Expect an update on the polyethylene extrusion business on Monday. Source: Lluis tgn via Wikimedia Commons.
Trex (TREX 0.23%) has been one of the few bright spots in the home remodeling products business over the past few months. While the stock is down year to date, it performed quite well over the summer, driven by strong sales growth from the company's expanded product distribution network.
On the other hand, stocks in peer specialty retailers Lumber Liquidators (LL) and Tile Shop Holdings (TTSH -1.40%) have been getting killed on falling comparable-store sales and profits:
With Trex's third-quarter earnings release set for Monday before the market opens, what can we expect? Here are the three things I'm looking for.
1. Guidance on growth
Last quarter, management guided for third-quarter revenue of $92 million, which would be a 27% increase from the $72 million in sales a year ago. While Lumber Liquidators and Tile Shop Holdings have seen their same-store sales levels fall over the past several quarters, Trex is banking on a major expansion of its distribution network to drive sales higher for the quarter, the same as it did in the second quarter.
Trex's growth is almost all market share, as the industry remains flat. Source: Trex.
The company hasn't yet issued early downward guidance, which is good. However, that doesn't mean a small miss isn't possible, especially in this environment. In short, keep your expectations for a revenue beat relatively low. After all, the market has remained flat, so all of Trex's growth has been in taking market share from competitors.
Furthermore, it's not clear when the housing market and the related remodeling market will fully recover. Until then, Trex could face some challenging quarters.
2. Update on new product expansion
The kind of raw material Trex is good at sourcing and processing. Source: Michal Manas via Wikimedia Commons.
CEO Ron Kaplan finally let the cat out of the bag last quarter, announcing that the new product expansion the company had previously referred to was polyethylene pellets that would be sold to polyethylene bag and sheet manufacturers. While this isn't a sexy new market, it's one with significant and constant demand.
This also allows Trex to leverage the two things it does best: source polyethylene to recycle, and use its proprietary extrusion process to utilize that material. Since the company historically buys more material than it needs, this will increase the value it gets for that excess. It will also streamline the business, which is currently very seasonal and lumpy.
Lastly, this business isn't expected to add materially to 2014, so don't look for any surprise sales from this category. The main production line won't be running at full capacity until early next year anyhow.
3. Cost reduction initiatives update
On the last earnings call, Kaplan said the company would implement three "major cost reduction initiatives" in manufacturing starting in the third quarter. While management wouldn't provide details, it was described as part of the company's vertical integration strategy, and was said to be process-focused, not driven by capital costs.
While we probably won't get the "nuts and bolts" of what was changed, it will be good to learn what the impact is on the company's cost structure, and what we can anticipate the return will be going forward.
Looking ahead
We will get more details on these three things Monday morning, but don't forget that this company is already very well positioned in its business. The market will eventually turn around, and when that happens, Trex's dominant market share position will provide even further growth.
With that said, seeing progress on both cost-reduction and efficiency improvements, as well as a progress update on the polyethylene pellet business, is definitely key for understanding the company's near-term prospects.
