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Mohawk (MHK) Shares Fall Despite Q2 Earnings Beat, View Soft

Zacks Equity Research

Mohawk Industries, Inc. MHK reported mixed second-quarter 2019 results, wherein earnings surpassed the Zacks Consensus Estimate, while revenues missed the same. However, on a year-over-year basis, its top line remained flat while bottom line dipped nearly 18% due to softness across the markets served, and pressure on volumes and pricing.

Notably, shares of the company fell more than 12% in the after-hour trading session, in response to tepid results. It expects the above-mentioned headwinds to prevail in third quarter as well.

Mohawk Industries, Inc. Price, Consensus and EPS Surprise

Mohawk Industries, Inc. Price, Consensus and EPS Surprise
Mohawk Industries, Inc. Price, Consensus and EPS Surprise

Mohawk Industries, Inc. price-consensus-eps-surprise-chart | Mohawk Industries, Inc. Quote

Inside the Headlines

During the quarter, Mohawk reported adjusted earnings per share of $2.89, surpassing the consensus mark of $2.87 by 0.7%. However, the said metric declined 17.7% year over year.

Net sales of $2,584 million missed the consensus estimate of $2,639 million by 2.1%. Nonetheless, the reported figure increased slightly from the year-ago figure of $2,577 million. On a constant-currency and days basis, net sales also grew 2.4% from the prior-year quarter.

To combat the above-mentioned headwinds, Mohawk has undertaken certain initiatives to improve business. The company is streamlining operations, consolidating facilities and removing higher cost assets. Also, it has been maintaining production rates, introducing new products and increasing promotions to address changing markets.

Markedly, in the first half of 2019, Mohawk implemented price increases to offset inflationary pressure. Although mix and competitive pressure offset the positive impact of the price rise, the initiative is likely to help it in the upcoming quarters.

Operating Highlights

Adjusted gross profit during the quarter came in at $743.6 million, down 4.5% year over year. Adjusted selling, general and administrative (SG&A) expenses, however, increased 7% from the prior-year quarter to $466.7 million.

Adjusted operating income totaled $277 million, which declined 19.1% year over year. Adjusted income tax rate was 22.1% during the reported quarter compared with 20.7% in the prior-year period.

Segment Details

Global Ceramic: Segment’s sales during the quarter totaled $958 million, reflecting an increase of 3.1% year over year. Also, the same grew 5% on a constant currency and days basis.

However, adjusted operating income dipped 15.2% from the year-ago quarter to $118.8 million. Also, operating margin of 12% declined 300 basis points (bps) from the prior year due to inflationary pressure, and temporary shutdown costs and marketing investments.

Flooring North America: Segment net sales came in at $983.4 million, which declined 7% year over year. The segment's adjusted operating income of $62.9 million also dropped 42.6% from the prior-year period.

Moreover, operating margin of 6% contracted 350 bps from 9.5% reported in the prior-year quarter, owing to lower volume, inflation and rampup cost of LVT.

Flooring Rest of the World: In the segment, net sales increased 9% year over year to $643 million. On a constant-currency and days basis, sales grew 15% from the year-ago period. Adjusted operating income in the segment also grew 11% on year-over-year basis to $112.9 million.

The segment’s operating margin remained flat with the year-ago figure of 16% and on an adjusted basis at 17%, backed by volume growth and lower inflation, partially offset by price and mix.

Third-Quarter View

Despite undertaking several initiatives to optimize long-term growth and profitability, labor and energy costs, material cost inflation, volume and pricing pressure, along with excessive competition are weighing on the company’s overall results.

Given the above-mentioned headwinds, Mohawk expects third-quarter 2019 earnings (excluding one-time charges) in the range of $2.58-$2.68 per share (versus $3.29 reported in the year-ago period). Moreover, the Zacks Consensus Estimate for earnings is currently pegged at $3.05 per share, which is much higher than the projected range.

Meanwhile, its U.S. ceramic market is anticipated to remain soft in the second half of 2019.

Zacks Rank

Currently, Mohawk, which shares space with Leggett & Platt, Incorporated LEG, Interface, Inc. TILE and Culp, Inc. CULP in the Zacks Textile - Home Furnishing industry, carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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