Stifel Releases Expectations for Q2 Flooring Industry Performance
St. Louis, MO, June 29, 2020-Analyst Stifel offers its Q2 flooring update,
“Residential rebound benefits certain names : The recent strength in residential N.A. flooring activity bodes well for near-term estimates for those companies in our coverage with the greatest exposure, which include Floor & Decor, LL Flooring, and Mohawk. Interface is largely commercial and the majority of Armstrong Flooring revenues tilt commercially as well.
“N/T upside potential for MHK: We think there is upside to 2Q20 and 3Q20 results for Mohawk where consensus estimates are overly bearish in our view. Our Mohawk estimates are already above the Street for Q2, 2020, and 2021, and thus will not be raising estimates, but we point out our Q2 estimate for Mohawk’s North American revenues to decline 30% is likely overly bearish based on our surveys. We maintain our Buy rating on shares of Mohawk as the equity continues to trade at relatively depressed multiples to its history and peers and remains our top pick in the group.
“Residential flooring the relative winner: While the second half of 2020 is difficult to predict and clarity on 2021 is opaque, we do feel that the residential business will be better than consensus view based on strong housing activity and our belief that the home wins share of wallet out of this pandemic. While there is clearly a decline coming in the builder business from the depressed housing starts in April and May, we think housing construction will rebound in the second half of 2020 and into 2021. It would also appear that housing resale activity may increase as a de-urbanization trend is likely. Commercial sales will likely be the drag as this was 25% of the flooring industry’s sales in 2019 and pressure on office, retail, and hospitality will likely pull activity lower.
“High level thoughts on North America flooring: Clearly there is a huge bifurcation currently on trends within the residential and commercial flooring businesses. Furthermore, there is a radical difference between these two segments if you are looking at June quarter shipments (commercial has held up better than residential within Q2) versus recent order trends where we hear residential demand is approaching year ago levels whereas commercial orders are down 30% plus.
"The residential new construction market, which approximates 15-20% of industry sales, will dip in Q3 and suffer somewhat into Q4 because of the sharp decline in new starts in April and May of over 20%. But we believe this market is already rebounding and expect housing construction will improve as we enter the second half of 2020 and be a source of growth for the trade at some point in Q4.
“The residential repair and remodel market has made a remarkable recovery from the depths of early April. As stores have re- opened and consumers are increasingly focused on their homes, the spend has returned quickly. We believe this is indeed sustainable as we doubt that much of the spending is due to stimulus checks based on our belief that most flooring demand is from homeowners who tend to skew towards income brackets.
“We are concerned about the commercial marketplace as approximately 70% of this market ties to office, retail, and hospitality. The pace of recovery in the latter two markets will be protracted and the office market faces uncertainty from compressed corporate profits and potential increases in work from home activity.
“Carpet hanging in: Carpet sales have surprised us in particular. With the shift to hard surfaces and the widely held view by consumers that carpet can be a trap for dirt/unhealthy air, we expected carpet to come under immense pressure in this downturn. While residential carpet sales likely fell at a 50% rate at the peak of the pandemic, the business has improved for 10 plus consecutive weeks and demand is currently exceeding production. Admittedly, production is somewhat challenged from a lack of inventory of key raw materials and absentee labor issues. While residential carpet sales are still likely down year/year, we believe it is less than 10%, a recovery that is much quicker than we and many others anticipated.”
For the full report, which details Stifel’s outlook for several flooring firms, click here.