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Interface Inc. Slips After a Rough Quarter

By Rick Munarriz - Apr 25, 2019 at 1:30PM

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The leading maker of modular carpet stumbles after posting mixed financial results.

A summertime acquisition from last year continues to inflate growth at Interface (TILE 2.44%), and the market's looking past the flooring specialist's reported results. Net sales rose 24% to $297.7 million in the first quarter. This is Interface's second-strongest top-line surge in more than 20 years, according to data provided by S&P Global Market Intelligence, but the lion's share of the increase is coming from its acquisition of nora systems, a move that expanded its product offerings from modular carpeting and luxury vinyl tile by pushing into rubber flooring.

The nora transaction closed in August of last year, and this is the second full quarter in which the rubber-flooring sales are added to Interface's original business. Organic sales climbed just 2%, matching the adjusted top-line gain it posted in the previous quarter. It won't be until midway through the third quarter that we lap the nora deal to get a more accurate oranges-to-oranges comparison.

Interface carpet tile in herringbone.

Image source: Interface.

Hitting the floor

Organic growth is chiming in at the low end of the 2% to 4% rate that Interface was forecasting for all of 2019 earlier this year, but the leading maker of carpet tile did warn at the time that the first quarter's adjusted earnings would fall before recovering with double-digit gains through the last nine months of the year.

Interface is living up to its February warning. Operating income, net income, and adjusted earnings declined 29%, 53%, and 36%, respectively. Results should bounce back for the balance of 2019.

Guidance is being adjusted from its mid-February update. It now sees reported net sales rising 14% to 16%, below the 16% to 18% it was targeting two months earlier, but this is entirely the handiwork of 200 basis points of currency headwinds that Interface now sees weighing on its full-year numbers. It continues to see organic sales from its flagship carpet tile and luxury vinyl tile business rising between 2% and 4%, with adjusted profit margin improving from 38.7% in 2018 to between 40% and 40.5% this year.

Wall Street has been unimpressed with Interface lately, and the stock is trading a lot closer to its 52-week lows than its high. It initially moved lower following Wednesday afternoon's first-quarter report.

There are a couple of silver linings within the sell-off. This is the eighth consecutive quarter of organic net sales growth. The addition of nora is paying off, at least on the top line. Interface now has a flooring option for hospitals, transportation hubs, and schools that favor durable rubber solutions, and organic nora sales actually rose 9% for the quarter. Interface now needs to make sure that it lives up to its forecast for improvement through the next three quarters.

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