Mohawk Industries (MHK) Q1 Earnings Beat, Margins Strong

Mohawk Industries, Inc. (NYSE:MHK) reported impressive first-quarter 2016 results, wherein both earnings per share and revenues surpassed the Zacks Consensus Estimate. Earnings per share exceeded management’s expectations.

Adjusted earnings of $2.38 per share beat the Zacks Consensus Estimate of $2.33 by 2.15%. Earnings also came above the guidance range of $2.24 to $2.33. Adjusted earnings exclude restructuring, acquisition and other charges.

Earnings increased 40% year over year backed by strong operating margins and top-line growth.

Revenues Rise Y/Y, Margins Strong

Total revenue of $2.17 billion surpassed the Zacks Consensus Estimate of $2.10 billion by 3.52%.

Revenues increased 15.5% year over year driven by higher sales across all the segments, especially Flooring Rest of the World. Net sales increased 19% year over year, on a constant days and currency exchange rate basis. Net sales also benefited from gains from acquisition, and volumes increase.

Adjusted gross profit of $645.5 million increased 23.7% year over year. Adjusted selling, general and administrative (SG&A) expenses were up 15.3% to $392.8 million.

Adjusted operating income on a constant exchange rate increased 41.0% to $255.7 million. Adjusted operating margin grew 200 basis points (bps) to 11.6%, mainly because of improved productivity initiatives, gains from acquisition, higher volumes and lower input costs across all the segments.

Segment Details

Last year, the leading flooring manufacturer realigned the reportable segments, organizing its carpet, wood, laminate and the newly acquired vinyl operations by geography into Flooring North America (NA) and Flooring Rest of the World (ROW) segments. The Global Ceramic segment remained unchanged with the acquisition of KAI in Eastern Europe.

Global Ceramic: The Global Ceramic segment includes ceramic tile, porcelain tile and natural stone operations. Some of the brands included in this segment are American Olean, Daltile, KAI, Kerama Marazzi, Marazzi and Ragno.

Net sales in this segment amounted to $773.7 million, up 7.5% year over year. However, sales were up 11% on a constant days and constant currency basis. In North American ceramic business, service centers accelerated the most, driven by increased investment in sales personnel, marketing and new product introductions. Mexican, Russian and European ceramic businesses also performed well during the quarter.

Flooring North America: The Flooring NA segment includes North American operations of various product categories, including carpets, rugs, carpet pad, hardwood, laminate and vinyl products, including LVT.

Net sales in this segment increased 7% year over year to $906.4 million. On a constant days and constant currency basis, sales improved 9%. The company continues to focus on premium residential carpet with new innovative products. Sales of U.S hard surface increased across all channels. The company also increased hardwood price by 6% - 10% effective May 15.

Flooring Rest of the World: Flooring ROW segment includes laminate, hardwood flooring, roofing elements, insulation boards, medium-density fiberboard (MDF), chipboards, and vinyl flooring products, including LVT. The new segment combines the European and Rest of the World operations of the former Laminate and Wood segment and the European and Rest of the World operations of the vinyl flooring businesses acquired recently. Some of the brands in this segment include IVC, Moduleo, Pergo, Quick-Step and Unilin.

Net sales of this segment were $492 million, up 56.3% year over year. Sales improved 62% on a constant days and constant currency basis driven largely by acquisitions. Sales were driven by the laminate and wood business in Europe, which outperformed the market trends on the back of differentiated high end products. Other products performing well include deeply textured new laminate collections and engineered wood products, particularly Quick- Step brand and direct distribution.

Outlook

For second quarter 2016, the company expects earnings per share in a range of $3.29 to $3.38, which indicates a 22% to 26% increase year over year.

Mohawk Industries carries a Zacks Rank #2 (Buy).

Key Picks from the Sector

Investors interested in the wider consumer discretionary sector may also consider Hooker Furniture Corp. (NASDAQ:HOFT) , Vista Outdoor Inc. (NYSE:VSTO) and Pool Corp. (NASDAQ:POOL) . While Hooker Furniture and Vista Outdoor sport a Zacks Rank #1 (Strong Buy), Pool Corp holds a Zacks Rank #2.