Interface Earnings: Margins Over Matter

By Markets Fool.com

Image source: Interface.

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Demand for modular carpet remains sluggish.Interface (NASDAQ: TILE)reported financial results after the market close on Wednesday, and for the third quarter in a row we're seeing a year-over-year decline in revenue.

Sales clocked in at $248.2 million for the second quarter, 6% below where the results were a year earlier. The world's largest maker of modular carpeting products also experienced a 6% year-over-year decline during the first quarter, but that period was held back as a result of a fiscal period that had one week less than the prior year's first quarter. Factor in the 9% decline that Interface experienced during last year's holiday quarter, and we're at a problematic streak of declining top-line growth.

There was weakness all around the world. Between a 6% decline in the Americas, a 9% drop in Europe on a local currency basis, and a 2% dip in Asia-Pacific, global demand is a bit problematic at the moment.

"The second half of the year is typically better for us than the first half, and we expect that to be the case this year as sales and earnings continue to improve," CEO Daniel Hendix offers in the earnings release, but optimism hasn't panned out in the recent past.

Sometimes the pieces don't fit just right

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Hendrix dismissed theweak holiday quarteras being a product of project delays instead of order cancellations, but instead of fueling a spike in sales during the first quarter we saw another year-over-year decline.

The glimmer of hope following the weak first quarter was that new products and a push to grow its presence in non-office segments would be enough to deliver top-line growth for all of 2016, but that will be challenging in light of Interface's weak first-half performance.

The silver lining here is that margins continue to improve as lower raw-material costs and pricing leverage continue to benefit its bottom line. Net income of $20.7 million, or $0.32 a share, fell just short of the $0.33 it delivered a year earlier.

Interface is doing a noble job of returning money to its shareholders. It announced a $50 million buyback following its first-quarter report, and this time out it's increasing its quarterly dividend form $0.05 to $0.06 a share. The new yield of 1.4% may not excite income investors, but it's still more money going their way.

Interface's product --carpet tile that easily locks into place on installation -- will be at the mercy of office budgets and the global economy. Interface took a hit last month after the Brexit vote. Europe accounted for 26% of its sales last year, with the U.K. as its biggest component. Whether the U.K. will really end up leaving the European Union remains to be seen, but investors obviously don't like uncertainty.

Interface feels as if things will get better during the latter half of this year, but it's only natural for investors to see if it actually happens this time.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Interface. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.