Mohawk Stock Down as New Court Filings Allege Multiple Issues (Revised)

Mohawk Industries (NYSE:MHK), Inc.’s MHK shares tanked almost 20% on Jul 9, after a shareholder lawsuit recently added new court filings that allege multiple issues within the company.

According to The Fly, Wells Fargo (NYSE:WFC) analyst Truman Patterson, in a research note to investors, highlighted that the Public Employees' Retirement System of Mississippi has filed a class action complaint against Mohawk and CEO Jeff Lorberbaum, claiming that the company engaged in a "fraudulent scheme to fabricate revenues through fictitious 'sales' of products that were not delivered to customers and to conceal from investors the true reasons for the company's ballooning inventory," damaging shareholders between April 2017 and July 2019.

Earlier in January, a class action lawsuit was filed in the federal court on behalf of purchasers of the securities of Mohawk from Apr 28, 2017 to Jul 25, 2019 (the "Class Period"). However, the suit got investors’ attention in late June, when new filings were submitted.

According to The Motley Fool, a former Mohawk’s employee claimed that the company has been using fictitious sales to artificially boost revenues since 2017.

The lawsuit states that Mohawk made false and misleading statements during the Class Period, and alleges that: it was engaging in fraudulent channel stuffing; the company’s statements regarding sales growth and the demand for conventional flooring products were false as well as misleading; it falsely assured stockholders about increasing accounts receivables and inventory levels during the Class Period by falsely attributing those increases to external factors like rising raw material costs as well as inflation; and as a result of the foregoing, defendants' statements about the business and operations were materially false as well as misleading at all relevant times.

The Fly also stated that Wells Fargo analyst, Truman Patterson, did not acknowledge the validity of the allegations but noted that the company would "clearly" be a negative if proven to be true, likely damaging shareholder confidence in management. Supporting Patterson’s opinion, a JPMorgan (NYSE:JPM) analyst Michael Rehaut added that he sees the "fairly granular level of detail across the allegations" and believes that the lawsuit will likely hamper the stock’s performance until the matter reaches a conclusion.

Challenges Faced by Mohawk

Mohawk has already been suffering from various challenges. The COVID-19 pandemic has impacted almost all regions served by Mohawk. Thus, demand has dropped drastically across all markets served, with residential remodeling being impacted the most. At April-end, overall sales rate was roughly 35% below the prior year, with business in Europe being hit more severely than the United States.

The Global Ceramic segment — which accounted for 36.4% of 2019 net sales — has been witnessing significant pressure due to a decline in product mix, soft retail demand, a stronger dollar, shift of customers to LVT and excess inventories in the channel, alongside COVID-19 woes. Also, 104% tariffs on Chinese imports and anti-dumping duties are a big concern.

Flooring is thought to be more of a discretionary purchase within the construction market, which can be more vulnerable to economic downturn.

Meanwhile, the company expects to generate loss in the second quarter. Results for the quarter are scheduled to release on Jul 30. The consensus estimate for second-quarter bottom line is pegged at a loss of 36 cents per share. Earnings of $2.89 per share were recorded a year ago.

Zacks Rank

Mohawk — which shares space with Culp, Inc CULP, Interface (NASDAQ:TILE), Inc. TILE and Select Interior Concepts (NASDAQ:SIC), Inc. SIC in the same industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

(We are reissuing this article to correct a mistake. The original article, issued on July 10, 2020, should no longer be relied upon.)