BCInvest

Q.E.P. Company: Flooring the Future

The negative cash flow was to support added working capital needs related to additional higher margin products being carried by the major home improvement retailers.

I don't see the flooring market vastly improving over the next year, but I don't see a major decline. QEPC has had increasing sales even with the backdrop of dismal new home construction. The home improvement market has shown strength in the past when new home construction declines. People who would otherwise be buying an new one fix up their old one.

"I don't think it's wise to make sweeping assumptions that they will reverse the trend."

What trend? The arbitrary, self confirming, short term 2 quarter results you anointed a trend. The company has been cash flow positive for more than 10 years. I am not saying that it guarantees they will always be cash flow positive, only that there is no trend. You are seeing something that does not exist. Every change needs to be evaluated in the context of everything that is going on, not taken at some superficial level. Negative cash flow bad, positive cash flow good. A company increasing inventory in front of large sales increases being cash flow negative is different than a company watching customers struggle to pay and seeing receivables balloon

"So why don't you write about WHY AR and inventory will correct?"

Inventories are up about $7 million and A/R is up about $6 from the end of FY08. Over the same time sales have risen from $49 million to $61 million or an increase of $12 million. What you see on the balance sheet is a result of increased working capital needs for the added sales and probably some timing differences mixed in. The rise in working capital necessarily precedes any sales unless you can get your buyer to prepay. This will not happen in retail, a Home Depot or Lowes would laugh at those terms. QEPC is forced to lay out the cash and pay for the products before they can bill a customer.

"I don't think it's wise to make sweeping assumptions that they will reverse the trend."

I don't think it is wise to make sweeping assumptions that there is a trend. When you analyze the underlying mechanics of what has occurred it is much less concerning. That doesn't mean that the situation does not need to be closely monitored. New information could certainly cause the situation to take on radically different meaning. So far management has done a tremendous job increasing sales in a tough market. The housing market has not gotten any better in the fall months and the recession is no help. Management needs to closely monitor cash flow and maintain their tight cost controls. The drop in oil will help reduce material costs and shipping costs. The drop in LIBOR will soften interest expense. The rapid change in the economy is going to make it harder for many companies. It will take some time to sort the winners from the losers. A good management team with a proven track record is nice to have, but is certainly not a guarantee. I look forward with cautious optimism to continued solid results from QEPC.