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Interface Keeps Growing Into 2018

By Rick Munarriz – Apr 25, 2018 at 7:04PM

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The leading maker of modular carpet reports its second best quarter of top-line growth in more than six years.

Carpet tile continues to gain traction as a flooring solution, and Interface (TILE -1.32%) is cashing in on the trend. The modular carpeting specialist posted financial results after Wednesday's market close, checking in with net sales rising 8.8% to hit $240.6 million in the first quarter.

Interface's top-line growth is decelerating from the 11.1% uptick it posted last time out, but that doesn't make this a disappointing performance. Net sales rose by less than 4% in each of the two previous quarters before the 11.1% surge to close out 2017. It went through six consecutive quarters of top-line declines before that. Wednesday's 8.8% increase in net sales is Interface's second headiest growth rate since 2011. 

Organic sales rose 6.6%, lower because its decision to discontinue its FLOR retail business has been more than offset by currency gains and the launch of its luxury vinyl tile modular resilient flooring business. Organic orders -- adjusted for foreign exchange fluctuations -- rose 12% during the quarter. 

Herringbone layout of Interface tile.

Image source: Interface.    

Putting the pieces together

Gross margin clocked in at 38.9% for the quarter, a slight decrease as higher input costs and exiting its FLOR specialty retail store business weighed on its markups. Operating income -- adjusted for last year's restructuring and asset impairment charges -- also moved lower, but Interface still managed to make it work on the bottom line. Net income rose 14.4% to $15.1 million or $0.25 a share. It had earned $0.21 a share a year earlier after backing out the one-time restructuring and asset impairment charges.

Interface continues to return money to its investors. It completed $14.5 million in stock repurchases during the quarter, and that follows the $91.6 million it put to work on buybacks throughout 2017. It declared a regular quarterly cash dividend of $0.065 per share after Wednesday's market close. 

Interface doesn't provide quarter-by-quarter guidance, but it's reiterating its outlook for all of 2018. The carpet tile leader continues to see organic sales growth rising 3% to 5% this year with gross margin chiming in between 39% and 39.5%. If we pit the first quarter's performance against its outlook for the entire year it suggests that organic sales will continue to decelerate through the next nine months with gross margin improving slightly. 

Revenue growing for four consecutive quarters is a welcome streak, but it also means that comparisons from here on out will get harder as the numbers are no longer being stacked up against depressed top-line results from a year earlier. Interface expects to post its strongest operating income growth in the second and third quarters of this year, a good omen for the next two quarters and as close as it gets to providing quarterly forecasts. Improving margins should take some of the sting off of the decelerating sales growth, as long as carpet tile remains popular for Interface.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Interface, Inc. The Motley Fool has a disclosure policy.

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