As most companies on Wall Street chalk off their first-half results, cabinetmaker American Woodmark (NASDAQ:AMWD) has already put a coat of lacquer on 2007 and moved on to rough out its fiscal 2008. We'll take a first cut at the year's earnings when Woodmark reports first-quarter earnings Wednesday.

What analysts say:

  • Buy, sell, or waffle? All four of American Woodmark's analysts still rate the firm a "hold."
  • Revenue. On average, they expect to see sales drop 22% to $174 million.
  • Earnings. Profits are predicted to plunge 44% to $0.46 per share.

What management says:
It's finally over. Woodmark revealed in its June end-of-year earnings report that "During the fourth quarter, the Company completed its previously announced transition out of certain low margin products." Now we should enter a phase in which Woodmark begins to replace sales lost from exiting lower-margin production with higher-margin products.

Unfortunately, we enter this phase in the midst of a severe downturn in housing sales and a subprime-mortgage debacle. And it's just one week after one of Woodmark's biggest customers, Home Depot (NYSE:HD), announced a 5.2% decline in same-store sales, and promised a 15% to 18% fall in full-year profits. We find out today whether Woodmark's other major customer, Lowe's (NYSE:LOW), did any better during the quarter. With these two companies accounting for two-thirds of Woodmark's sales and Home Depot hurting, it's now up to Lowe's to salvage Woodmark's year.

What management does:
This would appear to give Lowe's significant pricing power over Woodmark -- and I'm betting that a wounded Home Depot will be feeling motivated to squeeze Woodmark for price concessions as well. This could be very bad for margins, which had been making improvements following the new strategy.

Margins

1/06

4/06

7/06

10/06

1/07

4/07

Gross

17.0%

17.9%

19.2%

20.4%

20.7%

20.6%

Operating

5.3%

6.4%

7.6%

8.3%

8.2%

7.3%

Net

3.3%

4.0%

4.6%

5.0%

4.9%

4.3%
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:
I'm now beginning to wonder if, rather than turn out to be the superbly priced generator of free cash flow that I had thought Woodmark to be, it will instead morph into an object lesson in the perils of giving too much business to a few customers. Last year, Home Depot and Lowe's combined to provide 66% of Woodmark's sales. If Woodmark intends to capitalize on its cutting of lower-margin business and focusing on higher-valued-added products, now might be a good time for the company to find itself some new customers.

After all, rival Woodmark rivals Masco (NYSE:MAS) and Armstrong World Industries (NYSE:AWI) manage to make a living selling only about 20% of their wares to the Big Two home-improvement retailers. At Fortune Brands (NYSE:FO), sales to these two customers are apparently so small a part of the overall business they don't even get mentioned separately in the firm's 10-K. It's the customers its rivals are selling to that Woodmark should think about, and what they should be thinking about is stealing them -- and with them some market share.

Home Depot is a Motley Fool Inside Value recommendation.

What did we expect to see at American Woodmark last quarter, and what did we get? Find out in:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy is perfectly square.