Monday, March 28, 2011

Hardwoods Q4 2010 - Sell

The company just released it's Q4 results and quite frankly they were pathetic. 

My Highlights:


- Inventory write downs continue to plague the company.  I think there could be some deeper issues here.  I thought they had them dealt with them in 2009 but obviously not.

- Worst gross profit margin in a long time (possibly ever) in Q4 at 16.6%.  Company seems to be chasing short term sales at any cost which is the wrong strategy.  How do you maintain market share with all of the branch closures over the past few years, especially in California? 

-They lost money in Q4 and didn't really discuss that fact at all in the report.  Why not just be candid with shareholders?  Embarrassing.

- S&A expenses were down big time... I guess they kept a solid lid on salaries and sales bonuses last year among other things.  Senior management is still getting compensated quite well despite the poor results.  Beyond that, management better take off the rose colored glasses and look at the receivables.  They reduced bad debt expense with growing 90+ days receivables... Why not deal with the problem debts?

- Receivables continue to rise.  They currently have $10+ million in 30+ days and $4 million in 90+ days.  The 90+ days receivables number has grown for 2 consecutive quarters while the economy has improved.  

Conclusion

They didn't make any money in 2010 despite the smoke and mirrors.  The loss in Q4 should have been more.  The company operates at the margin and is clearly not performing.  The housing market will remain slow for at least another year.  Isn't it ironic that the previous CEO used to state how Hardwoods wasn't tied to the housing market and the new CEO says that over 50% of sales are related to the housing market.  I wonder which one is right?

I recently sold my shares over the past week or so, booking over a 100% return annualized.  I just thought the price levels were getting high relative to performance of late.  I want to have some cash available if the market dives.  Now, the current results don't support the stock at these levels.  I would expect it to sell off over the next couple months.  I also don't like the incentive shares, and feel management isn't candid enough with shareholders regarding actual results.

The company is also involved in a fairly large lawsuit that wasn't mentioned in the notes of the financial statements.  They don't "feel" that it is material.  How we "feel" about things and reality can be two different things.  I've read the claim, the numbers involved are material, and quite frankly it will be quite interesting to see how it plays out. 

Sorry, but it's time to move on.


Best Regards,
Kevin Graham

Disclosure: No position

2 comments:

  1. Just have to ask. I came across your article about Hardwoods back a few months ago knowing them as Sauder Industries many years ago. For the most part I agree with your previous analyst and good insight. That being said and putting two and two together I am sure I know exactly what lawsuit you speak of. If I am correct in goes back a few years and was for over a million dollars. I do not think it was ever publicly mentioned and only thought they must have settled with him burying it in some restructuring cost. If you say they are still involved in what I am sure is the same lawsuit they must be going to court. If you can share are they in court right now or when is it trial scheduled? And is it BC or ON? I would like to know. Not to mention the grateful stock holders I am sure which I am not. I could be wrong so I’ll keep my comments to myself.

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  2. It involves a former employee and goes go back a quite a few years. The claim has been rewritten and is for over $6 million. Not sure of the trial date and it is in Ontario.

    Your from Ontario... if you want to read it go down the courthouse. No electronic case and docket retrieval in Ontario.

    If you have any comments I would love to know. Feel free to send me an email.

    Kevin

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