Mohawk's (MHK) Shares Plunge Almost 18% on Q3 Earnings Miss

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Mohawk Industries, Inc. 's MHK shares plunged 17.9% in the after-hour trading session on Oct 25, after it reported third-quarter 2018 results, wherein its adjusted earnings and sales fell short of analysts' expectations.

The company's adjusted earnings per share (EPS) of $3.29 in the quarter missed the Zacks Consensus Estimate of $3.59 by 8.4%. The bottom line also decreased 12.3% year over year. The results were negatively impacted by input cost inflation, higher transportation costs, a stronger dollar and tight labor market. Softening market conditions and declining product mix also added to the woes.

Moreover, the company's net sales of $2.55 billion fell shy of expectations by 2.6% but increased 4% year over year on higher sales across all segments. Net sales were up 5% on a constant-currency basis.

To combat the above-mentioned headwinds, it plans to boost prices, expand in growing channels, introduce new products as well as foray into geographies. In the U.S. market, Mohawk's LVT sales continue to increase from greater internal production and sourcing programs.

Mohawk Industries, Inc. Price, Consensus and EPS Surprise

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

Operating Highlights

Adjusted gross profit of $737.7 million decreased 7.3% year over year. Adjusted selling, general and administrative (SG&A) expenses increased 6.4% to $423.5 million from the prior-year quarter.
Adjusted operating income of $314.2 million declined 21% year over year.

Segment Details

Global Ceramic: Net sales at this segment amounted to $885.8 million, decreasing 1% year over year on a reported basis but increasing by the same margin on a constant currency basis. The company's U.S. ceramic volume expanded, however, margins were pressured by price, mix and higher transportation costs. Higher competition from imports, owing to a stronger dollar and the growth of LVT, continued to impact the U.S. ceramic industry.

Flooring North America: The segment's net sales totaled $1,047.5 million, up 2% year over year. However, the segment's operating margin was impacted by inflation, lower-than-expected production and start-up costs.

Flooring Rest of the World: Net sales increased 17% year over year to $612.5 million. Sales improved 19% on a constant-currency basis. Operating margins also improved, attributable to improved price, product mix and productivity that offset inflation and start-up costs.

Fourth-Quarter View

Overall, Mohawk expects fourth-quarter earnings (excluding one-time charges) in the range of $2.45-$2.60 per share (versus $3.42 in the year-ago period).

The company expects fourth-quarter results to be softer than that of the third quarter. It expects sales to be slightly slower than the last reported quarter in most markets and product categories.

To counter the higher input costs incurred, Mohawk has planned to undertake a comprehensive approach to improve its performance and profitability in the United States. The company has been introducing new products and executing cost reductions to improve its performance. It is also expanding internal transportation and optimizing its distribution strategy in the United States. Overall EBITDA for 2018 is expected to be approximately $1.7 billion.

However, Mohawk does not anticipate these actions in the United States to materially benefit the company before 2019, given the impact of inflation, timing of price increases and other challenges. In the first quarter of 2019, the company anticipates some sequential improvement and expects operating income between $225 million and $250 million.

Internationally, Mohawk has been introducing new products and entering new geographies, as well as expanding constrained categories.

Meanwhile, its inorganic drive remains strong, and it expects to continue acquiring premier companies like Eliane to expand offering and geographic presence.

Zacks Rank

Currently, Mohawk, which shares space with Leggett & Platt, Incorporated LEG , Interface, Inc. TILE and Culp, Inc. CULP , 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: LEG , TILE , MHK , CULP

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