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Interface Needs the Floor to Click in Its Latest Quarter

By Rick Munarriz - Jul 26, 2019 at 9:15AM

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The flooring specialist delivers its second strongest quarterly revenue growth in 20 years, but it's a different story when it comes to organic growth.

An acquisition last summer continues to be the top-line growth gift that keeps giving for Interface ( TILE 5.84% ). The leading maker of modular carpet saw its sales soar 26% to hit $357.5 million for the second quarter, fueled largely by the purchase of rubber flooring specialist nora systems last August. The nora systems deal has been inflating Interface's revenue growth, clocking in at least 23.7% higher in each of the past four quarters. Things will likely get far more tame later this year when Interface has lapped its purchase of nora systems, as organic sales rose at a mere 2% clip for the second quarter.

The growth still looks good on paper, and this is Interface's second-strongest quarterly increase in revenue in more than 20 years, according to data provided by S&P Global Market Intelligence. However, with Interface dialing back the high end of its revenue guidance range for all of 2019, it's probably easy to see why the stock is trading closer to the three-year low it hit late last year than the 52-week high it tapped last summer.

Interface carpet tile laid out on a floor in herringbone layout.

Image source: Interface.

Mad about modular

This is the third quarter in a row in which organic sales rise just 2%, a stark contrast to the 26% top-line burst. The current quarter will also find nora systems padding results, at least for roughly half the period. It will be at that point that we will start to get a better picture of the slower growth at Interface.  

The flooring specialist is bouncing back on the bottom line after a rough first quarter. Reported earnings rose 43% to $0.50 a share with adjusted profitability climbing 21% to hit $0.51 a share. Unlike its performance last time out -- with double-digit percentage slides in operating income, net income, and adjusted earnings -- Interface bounced back with double-digit percentage gains on all three fronts. 

The rubber flooring solutions that are now in its arsenal since acquiring nora systems are faring well, and Interface credits its 2% rise in organic growth on strength with its luxury vinyl tile business. Guidance is where things potentially get thorny, as for the second quarter in a row we find Interface scaling back its earlier projections. 

Interface sees net sales rising 14% to 15% for all of 2019, down slightly from the 14% to 16% it was eyeing three months ago. Guidance was initially calling for 16% to 18% net sales growth in 2019. Organic net sales growth that has been locked at 2% to 4% for this year is now being dialed back to a more modest 2% to 3% uptick. It's also revising its 2019 goal for adjusted gross profit margin a few ticks lower. Interface is eyeing 39.7% to 40.2% on that front, just below the 40% to 40.5% in adjusted gross profit margin it was targeting last time out. 

Investors don't like seeing official corporate outlooks cool down with every passing quarter. Interface will have plenty to prove later this year, especially come the fourth quarter when it will no longer have nora systems inflating its net sales gains. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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