Mohawk (MHK) Q3 Earnings Meet, Sales Lag, EPS View Tepid
Mohawk Industries, Inc. MHK reported mixed results for third-quarter 2022. Earnings met the Zacks Consensus Estimate and declined on a year-over-year basis. Net sales missed the analysts’ and management’s expectations but increased year over year in a low-single digit.
MHK’s shares slipped 3.41% in the after-hours trading session on Oct 27.
Jeffrey S. Lorberbaum, chairman and CEO of Mohawk, said, “The U.S. is being impacted by high overall inflation and mortgage rates that have risen from below 3% to approximately 7%. The residential market, which is the most significant part of our business, is expected to decline further before we see an inflection point. Remodeling has slowed, and our product mix has been impacted as consumers trade down to options that fit their budgets. It is estimated that the U.S. has a housing deficit of five million units, and more than half of U.S. homes are over 50 years old. Remodeling investments are expected to grow long term as U.S. housing stock ages and families with low mortgage rates choose to remain in their homes.”
Inside the Numbers
Mohawk reported adjusted earnings of $3.34 per share, meeting the consensus mark and declining 15.4% from the year-ago quarter’s reported figure of $3.95. The downtrend was due to lower volume, which resulted in higher unabsorbed costs and material, energy and transportation inflation. Its Europian business suffered from the unprecedented energy crisis and high inflation.
Mohawk Industries, Inc. Price, Consensus and EPS Surprise
Mohawk Industries, Inc. price-consensus-eps-surprise-chart | Mohawk Industries, Inc. Quote
Net sales of $2.92 billion also lagged the consensus estimate of $3.06 billion by 4.6% but increased 3.6% from the year-ago quarter’s figure of $2.82 billion. On a constant-currency basis, net sales were up 8.3% year over year. The upside was driven by price increases and strength in the commercial sector. However, net sales were below the company’s expectation due to the retail channel, which softened across all regions and product categories and a 4.1% impact from currency.
Operating Highlights
Adjusted gross profit of $745.5 million was down 11% year over year. Adjusted selling, general and administrative expenses — as a percentage of net sales — increased 60 basis points from the year-ago period’s levels to 16.3%. Adjusted operating income totaled $271.1 million, down almost 25% year over year. Adjusted EBITDA was $412.4 million.
Segment Details
Global Ceramic: Sales in the segment totaled $1.1 billion, up 9.8% year over year. Also, the metric rose 12.4% on a constant-currency basis. Strength in the new home construction channel in most geographies and the commercial channel benefited the segment’s top line. Adjusted operating income increased to $132.2 million from $119.1 million a year ago. The segment’s adjusted operating margin was 12.1%.
Flooring North America: Net sales at the segment amounted to $1.09 billion, increasing 3.7% year over year on a reported basis. The upside was driven by strong pricing, with hard surface products outperforming due to the investments in premium laminate and LVT partially offset by lower manufacturing volumes. The segment registered an adjusted operating income of $87.7 million in the quarter, down from $120 million reported in the prior-year period. Adjusted operating margin was 8% in the quarter.
Flooring Rest of the World: Net sales in the segment decreased 4.7% year over year to $0.73 billion. On a constant-currency basis, sales were up 9.4% from the year-ago level, backed by price increases and growth in the panels, insulation and Oceania businesses. Yet, constrained consumer spending in the residential market and softness in the retail sector impacted the same. Adjusted operating income was $62.3 million, down from $133.3 million reported a year ago. The segment’s adjusted operating margin was 8.5% due to inflation, lower sales volume and reduced production.
Financial Highlights
Mohawk currently has available liquidity of more than $1.8 billion. As of Oct 1, 2022, Mohawk had cash and cash equivalents of $326.97 million compared with $268.9 million at 2021-end. Long-term debt — less current portion — at the third-quarter end was $1.02 billion compared with $1.72 billion at 2021-end.
For the third quarter, the company generated a free cash flow of $74.7 million, significantly down from $351 million a year ago.
Fourth-Quarter View
Higher interest rates have been moderating demand for homes, thereby impacting housing sales. Also, inflation is causing changes in consumer discretionary spending. Meanwhile, residential remodeling is softening as consumers have been deferring their home improvement projects. In Europe, gas and electricity prices are reducing demand and increasing manufacturing and material costs. Given these factors, MHK anticipates demand to slow in the fourth quarter and reduced production to result in greater unabsorbed overhead.
Second-quarter U.S. pricing announcement led to an increase in carpet material costs significantly that will compress margins until they flow through the inventory. Mohawk anticipates fourth-quarter adjusted EPS to be $1.40-$1.50, excluding any restructuring charges, down from $2.95 reported in fourth-quarter 2021.
Zacks Rank & Recent Consumer Discretionary Releases
Mohawk currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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