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Interface Earnings: It's a Jigsaw Puzzle

By Rick Munarriz – Feb 25, 2016 at 10:14AM

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The leading maker of modular carpet blames delays and not cancellations for its quarterly weakness.

Source: Interface.

The home-improvement market may be coasting along, but folks didn't warm up to carpet tile over the holidays. Interface (TILE -1.06%) posted sluggish quarterly results after the market close on Wednesday. 

Sales clocked in at $246.6 million for the fourth quarter, 9.4% below where they were a year earlier. Even if you adjust for foreign currency fluctuations -- a fair tweak given the heavy volume that Interface generates outside of the U.S. market -- sales still would've slipped by 3.5% during the period. A 7% currency-adjusted gain in Europe was no match for the 8% drop closer to home in the Americas and the 5% decline in Asia. 

A decline in sales has been rare at Interface in recent years. It's only the second time over the past 13 quarters that Interface has posted a year-over-year decline, according to S&P Global Market Intelligence data. It's also the first time that this has happened in a little more than a year.

The silver lining in the report is that Interface still made the most of the sales it did ring up. Margins expanded with its operating profit margin going from 9.8% during the fourth quarter of 2014 to 11.2% this time around. Improving margins resulted in adjusted earnings of $18.2 million -- or $0.28 a share -- increasing by 15% since a year earlier.

The quarter wraps up a year of flat sales growth, but the top line would've risen 8% on a constant currency basis. That's not problematic, as long as it's the year -- and not the quarter -- that dictates the trend. 

Interface is the world's largest maker of modular carpet, selling pieces of carpet tile that easily lock into place on installation. It will naturally be at the mercy of a healthy real estate or home improvement market. Folks moving into new digs often want to customize the flooring. Homeowners looking to freshen up their homes often turn to flooring as an easy way to update their properties. Interface is also an even bigger player in commercial real estate. Its namesake and FLOR carpet tile brands are popular flooring solutions for businesses given the easy installation, maintenance, and replacement of the flooring. 

Interface feels that the weakness will be temporary. 

"While we are disappointed with the softened demand and resulting order levels, our market feedback indicates this is primarily a result of project delays rather than cancellations, so we're anticipating a rebound in order levels as we move through the year," CEO Daniel Hendrix is quoted in the earnings release.  

Hendrix also feels that the currency headwinds are starting to fade, giving its reported results less resistance in the future. It's easy to hold a company accountable for comments like these. If the weakness truly was the result of delays instead of outright cancellations or waning demand the next few quarters should be explosive. Interface may have had a ho-hum quarter, but it's setting the bar high for 2016 in the process.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Interface. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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