How did American Woodmark (NASDAQ:AMWD) do last quarter, you ask? Various analogies to termites, dry rot, and catastrophic failure of structural integrity suggest themselves. But I'll skip right past those and give you the bare numbers instead. They're bad enough to convey the picture:

  • Fiscal second-quarter 2008 sales fell more than expected, down 24% to $160.2 million.
  • Profits imploded. Although investors were prepared for a 35% plunge, neither analyst estimates nor bad news at major client Lowe's (NYSE:LOW), nor worse news at other major client Home Depot (NYSE:HD), had prepared them for the catastrophe that Woodmark reported. Per-share profits declined 86% to a mere $0.08 per share.

But you expected this, right?
Sort of. In Tuesday's pre-earnings Foolish Forecast, I wondered "whether Woodmark will somehow manage to do less (or perhaps more) horribly than Wall Street expects." I then suggested: "Personally, my guess is 'more'..." But even I was unprepared for the magnitude of this disaster.

Management blamed "inefficiencies in labor and overhead costs stemming from the impact of lower sales volumes, new product launches, higher medical costs and rising fuel costs" for axing 300 basis points from its gross margins. Higher operating costs siphoned off another few percentage points, leaving Woodmark with a bare 0.8% operating margin for the quarter, down from 4.4% one year ago.

Aside from that, Mrs. Lincoln, how was the play?
Investors hoping for an intermission in this tragedy, it appears, will have to keep their seats a while longer. With the housing market still in shambles, management predicts we will see a total 14% to 18% decline in sales this year, gross margins of 18.5%, and no more than $0.90 per share earned for the year. And that's the good news.

The bad news is that to get to $0.90 (already a 56% decrease, year over year), Woodmark will be leaning heavily on share repurchases, which concentrate firmwide net profit among fewer shares outstanding. And the worse news is that $0.90 is the new "high" end of Woodmark's guidance. At the low end, we could see profits for this year sink as low as $0.70 per share despite the reduced share count.

And the worst news? If the worse news comes to pass, Woodmark's shares are currently priced at 22 times this current year's earnings. I seriously doubt investors will continue to pay that kind of multiple if we see earnings decline more than 50% versus last year, and this suggests the share price has further to fall.

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

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