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Repair & Remodeling Activity Aids Mohawk (MHK), Cost Hurts

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Mohawk Industries, Inc. MHK is benefiting from strong housing market fundamentals and higher repair & remodeling (R&R) activities. Also, the company’s dominant market share in the highly fragmented and competitive industry, acquisition strategy, and strong international presence are expected to drive growth.

However, increasing inflation and stiff competition may mar the company’s prospects going forward.

Factors Driving Growth

R&R Driving Growth: Due to the ongoing work-from-home trends, consumers across the country are more willing to invest in homes with more spaces to accommodate work and education. Also, the potential home-buyers are investing in repair & remodeling activities, and new flooring plays a vital role in most remodeling projects. The U.S. housing market backdrop is primarily driving growth for Mohawk and other Zacks Textile - Home Furnishing industry players like Interface, Inc. TILE, Culp, Inc. CULP and Select Interior Concepts, Inc. SIC. The combination of recovering economy and low-interest rates coupled with a massive vaccination drive and the government stimulus package is expected to support the housing market, thereby benefiting home furnishing companies. Notably, the company is observing an improvement in commercial demand as the global economy improves and businesses gain confidence to expand and remodel. Also, Mohawk is optimistic about seeing record housing sales and remodeling activities in the long run.

Inorganic Drives: Mohawk largely depends on acquisition as part of its growth strategy. During second-quarter fiscal 2021, the company acquired a laminate distributor in the U.K., which will improve its position in the market. It is awaiting permits to complete the acquisition of a plant that reduces wood veneers to lower costs. During first-quarter 2021, the company made acquisitions in the Flooring Rest of the World segment. These acquisitions broaden Mohawk’s product portfolio, and expand its geographic footprint and market share. Also, these acquisitions have already started contributing to the top line.

Planned Initiatives: In a bid to combat headwinds like inflationary pressure in materials, energy and transportation, increased product development costs as well as labor shortages, Mohawk has undertaken various strategic initiatives. Most importantly, the company is aligning ceramic production with demand in the United States, realigning its North American carpet operations, optimizing LVT manufacturing and ramping up new plants. Furthermore, the company has been focusing on new product categories, introducing innovative product extensions and optimizing the recent buyouts. Moreover, Mohawk is streamlining its regular business operations to enhance efficiencies and leverage automation and process enhancements to lower costs. The company expects these global actions to deliver annual savings of $100-$110 million. It achieved about $75 million of the projected goal in the first quarter and $95 million in the second. It will take almost the entire 2021 to complete these initiatives and capture the full benefits.

Robust Cross-Border Presence: Mohawk holds a strong market share in a highly fragmented and competitive industry. It is one of the largest flooring manufacturers in the global market. The company enjoys a competitive advantage in the laminate flooring channel backed by the Laminate and Wood segment’s industry-leading design, patented technologies and brands.

Furthermore, the company holds a strong international presence and a large portion of sales being generated outside the United States. The company has a presence in Australia, Brazil, Canada, Europe, India, Malaysia, Mexico, New Zealand and Russia. The strong international presence allows the company to capitalize on high demand in the lucrative global market. The company is increasing utilization of new investments in the United States, Europe, and Russia through more product offerings, expanding customer base, and boosting production.

Concerns

Of late, Mohawk has been witnessing inflation related to material, energy and transportation costs. Also, rising cost of product development and labor shortages are causes of concern. Although Mohawk has implemented multiple price increases in most product categories to cover inflation in materials and freight, it expects these challenges to continue in the third quarter. Additionally, Mohawk expects chemical supplies to remain tight and impact future sales. Also, labor constraints will likely limit production at most of its facilities.

Notably, the flooring industry is largely competitive with several players (large and small). The company needs to make significant investments in new products, distribution network and manufacturing facilities that could impact profitability.


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