Why These 2 Flooring Companies Will Survive the Waning Popularity of Carpet

As the residential and commercial markets show signs of recovery, carpet companies aren't necessarily the best proxies for them. As customers increasingly seek alternative flooring options, these two flooring companies have become interesting investment candidates.

Jun 12, 2014 at 4:32PM

Threecircles
Source: The Dixie Group

Since 2006, the U.S. carpet industry has seen declining shipments as a result of a weak housing market and changes in consumer behavior. Domestic carpet shipments have fallen from 1.7 billion square yards in 2006 to 1.0 billion square yards in 2012.

Flooring companies The Dixie Group (NASDAQ:DXYN) and Mohawk Industries (NYSE:MHK) have bucked the trend. Based on its internal estimates, Dixie's carpet sales have grown 69% since 2009; the industry only expanded by 11% over the same period. In the past three years, Mohawk has grown its revenue and operating income by impressive compound annual growth rates of 11% and 20%, respectively.

Diversifying away from run-of-the-mill carpet
Since 2004, Dixie has focused exclusively on the upper end of the soft floor-covering market. While the average price point for carpets & rugs sold in the residential market is approximately $8 per square yard, Dixie's range of residential carpet brands are priced anywhere between $10 and $50 per square yard. Masland is Dixie's high-end brand of handcrafted and imported rugs with a reputation for innovative style, design, and color; Fabrica is its premium high-end brand and close to 40% of its sales involve a designer.

In the commercial soft floor-covering market, Dixie is focused on the high-end contract market and distributes its products via direct sales, sales agents, and retailers. To further cement its reputation in the high-end space, Dixie acquired Atlas Carpet Mills, a high-end manufacturer and marketer of commercial floor-covering products, in March this year. Atlas primarily serves the corporate market with its high-fashion broadloom and modular carpet tile offerings.

While homeowners are increasingly looking for cheaper and more durable alternatives to carpet for their flooring needs, strong demand from the affluent and corporate remains for high-end carpet. This benefits Dixie with its portfolio of premium carpets & rugs brands.

Likewise, Mohawk's well-prepared for the shift in demand between competing flooring options. Mohawk has successfully diversified from its roots in carpets and now boasts leading positions across the domestic carpets & rugs; ceramic and laminate; & wood markets. Last year, it acquired Spano, a Belgian panel board manufacturer; and Marazzi Group, a leading ceramic tile company. These acquisitions enabled Mohawk to further diversity its business operations and geographical reach. More importantly, carpets & rugs currently account for only slightly more than a third of Mohawk's revenue.

Description
Source: The Dixie Group

Different approaches, similar outcomes
Dixie and Mohawk are quite different in terms of their product & segment focus and market size. Mohawk is the second-largest U.S. carpet seller with 24% market share, while Dixie accounts for only 3% of industry sales volumes. Despite their differences, they have leveraged on their specific strengths for success.

Mohawk has capitalized on its leading market share to reduce its costs relative to its peers such as Dixie. . By using the fiber from its internal manufacturing operations, Mohawk can reduce inventory costs and spread its fixed overhead over a large revenue base. In contrast, the high fixed cost of making fiber makes it uneconomical for smaller companies like Dixie to follow suit.

In contrast, Dixie isn't manufacturing-driven, like Mohawk and its peers. Instead, Dixie focuses on product quality and relationship building. It's product-driven, putting a strong emphasis on in-trend designs. It also ensures that it remains relevant with its core customer base of high-end consumers and designers by hiring and training its sales force to be attuned to design and customer solutions.

Another area of difference is distribution. Mohawk's extensive distribution network which spans 1,500 sales representatives, 300 distribution points, and 600 trucks gives it an edge over its competitors. Its ability to deliver products on-time and cost effectively to retailers across the country is something that smaller companies can't match.

For Dixie, its distribution (or the lack of it) is an advantage. As Dixie mainly targets its products at designers and affluent homeowners, mass distribution doesn't help to sustain its brand image. In fact, the fact that Dixie's products are available at only selected retailers in each individual market actually helps to create the perception of exclusivity.

In fact, on a trailing twelve month basis, Dixie's ROIC of 6.2% is is only slightly inferior to Mohawk's ROIC of 7%, despite the difference in sizes between the two companies. Dixie's higher fixed asset turnover helps to offset its lower margins relative to Mohawk. This is because Dixie doesn't incur the mass distribution costs of Mohawk and therefore operates on a leaner asset base.

Mohawk has relied on its scale to achieve cost benefits and efficiency. On the other hand, Dixie has turned its lack of scale to its advantage by focusing on what it's best at.

Foolish final thoughts
In the first quarter of 2014, Mohawk delivered a set of excellent results, growing net sales and adjusted EPS by 22% and 41%, respectively. Notwithstanding poor weather in certain of its markets, Dixie also saw year-on-year revenue growth of 9.6% and 9.4% for its commercial and residential product segments. With the residential market expected to maintain its growth momentum and the commercial market forecast to recover by analysts, flooring companies Dixie and Mohawk serve as good proxies for them.

Your cable company is scared, but you can get rich
What do you use for your living room's flooring-carpet, ceramic or wood? This could have a big impact on the flooring companies you will be investing in. You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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