DXYN The Dixie Group, Inc

Sector financial performance:

This company, that is primarily a floorcovering (soft surface mainly) products manufacturer focusing on both high end residential and commercial customers, has been grouped into floor covering sector in furnishing industry.

It seems that demand in US market for soft surface flooring covering products has been weak in the past several years as indicated by decreasing sale volume of companies that have a focus on this type of products. Demand for hard surface products seem to be strong and has been the major driver of companies’ sales growth but the growth has been seen slowing. We thus have seen a significant decrease since 2016 in sales among soft surface product-focused companies and a bounce back in 2017 as they shift their products to hard surface products. The typical annual growth in sales is about 4%, 3.6%, -1.2% and 6% in2018, 2017, 2016 and 2015.

Companies’ gross margin seem improved in the past several years ( 31% in 2018) as cost of raw materials continued to decrease and price raised. The average SG&A as percentage of sales is about 22% and the operating margin is about 8% in 2018.

The typical stock Price/cash flow ratio: 21 (interest/EBI ratio of 7%).

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Company performance:

It seems that the demand for products of this company from its commercial customers has been fluctuated but presented a downturn trend in the past three years as indicated by the continuously decrease in commercial products sales. The demand for its residential products seems to have been stronger entering 2017 but slowed down then.

 The first six months of fiscal 2018 compared with the same period of 2017

Comparable sales increased by about 0.3% (decreased 0.7 % for second quarter) primarily due to increase of about 5.6% ( 4% for second quarter)in residential products offset by decrease of 9.7% (-10%% for second quarter) in commercial products.

Fiscal 2017 compared with 2016

Comparable sales increased by about 5.2% primarily due to increase of about 9.3% in residential products offset by decrease of 0.8% in commercial products.

Fiscal 2016 compared with 2015

Carpet organic sales (exclude 53 weeks) decreased by about 6% primarily due to decrease of about 3% in residential products and decrease of 11.5% in commercial products.

Fiscal 2015 compared with 2014

Sales increased by about 4.5% primarily due to increase of about 14.4% in commercial products sales and decrease of 0.4% in residential sales.

Its gross margin has gone up to 23% since 2015 due to the lowered costs of raw materials. Due to slight increase in SG&A as percentage of sales, its operating margin has thus gone up from -1% to -0.3% in 2018.

Stock price

This stock currently has an enterprise price/sales ratio of 0.4 ($1.4). We think that its stock is being relatively slightly overvalued because the ratio of 0.4 implies a cash flow/sale ratio of about 2%, which is difficult to reach given sales potentials.