After excellent second quarter results, earnings estimates have been rising for The Dixie Group (DXYN) sending the stock to Zacks Rank #1 (Strong Buy) with an ‘Outperform’ recommendation.

About the Company

The Dixie Group is a manufacturer and marketer of carpet and rugs to high-end residential customers through the Fabrica International, Masland Residential and Dixie Home brands. The company began its operations in 1920 and transitioned from textiles to floorcovering in the 1990s.

In 2004, it refined its focus on upper-end markets—both commercial and residential. The company is known for its innovative styling, design and colors.

Excellent Second Quarter Earnings

On July 31, 2013, DXYN reported its second quarter operating results. The quarter resulted in earnings of $0.13 per share, compared with a loss of $0.03 per share for the same quarter of 2012. The results were substantially ahead of the Zacks Conesus Estimate of $0.04 per share.

Dixie had a year-over-year sales improvement of 26% with sales growth in all areas of the business. The management believes that despite potential macro-economic issues, conditions in the upper-end residential portion of the industry will continue to improve during 2013.

The commercial market also appears to be stable with the highest growth in the modular carpet tile segment. During the second quarter, 57% of the sales were derived from the residential market, while 43% were from the commercial market.

This was the second consecutive quarter of more than 200% earnings surprise by the company, after a disappointing financial performance last year. It appears that the growth initiatives adopted by the company during 2012 including continued investments in new products processes, are finally delivering results.

Positive Earnings Estimates Revisions
After excellent second quarter results, analysts have revised their earnings estimates for the company in the past few weeks. Zacks consensus estimates for the current quarter and the current year now stand at $0.09 per share and $0.38 per share respectively, up from $0.02 per share and $0.19 per share, 60 days ago.

Solid Industry Outlook

While rising interest rates seem to be affecting the housing market in general, the high-end segment of the market continues to be resilient. In addition to new housing, remodeling activity remains on the uptrend—which is positive for the carpet and floor covering segment of the home-furnishing industry. Rising stock market has also contributed to “wealth-effect”, which results in higher consumer spending on such products. Textile and home-furnishing industry currently has a Zacks Industry Rank of #3 (out of 265).

The Bottom Line

DXYN is a Zacks Rank#1 (Strong Buy) stock. The company also earned a (longer-term) Zacks recommendation of “Outperform”, based on its improved prospects. Further top Zacks Industry Rank also indicates strong chances of outperformance in the short- to medium- term.

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