

6.8%

5.6%

5.3%

6.4%

7.6%

8.3%

Net

4.1%

3.4%

3.3%

4.0%

4.6%

5.0%
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:
Reviewing American Woodmark's last couple of income statements, I see just one problem with the firm's recovery. At the gross margin level, we see that the expansion has been fueled by Woodmark growing sales 1% on average (over the last two quarters, versus last year), while its cost of goods sold fell 5%. Further down the income statement, though, we see that selling, general, and administrative costs rose 11% year over year, eating up a lot of the gross margin improvement. Ideally, I'd like to see those operating costs come down more in Tuesday's news.

Other than that, though, everything looks good here to me. The balance sheet shows Woodmark reducing accounts receivable 11% and inventories 10% year over year. Not bad at all for a firm with flat to slightly growing sales.

Competitors:

  • Fortune Brands (NYSE:FO)
  • Kimball (NASDAQ:KBALB)
  • Masco (NYSE:MAS)

Customers:

  • Home Depot (NYSE:HD)
  • Lowe's (NYSE:LOW)

We've been watching American Woodmark's impressive turnaround for some months now. Follow along in:

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Fool contributor Rich Smith does not own shares of any company named above. The Fool's disclosure policy comes in oak or cherry.