Analyst Sees Turbulent Hardwood Market This Year

New York, NY, Jan. 23, 2015 -- Analyst John Baugh of Stifel Nicolas described fourth quarter flooring company trends "as mixed and somewhat of a continuation of the first nine months results."

He noted that commercial flooring markets outperformed residential markets, hard surfaces were stronger than soft, and the residential construction market performed better than residential replacement.

Baugh expects that carpet volumes were likely flat with commercial growth offset by a decline in residential. Carpet tiles were strong (up at least mid single digits) while residential carpet units likely fell 1-2%.

"As we head into 2015, raw material input costs are expected to decline modestly at the start of the year and perhaps more aggressively in the second half," Baugh said. Buyers are already asking for price reductions.

The ceramic tile market likely saw low-mid single digit growth in units, with commercial and residential construction bolstering the growth.

'The anticipation that single family home construction should grow double digits and commercial construction should also grow at a similar pace bodes well for this category," Baugh said.

The hardwood market, he said hasn't recovered its volume from the 75% drop in housing starts, combined with rising raw materials cost and cheap imports. However, he expects that volumes grew in the low single digits.

Pricing competition has erupted with Armstrong responding to lost share for much of 2014 and Shaw Industries seemingly making a push to grow share in the one hard surface category where Mohawk does not have a distinct share or scale advantage," Baugh said. It may take several quarters still before the margin structure in wood stabilizes.

"We believe 2015 could be a turbulent year for the wood flooring business, particularly with raw material costs dropping," Baugh said. Meaningful growth in single family housing construction (at least one-third of wood flooring demand) this year would clearly help ease tensions after weak single family starts in 2014."

The sheet vinyl market was at best flat last year, while LVT likely grew almost 20% last year and is poised to grow at a similar rate this year and now represents at least 30% of the vinyl category as Mannington, Shaw, IVC (soon to be owned by Mohawk) and Armstrong are all bringing on capacity in the U.S.

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