Seeking Alpha
Profile| Send Message| ()  

Struggling furniture maker Furniture Brands International (FBN) reported its third quarter results last week that were quite disappointing to investors, causing the stock to stumble. While others in this furniture space appear to be making inroads and benefiting from the housing recovery such as Pier One Imports (PIR), Bassette Furniture (BSET), Ethan Allen (ETH), and La-Z-Boy (LZB), FBN missed even its own forecasts for free cash flow and increased sales (for starters) given to investors just 3 months prior.

Going into the quarter FBN had all the markings of yet another turnaround company on track to do great things - insider buying, backlog up big, cost cutting initiatives in full swing, a housing recovery underway, fresh new credit leverage extended, and company forecasts in its conference call for cash flow positive results. However, when the Q3 report came out the stock tanked on disappointing results with no real explanation from management in its Q3 conference call.

While the broad furniture industry during the quarter appears to have in come in with surprising results such as an 8% jump in the month of August according to the Commerce department with momentum continuing into the Labor Day, as stated by Furniture Today: "[m]ost reports we have gotten from around is that the Labor Day weekend was terrific. In fact many furniture retailers are indicating that business has been better than expected."

DREADFUL EARNINGS RESULTS

FBN reported its Q3 earnings results on November 1, 2012. Going into the quarter investors were generally upbeat and the stock price was up over 50% from its low made just two months prior. And investors had many reasons to be so upbeat: management in the last conference call communicated it "generated 3.7 million of free cash flow in the second quarter" and it "continue[s] to expect to generate positive free cash flow in 2012" and achieved $265 million in sales with "a higher level of order backlog to normal heading into the third quarter of the year." All evidence pointed to an even better Q3 as management went on to say "we remained focused on our goals of delivering continued improvement and progress to our profitability" -- ah with the language turning from free cash flow to profitability, no doubt investors were at the edge of their seats.

Then management gave seemingly hard evidence to truly latch onto stating "our backlog was $19 million higher than last year as we exited the quarter" and even better "...are now instock in our key items and well positioned to ship all product I third and fourth quarter."

All of this lip service sounded great; there was no doubt that Q3 results would show a big improvement, right? Wrong. Q3 results showed a $10 million revenue sequential dropout vs. Q2 results, back to negative cash flows, and an eye-popping sequential increase GAAP net loss of over $11 million over Q2, by all accounts the worst quarter reported in a long time, possibly years! The Q3 conference call offered no explanation whatsoever -- management acted as if the Q2 conference call and its upbeat statements simply never happened.

ADDITIONAL COMMENTS FROM MANAGEMENT PRIOR TO Q3 RESULTS

From the Q2 conference call transcript that seems in hindsight overoptimistic at best; misleading and deceitful at worst. One would think based on these comments that the Q3 report would be reporting a home run instead of the disaster it actually reported:

Our new [Thomasville] products are now shipping to all of our stores and are available for consumers to buy this month, and we are very excited about the new looks that we have available at retail.

At Lane, we made considerable progress in getting new value priced product developed and accepted on dealer stores which allows us to participate in high volume segments of the business. We are pleased with the traction the newer products are seeing in the marketplace that has enabled to fulfill all of the orders for this new product due to some shortages we experienced in our cover supply from Asia. We are focused on improving our instock positions on these key cover items and are now in a solid instock position today and in good shape going into the back half of the year.

At Broyhill, our upholstery sales continue to improve and this business has got solid momentum. The case goods product for our new Asia direct mix container programs started to ramp up in June and we expect it will get more product on retail floors during the third quarter.

The inventory is right now the freshest [that extends] since I've been here and we took a lot of shipments in the month of June and essentially, the up inventory is really there to service the backlog...we put some new entry level price point product into the marketplace and it's [sold] very, very quickly and it's a matter of gaining replenishment and as we have been moving cover supply very quickly from Asia.

What's equally puzzling are the comments made by Lane Venture line president, Gary McCray, to the media throughout the quarter. An example is this article with Casualliving.com:

At Lane Venture, we see the growth of the outdoor room as one of the driving forces of our business," said Gary McCray, president, Lane Venture. "We're seeing it manifested in larger tickets coming in from our dealers and more involvement by interior designers.

Lane Venture's core wicker business continues to grow with the acceptance of its new collections. "Our ongoing focus on style, comfort and long-term quality are keys to our success there and our expansions in aluminum and upholstery," McCray said.

And here's from another article along the same lines:

Outdoor furniture producer Lane Venture has seen its best sales in years, because of the growing popularity of "outdoor rooms," entertaining spaces furnished with patio recliners and swivel rockers, says President Gary McCray.

Lane Venture: Some home furnishings are more popular than others. The sister company to cedar-chest producer Lane Furniture has overhauled its product assortment to predominantly offer patio furniture in the past few years. As a result, this year's sales have been "up significantly over recent years," McCray says.

In light of all this, I believe FBN will have serious credibility problems going forward, and its stock price could continue to flounder until - and unless - management engineers a true turnaround and doesn't just give lip service.

Source: Furniture Brands Q3 Disaster Remains A Mystery