The Dixie Group, Inc. (DXYN) Earnings Call Transcript & Summary

Good day, and welcome to The Dixie Group, Inc. 2026 Second Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Chief Operating Officer, Kennedy Frierson. Please go ahead.

Thank you, Maria, and welcome, everyone, to our 2026 second quarter conference call. As reported last month by FloorDaily.net, my father, Dan Frierson, Chairman and CEO of The Dixie Group, had a bad fall on July 5, which required surgery the following day to the pelvis and hip area. He is continuing to recover extremely well at home and will be back in short order when his recovery is complete. I will be sitting in for him today for the conference call. With me, I have Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. For the second quarter of 2026, the company's net sales were flat with last year at $68.6 million. The company had an operating income of $3.093 million in the second quarter of 2026 compared to an operating income of $3.189 million in the second quarter of the previous year. The net income from continuing operations in the second quarter of 2026 was $1.130 million or $0.07 per diluted share versus net income of $1.254 million or $0.08 per diluted share in the second quarter of 2025. At this time, Allen will review our financial results, after which I will have additional comments regarding these results.

Thank you, Kennedy. As Kennedy said, our second quarter net sales of $68.6 million were closely in line with the same quarter in the prior year, but we were able to report a higher gross profit margin for 2026 at 29.5% compared to 29.2% in 2025. On the year-to-date, net sales were $128 million compared to $132 million in the prior year. The 2026 year-to-date gross profit margin was 30.9% or 2.8% higher than prior year, but this did include the favorable impact of recording the IEEPA tariff refund in the first quarter. Adjusted for that refund, the 2026 year-to-date gross profit margin would be 29.1% compared to the 28.1% margin in the prior year. The improved margins in 2026 despite the lower year-over-year net sales was the result of cost reductions and profit improvement initiatives implemented in 2025 in the early part of this year. Selling and administrative expenses were relatively flat year-over-year in the second quarter, but are 3% lower on the year-to-date. Our facility consolidation expense in the second quarter of 2026 included $389,000 for a cost-saving initiative to consolidate a portion of our West Coast yarn processing to our existing plant in Roanoke, Alabama. Our interest expense on the quarter was $2 million compared to $1.9 million in the prior year. On the year, interest expense was $3.9 million compared to $3.4 million in the prior year. For the second quarter of 2026, we had a net income of $1.1 million and $2.2 million on the year-to-date. The prior year net income was $1.2 million in the quarter and a loss of $537,000 for the 6-month period. On our balance sheet, our quarter end net receivable balance, excluding the IEEPA tariff receivable was $27.8 million compared to the prior year-end balance of $23 million. This increase was driven by higher sales activity in the final month of the second quarter compared to year-end. Our net inventory balance was also up slightly over year-end at $67 million in quarter 2 compared to $66.4 million at year-end 2025. Accounts payable and accrued expenses were $42.2 million compared to $38.8 million at the end of the previous year as a result of the higher volume compared to the seasonally low year-end. Net property, plant and equipment decreased by $2.2 million from prior year, which included $2.3 million in depreciation. Capital expenditure was $175,000. The debt on our balance sheet increased by $1 million from year-end. Our availability to borrow today under our senior credit facility is estimated to be approximately $13.3 million, which is subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Kennedy?

Thank you, Allen. We were encouraged by our slightly higher gross margins of 29.5% for the second quarter versus 29.2% in the prior year on flat sales with slightly lower unit volumes. Although we saw raw material increases in the second quarter, the results of our profit improvement initiatives drove this improvement. As mentioned last quarter, we did increase prices in the second quarter to offset some of these raw material increases. We expect that our profit improvement plan will contribute approximately $17 million in year-over-year cost reductions and profit enhancements. The downsizing of our Porterville, California yarn processing operation is substantially complete, and we should begin to see benefits in the second half of this year from this action. The restructuring costs recognized in the second quarter for this downsizing were nearly $400,000 with another approximate $100,000 to be recognized in the third quarter. These restructuring costs for the quarter explain the lower net income from continuing operations in second quarter 2026 versus prior year, even with a slightly higher gross margin on flat sales and flat SG&A spending year-over-year. As mentioned previously, our net sales were flat with slight improvement in our soft surface business, similar to the residential carpet industry results. However, we do not believe that the slight improvement that was seen in residential soft surface during the second quarter means that we are in the recovery phase yet. Our Fabrica wood continued to show significant growth during the period. The tariff transition from Section 122 to Section 301 tariffs on July 24 was pretty much a nonevent as some countries move from 10% to 12.5% tariff rates. This was a welcome relief in terms of the magnitude of volatility that we have seen in this area since Liberation Day in April 2025. Our order activity for the first 5 weeks of the third quarter has been higher than prior year in the mid-single-digit range with greater strength in soft surfaces. However, market conditions remain extremely challenging. Historically low existing home sales, high mortgage interest rates and economic uncertainty from Middle East conflicts have dampened the benefit of record stock market highs. We are still unsure when existing home sales will improve from the current level of 4 million units per year, a 30-year low where we have been stuck for over 3.5 years. Our focus continues to be the creation of differentiated styles for the mid- to high-end consumer with an emphasis on color pattern and textural visuals. In our soft surface offerings, we remain committed to our step into color campaign and believe that our ability to provide more extensive and on-trend color pallets remains a key differentiator in our offerings. We will remain focused on reducing expenses and improving our profitability during this challenging period of economic uncertainty and housing market struggles. We are encouraged by recent initiatives and legislation at the federal level to drive improvement in the housing market. Resolution to current Middle East conflicts and improvement in the housing market will be the key components to the recovery of the flooring market. At this time, we will open the meeting to questions.

[Operator Instructions] Our first question comes from Barry Blank with J.H. Darbie & Co.

First question is, are you seeing more consolidation in the industry? Or has that slowed down any?

Well, Barry, good to hear from you. I'm glad you were able to make the call. We have not really seen much more consolidation on the -- certainly on the soft surface side as most of that consolidation has occurred over the last 10 to 20 years. And also on the hard surface side, there continue to be a large number of suppliers of a lot of imported flooring. So in general, we have not seen a significant consolidation at this point in terms of the suppliers of flooring products to the industry.

What is your feeling on the progress that you're making on the hard surface?

Well, it's a little bit of a tale of 2 cities. We feel extremely good about the progress we're making with our Fabrica wood program. We have not performed as well with our hard surface in the resilient category and our TRUCOR brand. We are doing several things this year to improve that and are starting to see some progress in that area, but we have not performed as well as the industry in the resilient category over the last 18 months or so. We do expect to be able to get that going again, but it has not been as strong a part for us as our wood program and our soft surface.

One more quick question. What is your feeling on when this -- the housing downturn that we have will stop and turn around? I know it depends on interest rates, but are you seeing any movements in that area? Or is it still pretty flat?

It's still very tough, Barry. Unfortunately, as soon as we start to see momentum, interest rates, 30-year mortgage interest rates dipped below 6% at the end of February. And a few days after that, we entered the conflict with Iran. And at this point, we've continued to see interest rates go up, and I think that disrupted some of that activity. The medium, long term is very positive, but we have yet to see those short-term indicators that tide has turned. We are encouraged. I think JPMorgan has pledged a significant amount of money to help in terms of affordable housing and supporting the housing market. Congress certainly has gotten involved, and there are a lot of people that understand that's an important part of the American economy and really the American dream for the people in this country. But we have yet to see really that trigger or anything to help make that happen and really start to turn. We know it's going to. And we know when it does, it will be a significant recovery in terms of magnitude and duration. But unfortunately, we're still waiting until that happens and doing everything we can to operate as effectively, as lean as well as we can until we're able to capitalize on that opportunity.

Our next question comes from Mike Hughes with...

I think you took pricing in April. I was just curious how much of the volume in the quarter was covered by that pricing increase?

That's a great -- I don't have a specific number, Mike. That's an excellent question. I would say probably 1/4 to 1/3 would be my rough estimate in terms of when that -- once that gets implemented, including the timing of that and then the delay from order to shipment cycle and so forth. Maybe a little bit more than 1/3 actually. That would probably be the best estimate I could provide for you.