Mohawk Industries, Inc. MHK reported mixed second-quarter 2015 results, wherein earnings beat the Zacks Consensus Estimate, but revenues missed the same. During the second quarter, the company realigned its reportable segments.
Adjusted earnings of $2.69 per share beat the Zacks Consensus Estimate of $2.61 by 3.1%. Earnings per share came above the guidance range of $2.51 to $2.60.
Earnings of this leading flooring manufacturer increased 22% year over year as strong operating margin made up for a relatively softer top line.
Revenues Soft, Margins Improve
Total revenue of $2.04 billion missed the Zacks Consensus Estimate of $2.14 billion by 4.6%.
Revenues remained flat year over year as higher sales in the Flooring North America segment were partly offset by lower sales in the Global Ceramic and Flooring Rest of the World segments. However, net sales, on a constant exchange rate, increased 7% year over year.
Adjusted gross profit rose 260 basis points (bps) year over year to 31% due to lower cost of sales. Selling, general and administrative (SG&A) expenses increased 0.9% to $351.2 million. As a percentage of net sales, adjusted SG&A expenses increased 20 bps to 17.2%.
Adjusted operating income increased 31.7% to $307.4 million. Operating margin grew 240 bps to 13.8%, mainly due to improved productivity initiatives and lower costs across all segments.
Segment Details
During the reported quarter, Mohawk realigned the reportable segments, organizing its carpet, wood, laminate and the newly acquired vinyl operations by geography into the Flooring North America, and the Flooring Rest of the World segments. The Global Ceramic segment remained unchanged with the acquisition of KAI in Eastern Europe.
Global Ceramic segment: Net sales in this segment amounted to $789.8 million, down 1% year over year, as currency headwinds hurt sales in the quarter. However, sales were up 8% on a constant currency basis.
Flooring Rest of the World: Net sales of this segment were $331.6 million, down 7% as reported, but up 13% on a constant currency basis.
Flooring North America segment: Net sales in the segment came in at $920.3 million, up roughly 3%. For the quarter, the carpet tile, laminate, wood, rugs and vinyl sales increased, while broadloom carpet sales went down slightly.
Third-Quarter 2015 Outlook
For the third quarter, adjusted earnings per share (excluding the impact of restructuring charges and new acquisitions) are expected within the $2.91 to $2.99 range. Currency related headwinds hurt Mohawk’s third-quarter earnings guidance by 24 cents per share.
The company expects the U.S. economy to continue to improve, strengthening both the residential and commercial flooring markets. Therefore, U.S. sales and margins in all the product categories would improve year over year. However, currency headwinds are expected to persist. Nevertheless, the company expects improved performance in Mexico and most regions of Europe (except Russia). In the third quarter, the company will also face headwinds related to start-up costs related to its capital investments, including two new LVT plants, a new ceramic plant and major upgrades.
Mohawk Industries carries a Zacks Rank #2 (Buy).
Key Picks from the Sector
A couple of well-ranked stock in the home furnishing/textile industry are Culp, Inc. CFI and Interface Inc. TILE, both sporting a Zacks Rank #1 (Strong Buy). In the broader construction sector, Lennar Corporation LEN with the same Zacks Rank as Interface is worth a look.
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