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Interface Earnings: This Floor Has a Ceiling

By Rick Munarriz - Feb 23, 2017 at 8:25AM

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The leading maker of modular carpet posts its fifth consecutive quarter of declining sales.

Sales continue to go the wrong way at Interface ( TILE 5.02% ), but the top dog in modular carpeting is doing a better job of keeping its costs in check. Interface reported quarterly results after Wednesday's market close, continuing the trend of year-over-year declines on the top line. 

Net sales clocked in at $239.5 million for the fourth quarter, a decline of 2.9% since the prior year's holiday quarter. Interface is capping off a problematic year where revenue slipped in each and every quarter. The pace has improved since back-to-back quarters of 6% declines to kick off 2016, but the 2.5% dip in the third quarter and now the 2.9% slide in the final period stretches the unfortunate streak of top-line declines to five quarters. 

The biggest culprit was Europe, where sales took a 25% hit in U.S. dollars. Business was also sluggish closer to home, as a 28% surge in Latin America wasn't enough to offset a 2% drop in the U.S. and a 13% slide in Canada. Asia-Pacific was the only region showing growth, but the 0.4% uptick isn't going to set the world on fire.

Herringbone Interface modular carpet.

Image source: Interface.  

Putting the pieces together

The path down the income statement had a few one-time setbacks. The reorganization of its FLOR service, layoffs, and writing down impaired assets weighed on Interface's profitability. Back those items out and Interface's operating income would've been $26.2 million, slightly below the $27.7 million it delivered a year earlier.

Gross margin contracted for the quarter, but that was partly offset by containment of its SG&A expenses. Interface's adjusted earnings clocked in at $0.28 a share, flat with the $0.28 a share it posted a year earlier, but it was a feat accomplished as a result of having fewer shares outstanding this time around. Investors will take it, as flat earnings-per-share growth follows two quarters of year-over-year declines. 

It was still a disappointing quarter. Interface's CEO had said during its third quarter that orders were starting to turn positive, something that swayed some market pros to forecast positive sales growth for the fourth quarter. We're clearly not there yet. 

It's probably fitting that three months later, Interface has a new CEO. Jay Gould is replacing Daniel Hendrix, but the new guy at the helm is also waxing optimistic about a sales turnaround. 

"The momentum we picked up in the fourth quarter gives us optimism about our prospects and positioning for growth in 2017," he is quoted as saying in Wednesday afternoon's earnings release. "The orders progression we saw throughout the quarter, alongside improvements in U.S. macroeconomic indicators and signs of economic stabilization in Europe, point to top line growth in our core carpet tile business."

We've been here before, but now let's see if the new guy means it. Interface will have some explaining to do if three months from now we're talking about a six-quarter streak of negative sales growth. 

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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