Interface 2Q'11 Earnings analysis & opinion

Interface 2Q'11 Earnings: were on the mark.  However, they weren't as good as previous quarters as they missed consensus earnings estimates.  Relative to peers, they were quite good.  However, business intelligence for the industry is pointing towards tough Euro-headwinds.


Interface earnings Highlights:
Investors are requested to view IFSIA's earnings release link, as this article is a commentary of them, not a rehash. Highlights:
  • Revenues rose sharply, up 18% to $268MM
  • Orders grew 13%, and backlog continued to rise
  • Chinese plant, while not profitable, continues to ramp up.  It achieved breakeven performance during the month of June.
  • Operating Margins continued rising (from 9.5% last year to 9.8%)
  • EPS of $20 cents/share slightly missed analysts' estimates.
    What we liked:
    Despite all the talk of a decelerating US economy and Euro-Crises, revenue was quite good, especially compared to competitors.  Margins continued rising, albeit at a slower pace than previous quarters.

    And not so much..
    IFSIA has been able to pass costs through to customers.  We think this is getting increasingly difficult.  Other than higher raw material costs, the company is also getting hit with continued Start-up costs in China, and its relatively new strategy of opening company stores.  These stores don't comprise a large part of Interface's overall costs, but the trend is there.   The company had 5 stores as of quarter's end and several more are expected by YE.  Cash flow from operations was also weak, but likely short-term due to higher inventory (i.e, hoarding) ahead of price increases from its suppliers.  Also attributed to higher receivables and paying off its vendors more quickly.

    Conclusion:
    We believe the shares of Interface, which had performed quite well until the Euro-Crises reemerged, will be very sensitive to European and US economic activity (regardless of the company's sound business operations).  Also, note the shares have a high Beta, hence higher volatility is to be expected.

    What to look for in 2012:
    As such, we expect Interface to issue a cautious outlook for the rest of this year and into 2012.  We believe there already is a Euro-Crises, and that it's been with us for nearly 2 years now.  In our estimates, things could only get worse in Europe given political deadlocks, austerity measures and a stubbornly tight ECB (on the monetary side).  Traditionally Interface's key drivers were 2, now they are three:
    1. Residential Construction
    2. Commercial Construction
    3. Europe
    On the domestic side, the US economy is also witnessing slower government growth, which should slow demand from that end-market.  We will expand on specific economic data points and charts in our upcoming 3Q'11 review.


    What's happening on the Corporate Social Responsibility front:
    I'd like to highlight this "win-win" situation the company initiated during the quarter.  It essentially participated in a knitting program as it introduced a new floor tile that looks like yarn.


    The project produced a smashing number of squares, nearly 10,000 ! It also produced hats and other knitted garments.  This "Knit a Square" program was part of KasCare, a charity providing warm clothing to orphaned children with AIDS in South Africa.   See these links for additional info: knit-a-square.comknitting-for-charity.

    Background of the company:  
    Interface, Inc. is the world's largest manufacturer of modular carpet, which it markets under the InterfaceFLOR, FLOR, and Bentley Prince Street brands.  Interface's main goal, other than serving its investors, is to help make the world a better place via its widely heralded Sustainability program.

    Disclosure:  The author is long Interface.

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