The Dixie Group Q3 2026 Earnings Call - Third Straight Profit, But Tariffs and Iran War Costs Loom Over Q4

Operator: Greetings, and welcome to The Dixie Group’s third quarter 2026 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Dan Frierson, Chief Executive Officer. Please go ahead.

Dan Frierson, Chief Executive Officer, The Dixie Group: Allen Danzey, our Chief Financial Officer. Our safe harbor statement is included by reference both to our website and press release. First, a few highlights from our press release. Net sales rose 4.6% to $65.2 million, up from $62.4 million in the third quarter of 2025. Gross profit margin improved 180 basis points to 26.6% from 24.8% a year ago, reflecting cost reductions and improved operating efficiencies. Operating income was $2.4 million compared with an operating loss of $2 million in the previous year quarter, a $4.4 million improvement. Net income was $577,000 or $0.04 per diluted share compared with a net loss of $4.1 million or $0.29 per diluted share in the third quarter of 2025.

The third quarter was the company’s third consecutive profitable quarter, bringing net income for the first nine months of 2026 to $2.8 million, compared with a net loss of $4.6 million in the prior year period, a swing of $7.4 million. Business conditions in the flooring industry continue to be challenging. Historically low existing home sales, high and increasing home prices, and high interest rates have all adversely impacted the industry. Additionally, the war in Iran and the midterm elections have added to the uncertainty in the marketplace. Fortunately, the midterm elections are now behind us, and the blue wave has ensured we will have gridlock for the next two years. At this time, I’ll turn the meeting over to Allen.

Allen Danzey, Chief Financial Officer, The Dixie Group: Thank you, Dan. As Dan said, our third quarter net sales were 4.6% higher than the same quarter in the prior year at $62.4 million. Gross margin also improved by 1.8% to 26.6%. On the year-to-date, net sales were $193.2 million, which was close in line with the prior year at $193.9 million. The current year gross profit margins were 29.4% or 2.4% higher than the prior year. This did include the favorable impact of recording the IEEPA tariff refund in the first quarter. Adjusted for that other period impact of the refund, the year-to-date gross profit margin would be 28.2% compared to the 27% margin in the prior year. The improved margins in 2026 were the result of cost reductions and profit improvement initiatives that we implemented in 2025 and the earlier part of this year. Year-to-date selling and administrative expenses were favorable 5.3% to prior year.

This was due to lower sample-related expenses, which included a favorable adjustment for the capitalization of sample display costs. Our facility consolidation expense in the third quarter of 2026 included $85,000 for our cost-saving initiative of consolidating a portion of our West Coast yarn processing to our existing plant in Roanoke, Alabama. Our interest expense on the quarter was $1.9 million compared to $2 million in the prior year. On the year, interest expense was $5.8 million compared to $5.4 million in the prior year, which is due to higher internal interest rates and financing expenses. For the third quarter 2026, we had a net income of $577,000 and a $2.8 million income on the year. The prior year net loss was $4.1 million on the quarter and a loss of $4.6 million for the nine months.

On our balance sheet, our quarter-end net receivables balance was $28.2 million compared to the prior year-end balance of $23 million. The increase was driven by higher sales activity in the final month of the third quarter compared to year-end. Our net inventory balance was also up over year-end at $67.6 million in quarter three compared to $66.4 million at the end of 2025. Accounts payable and accrued expenses were $45.5 million. This compares to $38.8 million at the end of the previous year as a result of higher purchases of raw materials and inventory as compared to the seasonally low year-end. Our net property and plant and equipment has decreased by $3.4 million from the year-end, which includes $3.7 million in depreciation on the year. Capital expenditures were $247,000. The debt on our balance sheet increased by $486,000 from year-end.

Our availability to borrow today under our senior credit facility is estimated to be approximately $14.5 million, which is subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Dan?

Dan Frierson, Chief Executive Officer, The Dixie Group: Thank you, Alan. As all of you know, during the third quarter of 2026, the flooring industry continued to experience sluggish conditions. Existing home sales is a strong indicator for the residential replacement flooring segment, and 2026 marks the fourth straight year of existing home sales at an historic low in the 4 million unit level, down from 6 million several years ago. Despite the difficult environment, our sales for the quarter were 4.6% above year-ago levels. Our soft surface sales were up 7%, while the industry carpet sales, we believe, were essentially flat. Key growth areas included our DuraSilkSD solution-dyed polyester category and our EnVision solution-dyed nylon products. Our new introductions fueled the growth for our DH Floors business, and our Masland and Fabrica brands offer the industry diverse and beautiful color options and continue to outperform the competition.

Our hard surface sales declined, but our Fabrica wood program continued to be a highlight, growing 15% in the quarter. During these difficult times, we have continued to focus on ways to reduce costs and improve operations. We have held capital expenditures to a very low maintenance level, and yet, due to current low capacity utilization, we have ample capacity to grow the business when the market improves. Remember, the longer and deeper the downturn, when better business returns, the upturn will be that much stronger and longer. We entered the year with a profit improvement plan of about $14 million. We have added additional items and expect to reduce costs about $18 million for the year. Part of this additional savings came from the yarn consolidation plan, which resulted in the partial downsizing of our Porterville yarn plant in California.

We had significant cost increases in many areas this year. Medical costs continued to rise more rapidly than we had anticipated. Many of the other cost increases have been the result of the Iranian war. Raw materials, which are a derivative of oil, have continued to rise during the year as the war is prolonged. This has also drastically impacted freight costs of both imported goods as well as product shipment to customers. During the year, we have had two price increases to mitigate the impact of these increases. The first price increase was implemented during the second and early third quarters, and the last one began implementation last week. The increases have been industry-wide and as a result of the major cost increases. Unfortunately, the cost of raw materials and freight have risen rapidly, and the price increases are just now beginning to get into the market.

For this reason, our fourth quarter margins will be somewhat impacted, but the first quarter should return to our more normal margins. We have begun developing a profit improvement plan for next year. We continue to see operational improvements in our plants and believe we can continue to lower operating costs and provide beautiful quality products on a timely basis for our customers. So far in the fourth quarter, our order entry continues to be slightly ahead of last year. At this time, we would like to open the meeting to your questions.

Operator: Thank you. We will now be conducting a question-and-answer session. If you would 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 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 poll for questions. Thank you. Our first question is from Barry Blank with J.H. Darbie & Co..

Barry Blank, Analyst, J.H. Darbie & Co.: Hi, Dan. Got a couple of questions. The first one is, what do you think any more interest rate hikes will do to the industry in the next year? Do you think we’re at the bottom, or can it still go lower if interest rates go up another quarter, half, or three-quarters of a point during that period of time?

Dan Frierson, Chief Executive Officer, The Dixie Group: Barry, from what we can tell, we are pretty much at the bottom and have been now for some time. Certain segments of the market obviously are going to do better there, and I think the upper end continues to do better than the market overall, and I think in a higher interest rate environment, we’ll continue to do that. But we won’t see major improvement in the marketplace, I don’t think, until we’ve seen some lower interest rates.

Barry Blank, Analyst, J.H. Darbie & Co.: Is it only the interest rates that are causing this lower volume, or are there other factors that, not just including the interest rate, that causes this?

Dan Frierson, Chief Executive Officer, The Dixie Group: Well, it depends on how you look at cause and effect. We really look at existing home sales as the best barometer, and that is highly influenced by interest rates. It has been at a level of about 4 million units for the last several years. Prior to that, it was at 6 million and above. It’s at the lowest levels really since the 1990s, but we have a lot more people than we had in the 1990s. So it’s at a very historical low point, and I think at some point, we’ll revert to the mean.

Barry Blank, Analyst, J.H. Darbie & Co.: Are you seeing any competitors dropping out of the business, or everybody’s just pretty well being maintained status quo?

Dan Frierson, Chief Executive Officer, The Dixie Group: We have not had, to my knowledge. We had a competitor a year ago drop out, but since then, no, we have not seen any further reduction. Hard surface business may be a little different in that there are many, many players there. In the soft surface, there are just not many players today. In the hard surface area, I would think we probably will see some shakeout in the next year or two.

Barry Blank, Analyst, J.H. Darbie & Co.: Well, another question is, with the stock price as depressed as it is there any way that you could reinitiate a stock buyback program, or are you prohibited of the covenants on your borrowing?

Allen Danzey, Chief Financial Officer, The Dixie Group: We do have opportunity on that. We work with our board, of course, as far as making a decision on what we want to do on that front, and it is something that we do consider each quarter. But nothing has. We do not have anything active at this time.

Barry Blank, Analyst, J.H. Darbie & Co.: Do you have a buyback program in place if you so desire to buy something?

Allen Danzey, Chief Financial Officer, The Dixie Group: Yes, we would be able to initiate that if we so desired and the board approves that as well.

Barry Blank, Analyst, J.H. Darbie & Co.: Okay, my last question is there any way that you could give guidance for the next year from the worst to the best case scenarios and somewhere in between, so have some sort of numbers to think about for the next year?

Dan Frierson, Chief Executive Officer, The Dixie Group: Barry, we have not given guidance. Quite honestly, it’s been a very volatile market, very difficult to predict. Obviously, if we had made a prediction at the beginning of 2026, not knowing about the Iranian situation, we’d have been very far off. I think in such a volatile time, it’s just very difficult with credibility to give that kind of guidance for us.

Barry Blank, Analyst, J.H. Darbie & Co.: Okay. Well, thank you very much. Appreciate it.

Dan Frierson, Chief Executive Officer, The Dixie Group: Thank you, Barry.

Allen Danzey, Chief Financial Officer, The Dixie Group: Thank you, Barry.

Operator: Our next question is from Mike Hughes, private investor.

Mike Hughes, Private Investor: Good morning. Thanks for taking my questions. First, a detailed question for Alan. I was just wondering, what was the capitalized display structure amount in the third quarter, and did it have an out-of-period effect in that number?

Allen Danzey, Chief Financial Officer, The Dixie Group: Yeah, we have not disclosed the actual amount on that. I can say that in our investor packet, you’ll see our profit improvement plan that we do show the $4.5 million in savings from samples and marketing, and the display amount did make up more than half of that. But we also had other items such as freight savings and other cost eliminations included. The amount that we did record is all related to this year. There was a small portion or a portion of this that was from prior quarters. But the display structures that we use stay in use for several years, and with the change in terms that we did this year, we were able to start capitalizing these and amortize them over their expected life rather than expensing them all up front.

And that brings our accounting in line with how we actually get the benefit from these assets. So it puts us in a position now that we’ll be able to flow these through with amortization over time instead of hitting an expense all at once.

Mike Hughes, Private Investor: No, that makes sense. But for the first half, meaning the first and second quarter, you were still expensing the structures directly?

Allen Danzey, Chief Financial Officer, The Dixie Group: Yeah, we were recording expense for this. We do have an amount that was recorded per our usual process and our plan that was brought into our expenses during the first and second quarter. Yes, it was there in the first and second quarter, and we just did a slight true-up in the third quarter to get everything in line from an accounting standpoint.

Mike Hughes, Private Investor: Okay. But the SG&A was down $2 million sequentially. Is it fair to think a majority of that decline was related to this journal entry, or was it part of the cost savings program?

Allen Danzey, Chief Financial Officer, The Dixie Group: Yes, it’s fair to say that was a significant impact on the selling expenses for the quarter. As I said, we did have other favorable cost savings this year that is rolling through there as well.

Mike Hughes, Private Investor: Okay, great. Dan touched on this a little bit, but what’s the incremental cost saves number that’s still in front of you, if anything?

Dan Frierson, Chief Executive Officer, The Dixie Group: Most of that has been accomplished at this point, almost all of it. We are beginning on next year’s cost reductions.

Mike Hughes, Private Investor: Okay. I guess my last question, any update on the potential of raising some additional debt capital?

Allen Danzey, Chief Financial Officer, The Dixie Group: We continue to work on that front. Nothing that we can put in front of you at this time. We did just meet with our board and talked about our opportunities there, and we do plan to take advantage of opportunities that we have in front of us with available assets that we could look at for some financing.

Mike Hughes, Private Investor: Okay. Thank you for your time.

Allen Danzey, Chief Financial Officer, The Dixie Group: All right. Thank you, Mike.

Dan Frierson, Chief Executive Officer, The Dixie Group: Thank you, Mike.

Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to management for any closing remarks.

Dan Frierson, Chief Executive Officer, The Dixie Group: Thank you, Paul, and thank all of you for being on the call. We appreciate your interest and your questions and look forward to being with you at the end of the year. Thank you.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you again for your participation.