Interface Earnings: Picking Up the Pieces

By Markets Fool.com

Image source: Interface.

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The top dog in modular carpeting is still trying to piece together a turnaround. Interface (NASDAQ: TILE)reported another quarter of uninspiring financial results after the market close on Wednesday, sending the shares 6% lower at Thursday's market open.

Sales clocked in at $248.3 million for the third quarter, 2.5% below where the results were a year earlier. It's a less painful showing than the 6% decline it posted in each of the year's first two periods -- and the 9% slide during last year's holiday quarter -- butfor the fourth quarter in a row we're seeing a year-over-year decline in revenue.

The popularity of Interface's carpet tiles is a mixed bag around the world, and that's actually a welcome break from the second quarter when sales were weak across all regions. Asia-Pacific was the big winner, with sales up 7.4% in the third quarter. The strong rebound was led by big gains in China and Australia. Europe is still a problem, down 5.7%, but the weakness stemmed mostly from the U.K. following the Brexit vote. Sales in Central and Southern Europe were actually positive.

Closer to home, Interface experienced a 3.4% slid in the Americas. A 13% drop in Canada and a stateside decline of 4% was partly offset by a 2% uptick through Latin America.

Putting the pieces together

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"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 had offered up three months ago in the second quarter's earnings release. The trends are improving, but Interface hasn't turned the corner just yet.

The biggest shortfall came on the way down to the bottom line. Gross margin contracted during the third quarter, breaking a streak of six consecutive quarters of expansion. Net income clocked in at $15.9 million, or $0.25 a share. That's well short of the $0.31 a share it rang up a year earlier. After flat earnings growth through the first half of 2016 despite sluggish sales, we're seeing the bottom line deteriorate despite narrowing shortfalls on the top line.

Things should get better from here. Hendrix points out that the third quarter's orders were positive relative to the prior year, something that hasn't happened in more than a year. Momentum is encouraging, as the order strength increased with every passing month during the summer quarter. Interface expects sales to turn positive during the current quarter based on those sales trends. Ending the four-quarter streak of declining net sales is within reach, even if Thursday's initial market reaction isn't panning out that way.

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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.