How These Specialty Flooring Companies Hold Their Ground Against Competition

You walk on the floor all day long and you may think that there isn’t any difference where you buy it. These specialty-flooring companies want you to think otherwise about the tiles and carpets that they sell.

Feb 16, 2014 at 7:00AM

Both consumers and corporations have been turning to national home-improvement retailers like Home Depot and Lowe's for their flooring-product needs, such as tiles and carpets, for years. This allows buyers to consolidate their purchases so they can get better discounts and save time and effort involved in liaising with multiple suppliers. Furthermore, flooring retailers also price their products competitively because they save on the rental expenses associated with a physical presence. Despite these advantages, specialty flooring companies such as Tile Shop (NASDAQ:TTS), Mohawk Industries (NYSE:MHK), Interface (NASDAQ:TILE) have managed to stand their ground and thrive in their respective product niches.

Vertical integration
While most retailers that compete with the Title Shop purchase their tiles from third-party vendors, Tile Shop manages its entire value chain from the direct sourcing of raw materials to the manufacturing and shipping of the final products to its stores. Tile Shop's vertical-integration model provides it with two key advantages.

The first advantage is that Tile Shop is more cost-competitive by virtue of acquiring raw materials directly from the quarries, as it participates actively in product manufacturing and design and controls logistics and distribution. As a result, it enjoys lower costs and higher margins than its peers. In fact, Tile Shop's 70% gross margin is close to double those of Home Depot and Lowe's, which has raised some concerns.

Tile Shop's share price took a beating in November 2013, following allegations by Gotham City Research that Tile Shop used a China-based undisclosed related party and improper accounting to inflate its profits. In January 2014, Tile Shop released findings from an investigation conducted by an independent counsel and a "Big 4" public accounting firm which concluded that there was neither misstatement of financial results nor improper accounting treatment. This should help to address investors' concerns over Tile Shop's high gross margin.

The second advantage relates to Tile Shop's high proportion of private label products stocked. These products make up the majority of its 4,500 SKUs (stock keeping units). This helps Tile Shop avoid destructive price competition with retailers that offer me-too, undifferentiated products.

Unique customer benefits and customized solutions
Interface is the largest global manufacturer and seller of modular carpet, which essentially comprises carpet tiles cut into squares or rectangles that cover a floor. It used to sell predominately to offices, but it has subsequently diversified into other non-office and consumer markets, which currently contribute about half of its revenue. Modular carpet offers unique customer benefits vis-a-vis other competing flooring products.

Firstly, modular carpet results in the least disruption to normal business operations. Contractors can gain access to sub-floor wiring for telephones, computers, and other equipment easily with carpet tiles. Secondly, modular carpet can be maintained for longer periods. As certain floor areas (e.g. corridors) experience most of the wear and tear, the carpet tiles can be moved around to extend the average lifespan of a floor covering. Modular carpet's unique value proposition provides Interface with an edge over other retailers which sell other run-of-the-mill flooring products. According to the 2012 Floor Focus Top 250 Design Survey, about seven in 10 U.S. designers specifically request modular carpets to be used for their designs.

Furthermore, at least 60% of Interface's global modular carpet products in various geographical markets are made-to-order for its clients. These products tend to carry higher margins and enhance customer retention because they are tailored to customers' needs.

Commitment to innovation
Mohawk is the second-largest U.S. manufacturer of carpets and rugs, with 26% market share, behind Shaw Industries (31%), a subsidiary of Warren Buffett's Berkshire Hathaway. In a seemingly commoditized market, Mohawk has stood out for its commitment to innovation. Its recent award wins include the Council of Supply Chain Management Professionals' 2012 Supply Chain Innovation Award.

Mohawk's innovation products include SmartStrand Silk and Wear-Dated Embrace. SmartStrand Silk is a proprietary fiber developed by Mohawk that delivers unrivaled softness and superior protection against stains. Third-party tests found that SmartStrand Silk carpets were at least 42% cleaner than other nylon carpets. Customers also agreed. According to a November 2010 survey, 96% of SmartStrand buyers were satisfied with their purchases, while 98% said that they will buy SmartStrand again. Its Wear-Dated Embrace boasts twice the fiber of ordinary soft nylon, so it makes carpets twice as soft. In addition, Wear-Dated Embrace carpets are more durable, as performance tests suggest that they can withstand 30,000 foot passes.

Mohawk's unique technology and trademarked brands help to differentiate its products from those of its peers. The financial numbers speak for themselves. Excluding 2009 when results were affected by the Global Economic Crisis, Mohawk's gross profit margin has been remarkably stable, fluctuating within a narrow 25%-28% range.

Foolish final thoughts
The specialty-flooring companies mentioned above have adopted varied strategies such as vertical integration, specialty products, and product innovation to develop their own differentiated value propositions for their customers. An industry classification shouldn't define success or failure. Profitability is more about what you do than what you sell.

So can flooring stocks help your retire in style?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Interface and Tile Shop Holdings. The Motley Fool owns shares of Interface and Tile Shop Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information