Wednesday, July 26, 2006

"Stupid is as Stupid does."

After spending this weekend past shucking 10-Q filings to uncover some undiscovered pearls in which to invest, we admit that we came up short. Nevertheless, the 10Q Detective did uncover several instances of corporate newspeak—lending credence to con man Joseph ("Paper Collar" Joe) Bessimer famous quote: "There's a sucker born every minute...and two to take 'em.” [Ed. note. Before readers rush off to correct us, the evidence strongly suggests that P.T. Barnum never uttered those famous words.]

After many quarters of steady growth, during the second quarter of 2006, homebuilder Lennar Corp. (LEN-$45.22) experienced slower sales, higher cancellation rates and greater need for incentives and discounting. These factors contributed to lower backlog year-over-year and margin erosion, which will be realized in future quarters [i.e. declines in future profitability]. The Company said that its homebuilding activities in the second quarter were affected by a combination of factors found in many of its largest markets across the country, primarily:

· weakened demand due to changing homebuyer sentiment stemming from a view that now is not the best time to purchase a home;
· weakened demand due to the speculative real estate investor exiting the market;
· increased supply and pricing pressures due to speculative investors now selling previously purchased homes at reduced prices; and,
· increased supply due to purchasers of primary residences and speculative investors canceling existing contracts.

Despite these conditions, and the factors contributing to them, management “believes the fundamentals driving the homebuilding business remain strong and suggest a healthy long-term prognosis for the industry.”

Contrary to what management would have its shareholders believe, evidence continues to accumulate that the housing market is softening and it appears that the inventory of homes for sale may be starting to adversely impact housing prices.

The National Association of Realtors said today that existing-home sales were down 1.3% in June to a seasonally adjusted annual rate of 6.62 million units from 6.71 million in May. June's rate was down 8.9 percent from the 7.27-million-unit pace set a year earlier.

Additionally, inventories of unsold homes at the end of June swelled 3.8 percent to a record 3.73 million, representing 6.8 months of supply -- the largest since July 1997 -- from 6.4 months at the end of May.

“Stupid is as Stupid does.” [Forrest Gump]

Citing a weak sales environment for residential furniture, home furnishings’ maker, Stanley Furniture Company (STLY-$23.67) said that its sales in the second quarter ended July 1, 2006, fell 7.4 percent to $77.5 million and the Company’s net income came to $3.9 million, or 32 cents a share, down from $5.8 million, or share-net of 44 cents, a year earlier.

The Company also cut its profit outlook for the year, guiding Wall Street to a profit range of $1.52 to $1.61 a share and a sales range of between $323.5 million and $331 million. Analysts currently expect profit of $1.58 a share for this year on full-year sales of $324.7 million, according to Reuters estimates.

In the Company’s second quarter 10-Q filing with the SEC on July 18, management also cited a surge in low cost imported products, primarily from China, as a reason for declining sales and profitability.

“Imports have grown dramatically in the past few years and according to industry sources it is estimated that imports now account for over half of all residential wood furniture sold in the United States.”

In response to this trend, Stanley developed a blended strategy of combining its domestic manufacturing capabilities with an offshore sourcing program that incorporates selected imported component parts and finished items in its product line to lower aggregate production costs. According to management, sourced product represented approximately 34% of sales during the first six months of 2006 compared to 31% in 2005.

This integration was also “meant to provide design flexibility and to offer a better value to customers.” After admitting that the Company faced competitive pressure from Asian imports, management then goes on to state in the 10-Q that to offset unit volume declines, average selling prices were increased on its product offerings. [Ed. note. How does raising prices offer “better value to customers?”]

On July 17, 2006, management announced, too, that the Board of Directors increased its stock repurchase authorization to $50 million. From April 1, 2006 – July 1, 2006, Stanley had already repurchased 587,345 shares of Common Stock at an average price of $25.41 per share.

If this announcement is supposed to signal to investors that Stanley Furniture Company’s stock is cheap at its current price, our confidence was quickly dashed when we read that the Company has a great excuse hidden up its sleeve to explain away any future profit shortfalls:

“An outbreak of avian flu or similar epidemic in Asia or elsewhere may lower our sales and earnings by disrupting our supply chain in the countries impacted.” [10-K Annual Report]

"And that's all I have to say about that." [Forrest Gump]

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