Mohawk (MHK) Shares Up 4.7% As Q3 Earnings Beat Estimates

Mohawk Industries, Inc.’s (NYSE:MHK) shares increased 4.7% during after-hour trading session on Oct 24 as it reported better-than-expected third-quarter 2019 results. Both earnings and revenues surpassed the Zacks Consensus Estimate.

However, on a year-over-year basis, the top and the bottom line declined due to softness in retail demand, strong dollar and excess inventories. It expects the afore-mentioned headwinds to prevail in the upcoming quarter as well.

Inside the Headlines

During the quarter, Mohawk reported adjusted earnings per share of $2.75, which surpassed the consensus mark of $2.64 by 4.2%. However, the metric declined 16.4% year over year.

Net sales of $2,519.2 million surpassed the Zacks Consensus Estimate of $2,499 million by 0.8%. However, the reported figure fell from the year-ago quarter’s figure of $2,546.8 million. On a constant-currency and days basis, net sales were flat year over year.

To combat the above-mentioned headwinds, Mohawk has been undertaking many initiatives to improve business, which include aligning and realigning of ceramic production with demand in the United States and its North American carpet operations as well as setting up of new plants and upgrading its LVT manufacturing. Also, the company has enhanced its operations in Australia, New Zealand and Brazil by entering into new product categories, with innovative extensions.

Operating Highlights

Mohawk Industries, Inc. Price, Consensus and EPS Surprise

Gross profit during the quarter came in at $691.7 million, down nearly 4% year over year. Adjusted selling, general and administrative (SG&A) expenses increased 6.1% from the prior-year quarter’s level to $449.2 million.

Adjusted operating income totaled $250 million, which declined 20.4% year over year. Adjusted income tax rate was 18.3% during the reported quarter compared with 18.8% in the prior-year quarter.

Segment Details

Global Ceramic: Sales in the segment totaled $916.4 million, up 3.5% year over year. Also, the metric rose 4% on a constant currency and days basis.

However, operating margin of 9% declined from the prior-year quarter’s level due to inflation and lower production rates, partially offset by productivity. Sluggish economy and excess industry capacity across the globe were other headwinds.

Flooring North America: Net sales in the segment came in at $1001.9 million, down 4.4% year over year. The segment's adjusted operating income of $80.2 million also dropped 14% from the prior-year quarter’s level.

Moreover, operating margin in the unit was 8% owing to lower volume and inflation.

Flooring Rest of the World: In the segment, net sales dipped 1.9% year over year to $600.9 million. On a constant-currency and days basis, sales grew 2.5% from the year-ago quarter’s level. However, adjusted operating income in the segment fell 8.2% on year-over-year basis to $88.8 million.

Operating margin in the segment was 14% backed by volume growth and lower inflation, partially offset by price and mix.

Financial Highlights

As of Sep 28, 2019, it had cash and cash equivalents of $111.3 million compared with $91.4 million at 2018-end.

During the first nine months of 2019, net cash from operating activities came in at $978.1 million compared with $894.5 million in the comparable year-ago period.

Since the beginning of the third quarter, it purchased 740,000 shares for $91 million under its stock purchase program. Markedly, free cash flow in the quarter rose year over year and balance sheet remained strong.

Q4 View

With more investment in sales and marketing to expand placement of its products and increased utilization of new plants, the company is aiming for business improvement. With improved sales, cost, LVT production and increased distribution, its greenfield project is expected to yield favorably.

Given the above-mentioned tailwinds, Mohawk expects fourth-quarter 2019 earnings (excluding one-time charges) in the range of $2.13-$2.23 per share (versus $9.8 reported in the year-ago quarter).

Zacks Rank

Mohawk, which shares its space with Crown Crafts, Inc (NASDAQ:CRWS) , Culp, Inc (NYSE:CULP) and Interface, Inc (NASDAQ:TILE) in the Zacks Textile - Home Furnishing industry, carries a Zacks Rank #4 (Sell).

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

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