You can teach a modular carpeting specialist some new flooring tricks, but investors know that top-line growth is always relative. Shares of Interface (TILE -3.47%) opened slightly lower on Thursday despite posting its strongest quarterly sales growth in more than 20 years shortly after Wednesday'a market close. You have to go back to the first quarter of 1998 -- according to data provided by S&P Global Market Intelligence -- to find the last time that its top line was growing faster.
Net sales soared 23.7% to hit $318.3 million in the third quarter, but an acquisition that closed in early August accounted for the lion's share of Interface's top-line growth. The purchase of rubber flooring leader nora systems helped pad net sales by $41 million, but organic sales still rose at a respectable 9% clip as carpet tile and luxury vinyl tile continue to gain in popularity.
Image source: Interface.
You're walking all over Interface
Things didn't work out so well on the bottom line, as reported net income and operating profit were roughly shaved in half as a result of one-time acquisition-related costs. However, adjusted earnings did outpace the heady net sales growth, climbing 28% to hit $24 million or $0.41 a share.
It wasn't a perfect report, something that's obvious given the market's lukewarm initial reaction to the numbers. Gross margin continued to contract, and for the second time in as many quarters, we see Interface lowering its full-year guidance for gross profit margin even as it boosts its organic sales growth target.
Interface now sees organic sales growth of 5% to 7% for all of 2018, up from the 4% to 7% it was forecasting three months ago and the 3% to 5% goal it established the quarter before that. It's great to see that metric inch higher with every passing quarter, but since we've already seen organic sales rise 9% through the first nine months of the year, it suggests some sharp deceleration in the current quarter.
This is a cyclical business, and while this is the sixth consecutive quarter of net sales growth, there will be inevitable lulls when the economy slows and corporations hold back on modular carpet purchases. The nora systems purchase could help smooth out the cyclicality here. Rubber flooring may not look as fancy Interface's flagship carpet tile, but it's essential flooring for hospitals, schools, and transportation hubs -- industries that march to different beats during economic downturns than corporate America. Wall Street isn't impressed with Interface's latest report, and the already weak shares are hitting fresh 52-week lows on Thursday. Though it's only fitting that a flooring specialist stock is breaking through the floor, growth organic and otherwise continue to push in the right direction.
