Mohawk Industries, Inc. (MHK) reported adjusted earnings of $2.21 per share in the second quarter of 2014, which beat the Zacks Consensus Estimate of $2.20 by a penny.
Earnings of this leading flooring manufacturer increased 20% year over year as strong operating margin made up for softer top line performance.
Revenues Soft; Margins Go Up
Total revenue of $2.05 billion missed the Zacks Consensus Estimate of $2.08 billion as well as management’s internal expectations due to the recent slowdown in housing construction and remodeling activity in the quarter.
Nevertheless, revenue increased 4% year over year. Organic revenue increased 3% driven by pricing gains and successful product introduction.
Gross margins rose 70 basis points (bps) year over year to 28.4%, driven by pricing gains. As a percentage of net sales, adjusted selling, general and administrative expenses declined 90 basis points to 17.0% due to productivity improvements and better cost controls
Adjusted operating income was $233.4 million during the quarter, up 20.7%. Operating grew 160 bps to 11.4% driven by higher gross margins and better SG&A leverage
Segment Details
The company operates in three segments namely Carpet, Ceramic and Laminate and Wood segment.
Carpet segment: Net sales of the Carpet segment amounted to $780 million, up 1% year over year. Adjusted segment operating income of $62.8 million increased 15% year over year, driven by higher productivity, decline in operation and administration cost. Operating margin increased 100 bps to 8.1%.
Ceramic segment: Net sales of the Ceramic segment were $796.7 million, up 4.8% year over year. Organic revenue increased 5.1% year over year. Segment revenues benefited from new collections, which are in accordance with the market shift towards larger sizes, planks and rectangles.
Revenues increased significantly in Mexico on the back of extended distribution of new products. In Russia, specialized products customized for new construction and DIY channels drove revenue growth, offset by unfavorable foreign exchange and soft retail sales. Segment revenue also increased in Europe on the back of growth in Spain and favorable mix towards large size and unique styling.
Adjusted segment operating income of $106.6 million increased 20.6% year over year, driven by higher productivity, volume, pricing and mix. Operating margin increased 180 basis points to 13.4%.
Laminate and Wood segment: Net sales of the segment were $501.3 million, up 6.4% year over year. Organic revenue rose 3% driven by an increase in new construction activity in the U.S which drove wood flooring sales. Revenues were also driven by an increase in the price of second wood flooring. Strong sales in Nordic countries and UK were driven by an increase in sales of wood and luxury vinyl tile categories.
Adjusted segment operating income of $71.6 million increased 20.7% year over year, driven by higher productivity, acquisition synergies, and a decline in cost. Operating margin of 14.3% increased 170 basis points.
2014 Outlook
The company expects further improvement in the U.S, with restrained growth in Europe and Russia. The company expects revenues to grow in the upcoming quarters of 2014 on the back of an improving U.S job market and economic growth.
Full-year 2014 earnings are expected to range between $8.09 and $8.25 per share.
For the third quarter of 2014, earnings are expected to range between $2.38 and $2.47 per share.
Mohawk Industries carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Better-ranked stocks in the home furnishing/ textile industry include Restoration Hardware Holdings, Inc. (RH), Vince Holding Corp (VNCE) and Williams-Sonoma Inc. (WSM). Restoration Hardware Holdings and Vince Holding carry a Zacks Rank #1 (Strong Buy). Williams-Sonoma carries a Zacks Rank #2 (Buy).
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