As I continue try to unravel the mystery as to what happened to cause such a huge disappointment in the Furniture Brands (FBN) Q3 results, the disappointing report out of La-Z-Boy (LZB) offers some clues. In my previous report on FBN, I noted insider buying, huge backlog, new credit, company forecasts, statements of delivery, etc. of seemingly overwhelming evidence that FBN was going to report a fantastic turnaround quarter. Instead, the report came in as a disaster with little explanation.
LZB reported after hours Tuesday that missed analyst estimates and blamed the challenging operating environment. Although sales were up 4.7%, they fell short of analyst expectations coming in at $322.3 million vs. a consensus of $326.45 million. The EPS miss was more severe; .12 EPS (after .03 one-time charge) versus .20 EPS expectations. Ouch.
Furthermore LZB blamed increased costs during the quarter stating it "increased our marketing spend on the brand campaign, which we believe is delivering strong results, and opened or remodeled several stores." Apparently these investments haven't paid off just yet. Perhaps they were expecting a better operating environment and the lack of sell-through on the retail level hurt suppliers like FBN even more? Going forward its CEO Kurt L. Darrow warned "the operating environment for the overall furniture industry remains challenging" and only gave vague details of a better future from there, hinting that they need housing and consumer confidence to improve first. Troubling is that their inventory levels on their balance sheet at the end of the quarter appear to be the highest it's been in years. This suggests production anticipated greater demand that failed to materialized. At FBN, that tended to lead to inventory write downs and losses. We may end up seeing that with LZB is this holiday season does bear fruit.
On a more upbeat note, LZB reinstated their dividend and declared a .04/share payout. Generally when a company reinstates their dividend when in turnaround mode, it's a Wall Street signal about the quarter and how confident management is going forward. It's possible that their current challenges will be short-lived and management has greater, not-yet-reported reason to be confident communicated by way of that dividend. Let's just hope they're not simply overconfident like FBN was.
On the macro level, the commerce department reported small declines in retail furniture sales for September and October of 0.6 and 0.2 percent respectively, after showing an impressive 8% jump in August. Could it be that deliveries in July for FBN (for August) and the retail sales for LZB in August got both managements prematurely overoptimistic and even sloppy with their projections and cost allocations? We should learn more in early 2013 as furniture companies begin reporting their calendar Q4 results.