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The Dixie Group -- Micro Cap Turnaround Story $DXYN
  • Style: Value & Turnaround story


  • Market cap: $40 million (micro cap)


  • Price: ~$3.00 - 3.20


  • Price target: $5.00 - 6.00 (~40% - 70% upside)


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**The Company:** The Dixie Group $DXYN is a manufacturer of carpets and hard flooring based in Dalton, Georgia. CEO Daniel Frierson has been in that position since 1980 and controls all the Class B stock giving him over 50% of the voting rights.

Dixie has struggled for years, losing money 7 of the last 8. This is partially due to competing with much larger players such as Shaw (part of Berkshire Hathaway) and Mohawk. Both are over 15 times Dixie’s size in revenues. Mohawk has been very profitable.

As a smaller manufacturer, Dixie has migrated to the higher end for residential and commercial flooring. In the first quarter of 2021, residential was 83% of revenues, up from 73% one year earlier. Traditionally a carpet manufacturer, in order to return to growth, the company has moved into what it refers to luxury vinyl and wood flooring.

**Thesis:** The recent catalyst is the sale of its commercial flooring division, which was losing money with declining sales. The sale should immediately boost earnings and reduce debt.

Given the already depressed multiple of ~0.14x projected revenues from continuing operations, Dixie does not need to be a strong performer for the stock to move up significantly - it just needs to move from poor results to decent and turning sustainably profitable should do it.

Investing in small companies that are either overlooked or assumed to be dead is my favorite type of investment.

Whether it was $GME at $8/share (now $200), or $CMT at $7/share (now $17), buying a companies at rock bottom means you have a huge margin of safety. Why?
Because poor expectations are already priced in. The #1 rule of investing: Don’t lose money.

**Operating Results:**

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Source: DXYN Forms 10-K and 10-Q

Note that for homebuilders, Q1 2021 is historically the seasonally slowest quarter & Q4 is the second slowest. Residential sales increased 23% year over year in that quarter and represented 83% of sales. Sales in 2020 were significantly impacted by Covid-19, especially in their two seasonally strongest quarters (Q2 and Q3).

Based on residential sales in Q1 2021, which is their seasonally slowest quarter, and the additional strength since with the ongoing housing frenzy, Current revenue run rate of the residential segment could be $300to $350 million. That exceeds sales last year, though that was impacted by Covid.


Risks:

  • The CEO has a long track record of mediocrity and can’t be removed since he owns 50% of voting rights. That said, he made the right move selling a money losing operation and cutting costs. He also made the right move to focus on higher end products.



  • The home building market may be at unsustainable levels. The 60% increase in backlog of homebuilding this year probably won't last beyond 2022. However, with cost cuts at the current run rate, Dixie should be profitable even if the backlog surge reverts back.



  • Dixie is relatively highly leveraged. However, its line of credit has a 2025 maturity and $43 million undrawn.



  • Raw materials costs are elevated. The company announced price increases as of April 1st to offset higher costs. Some may not take effect until late in the quarter so this quarter may be impacted.



  • There are lawsuits filed from 2016-2019 alleging environmental damage. 3M is the lead defendant. See page 11 of the last 10-K for more information.



Why now? There have been significant cost cuts (since 2019 selling and administrative costs reduced by ~$3-4M), residential revenues have taken off (up 23% last quarter) primarily due to a hot housing market (and it doubled residential carpet share from 3% to 6% over the last ten years) and the company’s move into higher end vinyl/wood flooring appears to be gaining traction. The sale of the commercial flooring segment, rapidly growing residential revenues and lower operating costs should lead to solid earnings over the coming few months-year.

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