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Interface Works on a Turnaround, One Tile at a Time

By Rick Munarriz - Oct 25, 2017 at 7:40PM

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The leading maker of modular carpet reports its headiest top-line growth in more than two years.

Turnarounds are like tile carpeting, in that you have to put them together one piece at a time. Interface (TILE 1.20%) reported fresh financials after the market closed on Oct. 25 and once again confirmed that its slow yet steady turnaround is still intact.

Net sales rose 3.7% to $257.4 million in the third quarter for the flooring specialist that specializes in modular carpet products. It may not seem like much, but it's been more than two years to find the last time Interface's top line was growing faster. Interface grew its net sales by just 1.4% in its previous quarter, and that ended a streak of six consecutive quarters of year-over-year revenue declines.

Interface experienced improvement across all of its regions. Organic sales, adjusted for foreign exchange fluctuations and its decision to exit its FLOR retail business, grew at a 3.9% clip. Organic orders rose at an even better 6.5% rate, suggesting continuing growth. Once again we find Interface crediting its improving performance to growth in its core carpet-tile business and the recent launch of its luxury vinyl tile modular resilient flooring business. 

Herringbone modular carpeting by Interface in an office setting.

Image source: Interface.   

Piece by piece

The improvement at Interface continues as we work our way down the income statement. Margin is widening, resulting in a 20% pop in operating income. Earnings rose 22% to $19.4 million, or $0.32 a share. 

Gross margin had contracted in the second quarter as a result of an increase in raw-material input costs and the FLOR-related restructuring. Interface credits productivity enhancements for turning things around to deliver margin expansion this time around.

CEO Jay Gould, who has been at the helm since March, is sticking to his company's earlier guidance. Interface expects 3% to 4% in organic sales growth, 38% to 38.5% in gross margin, and $260 million to $265 million in sales, general, and administrative expenses for all of 2017.

Investors could've been hesitant heading into Wednesday afternoon's report. Longbow analyst David MacGregor had warned of weakness in the U.S. flooring market earlier this month, slashing his third-quarter profit target for Interface from $0.30 to $0.28 a share. He feared that internal disruptions and rising pressure from cheaper competitors would weigh on its bottom-line results. We now know that Interface earned $0.32 a share for the period, overcoming those concerns. 

Our conclusion last time out: "With orders on the rise and a long overdue return to net sales growth, Interface is taking small but definite steps in the right direction." The story remains the same, but now with Interface another step ahead of where it was three months ago.

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