Interface's FLOR retail brand. Source: Interface.
Modular carpet maker Interface (TILE +7.66%) wrapped up 2014 on firm footing. Customers lined up for new carpets in the fourth quarter, and Interface filled these orders efficiently, which led to a higher profit margin, according to earnings numbers released after market close Wednesday. The stock responded with a nice 17% pop in early Thursday morning trading. For a company that seemed to be unraveling in the preceding quarter, the loose ends are coming together to begin 2015.
Carpet sales surge
Bad weather and sluggish demand weighed on Interface through much of 2014, but the last few months of the year brought what CEO Daniel T. Hendrix described as a "speedy and robust recovery." Hendrix also noted that demand for carpets "surged upward" in the Americas and Asia-Pacific markets, which helped Interface increase throughput and achieve higher gross profit margin. This boosted both the top- and bottom-line results:
|
Metric |
Q4 2014 |
YOY Variance |
|---|---|---|
|
Sales |
$272 million |
8.1% |
|
Net income |
$15.8 million |
21.5% |
|
EPS |
$0.24 |
20% |
Source: Interface press release and author's calculations. Net income figures exclude nonrecurring financing expenses and insurance gains.
If not for the significant weakening of the euro during the quarter, sales across each region would have shown a promising uptick:
- Americas sales up 11.8% year over year
- Europe sales up 2.2% in U.S. dollars and 6.5% in local currency
- Asia-Pacific sales up 13.4%
The fourth quarter turned an otherwise dismal year into a more promising situation for both the company and its investors. Looking at all of 2014, Interface had $1.004 billion in sales, a 4.6% increase from 2013's revenue of $960 million. Net income excluding nonrecurring items was $41.2 million, down 6.5% from $44.1 million in 2013.
If demand continues to rise, Interface is in a good position to realize a greater benefit on the bottom line. Management made progress during 2014 on its cost-cutting and restructuring initiatives, and reduced selling, general, and administrative expenses as a percentage of sales by 280 basis points, from 26.6% to 23.8%.
A solid foundation for 2015
During the conference call, management said it was particularly optimistic about growth in a few key segments, including retail, government, and hospitality. Year-over-year sales in the Americas for retail, government, and hospitality were respectively up 20%, 12%, and nearly 100% during the latest quarter. However, its attempt to venture into direct-to-consumer sales through FLOR retail outlets is still a laggard. In the Americas, FLOR sales were flat year over year, and management hopes FLOR will merely break even in 2015.
For the quarter ahead, a strong U.S. dollar will likely continue to put a damper on sales in Europe. But management expects lower oil prices to result in a dip in raw materials costs that could offset most of the currency effects.
Similar to the beginning of the fourth quarter, management described a healthy order flow through the first seven weeks of 2015. Hendrix said he expects "a nice top line number in the first quarter." While the company offered no specific targets, a double-digit growth rate seems achievable if carpet demand continues to grow at a healthy clip.
An impressive holiday quarter does not make a trend for this eco-conscious carpet company, but it takes the monkey off management's back for now. These recent results demonstrate management is making the necessary operational fixes to boost Interface's profit margin. Its efforts could dovetail nicely with greater construction demand in the quarters ahead.
