Earnings call transcript: Dixie Group's Q3 2025 sees sales drop, stock declines

The Dixie Group Inc (DXYN) reported its Q3 2025 earnings, revealing a decline in net sales and a net loss, prompting a negative reaction in the stock market. The company's net sales fell to $62.4 million from $64.9 million in the same quarter last year. Despite the operating loss improving slightly from $2.1 million to $2 million, the net loss widened to $4 million, or $0.28 per diluted share. Following the earnings announcement, Dixie Group's stock price fell by 5.8%, reflecting investor concerns over the financial results.

Key Takeaways

• Net sales decreased to $62.4 million, down from $64.9 million in Q3 2024.
• Net loss widened to $4 million, or $0.28 per share.
• Stock price dropped by 5.8% post-earnings announcement.
• The company introduced new products and focused on high-end market segments.
• Cost reduction efforts resulted in significant savings and debt reduction.

Company Performance

Dixie Group's performance in Q3 2025 showed a challenging environment, with a decrease in net sales compared to the previous year. However, the company managed to reduce its operating loss slightly. The flooring industry faced significant headwinds, including a 30% decline in the soft floor covering industry and challenges in the housing market due to high interest rates and prices. Despite these challenges, Dixie Group outperformed the industry in soft surface net sales.

Financial Highlights

• Revenue: $62.4 million, down from $64.9 million in Q3 2024.
• Operating Loss: $2 million, improved from $2.1 million in Q3 2024.
• Net Loss: $4 million, compared to a $5.8 million year-to-date loss in the prior year.

Market Reaction

Following the earnings release, Dixie Group's stock price fell by 5.8%, closing at $0.69. This decline reflects investor concerns over the company's financial performance and the broader challenges in the flooring industry. The stock's performance was also impacted by its position within its 52-week range, with a high of $0.76 and a low of $0.383.

Outlook & Guidance

Looking forward, Dixie Group remains optimistic about potential market improvements, driven by possible declining interest rates and the wealth effect from higher home prices and stock market performance. The company expects a positive impact of approximately $6 million from recent price increases across its soft floor covering products.

Executive Commentary

Dan Frierson, CEO, emphasized the company's commitment to high-end customer service and operational excellence, stating, "Our team remains committed to high-end customer service, design-focused product introductions, and operational excellence." He also expressed relief over the resolution of PFAS-related lawsuits, noting, "We're mighty glad to get the PFAS lawsuits in the rearview mirror and look forward to a better fourth quarter."

Risks and Challenges

• Continued decline in the soft floor covering industry, down 30% in units.
• High interest rates and housing prices impacting the housing market.
• Limited housing supply not meeting household formation demands.
• Competitive pressures in the flooring industry.
• Potential supply chain disruptions affecting product availability.

Q&A

During the earnings call, analysts inquired about the company's price increases on imported goods and the strong business performance in October, which was 12% above the Q3 average. The management addressed concerns about liquidity, confirming a comfortable position, and discussed potential property sales and equipment financing as part of their strategic initiatives.

Full transcript - The Dixie Group Inc (DXYN) Q3 2025:

Melissa, Conference Call Operator, Dixie Group: Good day, and welcome to the Dixie Group 2025 third quarter earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir.

Dan Frierson, Chairman and Chief Executive Officer, Dixie Group: Thank you, Melissa, and welcome everyone to our third quarter earnings conference call. Our safe harbor statement is included by reference both to our website and press release. For the third quarter of 2025, the company had net sales of $62,379,000, as compared to $64,877,000 the same quarter of 2024. The company had an operating loss of $2,025,000 compared to an operating loss of $2,107,000 in the third quarter of 2024. The net loss from continuing operations in the third quarter of 2025 was $3,998,000, or $0.28 per diluted share. In 2024, the net loss from continuing operations in the quarter was $3,729,000, or $0.26 per diluted share. Third quarter sales got off to a slow start as a result of headwinds in the housing markets tied to high interest rates and high housing prices.

Despite a slow start to the quarter, we saw a strong rebound in sales for September, giving us momentum as we entered the fourth quarter. The average weekly order entry rate for the first month of the fourth quarter was 12% above the average weekly order entry rate in the third quarter, and close to last year's level for the same period. At this time, I will turn the meeting over to Allen, who will review our financial results.

Allen, Financial Officer, Dixie Group: Thank you, Dan. The lower sales volume in the first part of the third quarter resulted in gross margins that were less favorable than what we had seen in the first two quarters of this year. They were still slightly favorable to the prior year at 24.8% of net sales compared to 24.6% in the third quarter of 2024. Year-to-date margins were still very favorable to the prior year-to-date September, at 27% compared to 25.7% prior year. Our selling and administrative expenses were $1.2 million, or 6.8% below the same quarter of the prior year, and they were 2.5% lower on the year-to-date. We've had significant reductions in selling expenses, particularly related to samples and marketing, and they were partially offset by higher legal expenses. Other operating expenses of $1 million in the third quarter included lease income, net of the related expenses, estimated legal costs, and other miscellaneous expenses.

Our interest expense on the year was $5.4 million compared to the 2024 year-to-date interest expense of $4.8 million. We had higher internal interest rates and amortization of financing fees throughout the year that contributed to that difference. The net loss on the quarter was $4.1 million compared to a net loss of $3.9 million in the prior year. Fiscal year-to-date September, we had a net loss of $4.6 million compared to a net loss of $5.8 million in the prior year. Looking to our balance sheet, our September month-end receivables of $26.3 million was up from our seasonally low year-end balance of $23.3 million, and that increase was driven by the comparatively higher sales volume in that latter period.

Our net inventory balance at the end of the third quarter was $68.5 million compared to a net inventory balance of $76.8 million in the third quarter of the previous year. We had a planned reduction of inventory in the fourth quarter of last year, and we continue to manage inventory at the lower levels while maintaining our service to our customers at a timely level. Accounts payable and accrued expenses were $44.1 million compared to $36.8 million in the same period of the previous year. That's as a result of extended terms and timing of payments that were due. Net property, plant, and equipment decreased by $3.5 million from our prior year-end. This included $3.9 million in depreciation year-to-date. Year-to-date capital expenditures have been $446,000. We plan to hold capital expenditures under a maintenance level of approximately $800,000 for this year, and depreciation is expected to be $5.1 million.

The debt on our balance sheet decreased by $916,000 from year-end. Our senior debt balance, net of restricted and unrestricted cash on the balance sheet at the end of the third quarter, was $45.8 million. That's a $4.2 million reduction from that same total at prior year-end. Our balance for term debt decreased by $4 million from year-end. At the end of the quarter, borrowing availability under our new senior credit facility was $10.9 million, which was subject to a $6 million excess availability requirement. Our investor presentation is available on our website at DixieGroup.com. Dan.

Dan Frierson, Chairman and Chief Executive Officer, Dixie Group: Thank you, Allen. For the past three years, the supply of available housing has not kept pace with household formation, which has created a shortage of supply. Consequently, the flooring industry has been impacted by low home sales and consumers postponing large discretionary purchases. Housing turnover has a dramatic impact on the flooring industry. Residential remodeling is the primary driver of our sales, as flooring is often replaced before a home is listed for sale or just after a home is purchased. Over the last three years, the soft floor covering industry has been down approximately 30% in units. To mitigate the impact of floor business, we have curtailed capacity and significantly lowered costs. Over the three-year period, including this year, we have lowered costs by nearly $60 million. This has been accomplished by restructuring our operations and reducing costs in almost every phase of our business.

In preparation for next year, we have developed an additional profit improvement plan of $10 million, which will be 90% in place by the end of the year. We have also continued to minimize capital expenditures and closely manage our working capital. As a result, in the last year, we have lowered our net debt by over $12 million. Obviously, tariffs have been a major area of concern for our industry and industry generally. Since we produce most of our products domestically, it has less impact on our company than some others. We have monitored these actions closely and have initiated price increases to mitigate the impact of the tariff increases when appropriate. We have also increased prices in the fourth quarter on all soft floor covering product, as has most of the industry, which will have a major impact on our financial results next year.

For the third quarter and for the first nine months of 2025, our year-over-year soft surface net sales were down less than 1%, outperforming the industry, which we believe was down closer to 4% in the quarter and 6% for the first nine months. Our commitment to the luxury end of the market has enabled us to continue to outperform the market during these difficult times. A key growth segment has been our Duracil SD collection, which has shown strong growth and gained share of the polyester market. Our high-end carpet segment also had positive growth in the quarter for both nylon and decorative products. Building on this momentum, in the third quarter, we introduced two new Duracil polyester carpet styles and six new decorative carpet styles.

In our hard surface segment, our Fabric of wood is a highlight, with net sales increasing over 17% year-over-year for the first nine months. While our True core segment declined for the quarter, our True core prime WPC collection showed positive signs as the market is shifting toward WPC. While market headwinds persist, especially within residential housing and consumer confidence, our team remains committed to high-end customer service, design-focused product introductions, and operational excellence. Our continued focus on cost reductions and operational efficiency will be instrumental in navigating industry challenges and driving improved profitability in future periods. Subsequent to quarter end, as we said in our press release, the company has entered into a memorandum of understanding to settle two of its PFAS-related lawsuits, and the company has obtained an agreement in principle to be dismissed without prejudice from a third PFAS-related lawsuit.

An estimated liability for the proposed settlement was recorded within the third quarter results, and the legal expenses associated with these cases are included in our administrative expenses. The proposed agreements are subject to certain conditions and final negotiations with the plaintiffs in the latter. Looking forward, we're optimistic that declining interest rates, along with the wealth effect from higher home prices and the stock market, should positively impact floor covering purchases. At this time, we'll open the meeting for questions.

Melissa, Conference Call Operator, Dixie Group: Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Mike Hughes, private investor. Please proceed with your question.

Good morning. Thanks for taking my questions. First, on the price increases, I think the price increases on the imported goods were implemented on September 30 and then the nylon polyester and freight on October 20. I assume there was not really any impact on the just reported quarter. Could you maybe help us quantify the impact from those two actions on the fourth quarter and then into next year? Dan, I think you mentioned that it could have a materially positive impact. How would you define materially positive?

Dan Frierson, Chairman and Chief Executive Officer, Dixie Group: First of all, we've had several increases on imports. We had one earlier in the summer, in addition to what you outlined there, as the first liberation day tariffs were implemented. Overall, the impact will be somewhat muted in the fourth quarter, as you pointed out. They're going into effect in the October-November timeframe, and by the time you receive orders, ship the products, and so forth, there is a lag. I would say in the fourth quarter, there will be relatively small impact, but major impact next year. We think the impact will be somewhere in the $6 million range.

Okay. Great. Great. You've already addressed this to some extent, but some of the bedding and furniture players said business was pretty good in the September quarter through Labor Day, and then it kind of softened. You're saying that you've experienced something a little bit different. Your business actually, did it strengthen in October, or how did it perform in September and then into October?

Mike, first of all, we tend to be a little different from some other people in our industry and in some other home furnishings businesses. The second and fourth quarters tend to be our best quarters. In the high-end, particularly, you begin to see a buildup of orders in September, typically, which manifests itself in higher sales or shipments in October and November, then slowing down in December. Our October business, I think, as we outlined there, our run rate is some 12% over the third quarter. Run rate and very close, very similar to what we experienced a year ago.

Okay. Good. And then the $10 million in cost takeouts that you referenced on today's call and in the press release, that's incremental beyond what you've done so far, correct? So that would be a benefit for 2026 versus 2025 of $10 million. I just want to clarify.

That is incremental from cost reductions previously, but that includes the $6 million of price increase.

Okay. Great. Okay.

Allen, Financial Officer, Dixie Group: It's a year-over-year incremental improvement.

Okay. And then the other operating expenses of roughly $1 million, is that related to the legal settlements?

As we mentioned, we did record an estimate to the other operating expenses based on having reached some agreements here. Prior to this, we were not able to estimate the cost of this. Those agreements are still under negotiation and subject to certain conditions, so they certainly are not final at this time. There is obviously some confidentiality involved in that, but we're happy to be reaching the stage we're at, and we look forward to some conclusion on these lawsuits.

Okay. I'll ask it a little differently. There's another operating expense item in the September quarter of roughly $1 million. Is it fair to think that that will not recur in the December quarter?

There is certainly an understanding that a portion of that would not be recurring, yes.

Okay. And then last item, can you just speak to liquidity and your comfort level? Let's say that the mortgage rates stay where they are for the next, I don't know, 12 to 18 months. Are you still comfortable with your liquidity where it stands today, or would you take additional actions on that front?

We are, as we talked about on the debt level. We're pleased to have been able to manage, certainly within the operating cash flow, and maintain our debt levels and actually reduce those over the time period. As you mentioned, everything's unpredictable out in the market right now. We're happy with the momentum we've seen here coming out of the third quarter and into the fourth quarter. As Dan mentioned, the first quarter is a seasonally low period for us, so we're keeping an eye on that, and we'll be looking at opportunities for financing, additional availability or funds coming from additional financing to help give us a cushion through that period.

Is there any additional land that can be sold off at this point or sale lease specs, anything like that?

Yes. We do have opportunity with several property locations that we are considering and looking at those opportunities as well as some equipment financing and just seeing what presents the best terms and amounts for us.

Okay. I appreciate your time. Thank you.

All right. Thank you, Mike.

Melissa, Conference Call Operator, Dixie Group: Thank you. Once again, as a reminder, it's star one to join the question queue. We'll pause just a moment to allow for any other questions. Mr. Frierson, I'm seeing no other questions at this time. I'll turn the floor back to you for final comments.

Dan Frierson, Chairman and Chief Executive Officer, Dixie Group: Thank you, Melissa, and thank everyone for being on the call. We appreciate your interest. We're mighty glad to get the PFAS lawsuits in the rearview mirror and look forward to a better fourth quarter. Thank you very much.

Melissa, Conference Call Operator, Dixie Group: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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