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Interface Has a Lot to Prove in 2019

By Rick Munarriz - Updated Apr 22, 2019 at 3:08PM

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The leading maker of modular carpet checks in with its best quarter of top-line growth in 20 years, but a rubber flooring acquisition is accounting for nearly all of the growth.

Growth continues to take big steps at Interface (TILE 2.88%), but once again it's a recent acquisition doing most of the heavy lifting. Net sales rose 27% to hit $337.1 million during the fourth quarter -- its headiest top-line burst in more than 20 years, according to data provided by S&P Global Market Intelligence. But most of that gain was the handiwork of the nora systems acquisition, which added rubber flooring to its flagship lines of modular carpeting and luxury vinyl tile. 

The deal for nora closed in August of last year, making the fourth quarter the first full period with the rubber flooring products on Interface's books. Naturally the nora results will continue to inflate revenue growth until it laps the transaction closing in the middle of the third quarter of 2019. Organic sales -- the better gauge of Interface's sustainable growth -- rose at a more modest 2% clip for the period.

Carpet tile set in herringbone.

Image source: Interface.  

Interface fourth-quarter results: The key numbers

Growth didn't take a breather working its way down the income statement. Interface's reported net income and adjusted earnings rose 50% and 28%, respectively, over the prior year's fourth quarter. Adjusted margins widened at Interface, a welcome sight after back-to-back quarters of contraction

Interface is initiating guidance for 2019, and it sees continuing growth into the new year. The forecast calls for 16% to 18% in net sales growth this year including nora's business. Organic sales growth from its carpet and luxury vinyl tile businesses will rise at a 2% to 4% clip. The company sees adjusted gross profit margin of 40% to 40.5% in 2019, improving from the 38.7% it scored for all of last year.  

Check out the latest Interfaceearnings call transcript.

There will be lumpiness in the numbers. Interface warns that adjusted earnings will fall sharply in the first quarter, recovering with double-digit adjusted earnings growth through the next three periods of 2019. 

The quarter was ultimately a success. The shares didn't sell off the way they did last time out, recovering into positive territory after initially moving lower at the open. This is a cyclical business, but Interface has now rattled off seven consecutive quarters of organic net sales growth. Its push into rubber flooring will open new markets -- think hospitals, schools, and transportation terminals that need more durable flooring than the aesthetics-catering corporate stronghold of Interface's flagship modular carpet tiles -- and that's the kind of diversification that should help smooth out the cyclical hiccups. 

Interface also declared its regular quarterly dividend of $0.065 a share this week. The stock's 1.5% yield isn't exactly a magnet for income investors, but the steady trickle of distributions is there for investors that crave quarterly reminders of the merits of stock ownership. The shares continue to trade closer to their 52-week low than last February's 52-week high, but growth awaits investors once it gets past what should be a mixed first quarter.

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