Stifel Releases Q2 Analysis in Advance of Flooring Earnings Reports
St. Louis, MO, July 19, 2019-Stifel has released an industry analysis in advance of the release of Q2 earnings.
“Overall, our sources indicate the market continues to be more or less flat so far in 2019, though with significantly different growth rates across various product categories, notably a bifurcation between carpet and LVT growth. We noted in prior reports that the industry saw some lift overall in late spring off of bottoms early in the year, and we have not heard any changes to that run rate. Tariffs and potential duties are a top topic currently, while LVT continues to take share in the industry.
“While investors in FND (Floor & Décor), LL (Lumber Liquidators) and TTS (The Tile Shop) are only focused on hard surface trends, the fact is that carpet still represents roughly 40+% of industry dollars, and trends in this segment have a large impact on industry sales. We note Mohawk’s Flooring North America segment is estimated to be comprised roughly 2/3 of carpet revenue. We estimate the industry saw unit declines in Q2 in the mid-single digit range with dollar declines in the low single digit range as price increases offset some of the volume decline. The good news is margins are likely to see some benefit from raw material tailwinds assuming the reduced unit production does not overwhelm the benefit.
“The increased tariff from 10% to 25% in mid-June will likely be impacting the industry through the remainder of the year. This tariff rate applies to essentially all flooring imported from China, which is roughly 25% of the U.S. market. There have been some petitions from LVT importers to exempt those products, but there has not been any resolution so far. The tariff will result in a mid-teens increase in the cost of Chinese flooring although the actual increases passed on to U.S. buyers may be somewhat lower. A variety of price increases by wholesales here have been announced, though we believe there is likely more to come as smaller players have not been active with pricing in some attempts for some share gains. We have not seen a material price increases at retail yet.
“Separately, there is also a group of domestic ceramic tile players who have filed anti-dumping petitions against Chinese ceramic tile, porcelain tile, and stone, which represents over 20% of U.S. consumption in square footage today. We believe a preliminary ruling could occur in September, and if material duties were assigned, this would be a nice win for Mohawk.
“The growth of LVT continues with substantial innovations occurring rapidly. We have seen introductions of products that we would describe as a mix between engineered hardwood and LVT, with a recent introduction by Shaw called Floortè. The waterproof flooring trend has shown no signs of slowing, with the waterproof features of WPC/SPC spilling into other categories like laminate to attempt to maintain market share. Mohawk has been aggressive in the waterproof laminate space while the LVT volume ramps with a recent introduction of the RevWood line that advertises durability and waterproof features. Mohawk also has introduced a new line of Pergo LVT product for ‘Edge’ retailers, the company’s top accounts, called Pergo Extreme which is advertised as ‘100% kid-proof, 100% pet-proof, and 100% waterproof’ with a lifetime warranty against denting and SolidTech LVT designed to work well with imperfections in sub-floors featuring a ‘No Gap Guarantee.’ New products are being debuted with tile-like looks in the LVT space by a variety of players as well, obviously looking to target non-wood looks. We think many of these products are sourced.”