Mohawk Industries (MHK), a supplier of various of types of flooring (carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring), is trading higher today after reporting 4Q18 earnings upside, but guiding lower for 1Q19.
Non-GAAP EPS fell 26% YoY to $2.53, which was within prior guidance of $2.45-2.60. Revenue rose 3.4% year/year to $2.45 bln, which was generally in-line with market expectations. So Q4 was decent overall. However, guidance for Q1 was on the weak side as MHK expects non-GAAP EPS of just $2.02-2.12, which is a good bit below market expectations.
So what's going on at Mohawk? The period was affected by significant inflation, slowing markets and LVT (luxury vinyl tile) impacting sales of other products. Even as MHK executed price increases in many products, its businesses saw greater pressures on pricing and mix. In the quarter, inflation continued to be a headwind across most of its categories, as higher cost materials flowed through the Q4 results. During the period, MHK decreased its manufacturing production to adapt to market demand. Also, its start-up costs for the quarter were higher than projected, with LVT production improving slower than anticipated.
Overall, after five consecutive years of record earnings, 2018 proved more difficult than expected with inflation increasing dramatically, luxury vinyl tile impacting other US flooring products and most of its markets slowing. The good news is that MHK took advantage of the downturn to acquire flooring companies in Australia, New Zealand and Brazil and in Europe it acquired two flooring distributors and a specialized mezzanine company.
Looking ahead to 2019, MHK's guidance for Q1 is pretty weak. The company said that economies have been slowing in most of its markets, oil volatility is making MHK's costs unpredictable and housing markets in many regions are under pressure. It's not all bad news, as MHK expects results will improve through the year. It's just that in Q1, MHK is reducing production rates due to the softer environment.
In sum, it's nice to see MHK trading higher despite the downside Q1 guidance. Perhaps investors are already pricing in a weaker Q1 for home remodeling stocks generally.