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Interface Picks Up the Pace

By Rick Munarriz - Jul 26, 2018 at 12:08PM

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The leading maker of modular carpet checks in with its best quarter of top-line growth in more than seven years.

The pieces keep coming together for Interface (TILE -2.58%). The modular carpeting specialist is checking in with its strongest sales growth since the first quarter of 2011. Carpet tile and luxury vinyl tile continue to grow in popularity, and Interface is also boosting its full-year sales target. 

Net sales rose 12.7% to $284 million for the quarter. Organic sales -- Interface's metric that basically balances out foreign currency fluctuations -- rose a hearty 10.6% with a welcome 9.7% uptick in organic orders.

An overhead view of a herringbone layout of Interface's carpet tile on the floor of a room.

Image source: Interface.

Flooring and high ceilings 

Interface isn't a typical growth stock. This is only the second time in seven years that Interface's top line checks in with double-digit percentage growth. However, this is now the third consecutive quarter where net sales growth rose by at least 8.8% and the fifth period of any top-line growth. There's healthy momentum building in the stock, but investors can't forget that the current winning streak came immediately after a string of six consecutive quarters of top-line slides.

The initial path down the income statement isn't as flattering. Operating margin and gross margin contracted, as the revenue mix and delayed productivity initiatives kept markups and profitability in check. A pending acquisition also weighed on net margin, resulting in net income of $21 million that was essentially flat with the prior year's showing.

Back out the acquisition-related hit -- Interface's purchase of rubber flooring leader nora systems won't close until the third quarter, but it still incurred due diligence and financing costs related to the deal during the second quarter -- and adjusted earnings per share rose to $0.42 from $0.33 a year earlier. Share buybacks over the past year have also helped profitability on a per-share basis.

Interface doesn't offer up quarterly guidance, but it is tweaking its forecast for all of 2018. It's now targeting 4% to 7% in organic sales growth, up from its earlier goal of 3% to 5% growth. The update isn't perfect. Interface now sees its gross profit margin clocking in at 39% in 2018. In April it was eyeing gross margin of 39% to 39.5%, but that tweak is more than offset by Interface's heartier sales-growth update.

The stock opened marginally higher on Thursday following the report, so investors don't seem to be impressed with Interface notching its strongest top-line growth since early 2011. Bumping its full-year guidance for organic sales growth is also not gaining a lot of traction, likely because the stock has grown much faster than that already in the first half of 2018 -- so the second half should come in below its full-year forecast. However, there's also no denying that carpet tile and luxury vinyl tile are growing in popularity, and now we get to see what Interface can do when its nona systems purchase closes later this summer.

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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