Armstrong Flooring (AFI), which was spun off from Armstrong World Industries (AWI) in April 2016, is trading lower (-11%) this morning after reporting Q4 results.
In case you're not familiar, Armstrong Flooring is a supplier of resilient and wood flooring products across North America. It operates 17 manufacturing facilities in three countries. AFI operates two business segments: Resilient Flooring and Wood Flooring. Let's take a closer look:
- Resilient Flooring: This segment makes a broad range of floor coverings primarily for homes and commercial buildings under various brands, including the Armstrong brand. Products include vinyl sheet, vinyl tile, and luxury vinyl tile (LVT) flooring. In addition, its Resilient Flooring segment sells laminate flooring products, vinyl tile products, vinyl sheet products, LVT products, and linoleum products, as well as installation and maintenance materials and accessories. Resilient Flooring products are offered in a wide variety of designs, colors and installation options.
- Wood Flooring: This sells branded hardwood flooring, including the Armstrong and Bruce brands, for use in residential construction and renovation, with some commercial applications in stores, restaurants and high-end offices. The product offering includes pre-finished solid and engineered wood floors in various wood species, and dimensions. Its Wood Flooring products are generally sold to independent wholesale flooring distributors, large home centers, retailers, and flooring contractors.
Approximately 55% of 2016 sales were to flooring distributors. Sales to large home centers account for approximately 25% of sales. Its remaining sales are primarily to other retailers, end-use customers and contractors. Home Depot (HD) and J.J. Haines (major flooring distributor, privately held) each accounted for 10% or more of sales in 2016.
Its flooring products compete with carpet, stone and ceramic products, which AFI does not offer. Its products are used in new home construction and existing home renovation work. AFI monitors key US statistics including existing home sales (a key indicator for renovation opportunity), housing starts, housing completions, home prices, interest rates and consumer confidence.
Turning to the Q4 results, AFI reported a non-GAAP loss of $(0.09) per share, a big improvement from $(0.43) in the prior year period and the result was better than market expectations. However, revenue fell 3.0% year/year to $271.7 mln, which was below market expectations.
AFI says that it made significant progress in driving its growth initiatives to produce an increase in annual sales for the first time in three years (2016 revenue rose +0.4%). However, AFI continues to encounter a declining trend in its legacy portfolio, and AFI believes that the sales trends experienced in 2016 will continue in 2017. As a result, AFI has been enhancing its product mix to include higher growth products, while taking actions to revitalize its legacy categories.
In addition to earnings, AFI also announced a reorganization. The company is combining its commercial and residential go-to-market structures and related organization. The new structure should provide enhanced support and responsiveness to retailers and contractors and should foster greater alignment with distributors, which cover both commercial and residential markets. These streamlining efforts are expected to achieve annualized savings of $6-7 mln in SG&A expenses. The streamlining of operations should allow AFI to better service customers and better align its cost structure with the current environment, in light of protracted market challenges.
In sum, while the Q4 results were decent/mixed (EPS upside, revenue miss), the weakness in the stock today seems more related to AFI's comments that sales trends from 2016 will persist in 2017. Investors were likely hoping for a more optimistic outlook for 2017. With that said, there were some positives as AFI announced a $50 mln share repurchase plan and AFI said it remains confident it can achieve a 10% Adjusted EBITDA margin target (up from 7.9% in 2016) in the mid-term.