T-Rex (T-REX -20.34%) used cost controls to beat profit margins despite lower-than-expected revenue. However, investors focused more on the company’s weak outlook for future demand.

After the earnings announcement, the stock plunged, losing 21% at 1:30 p.m. ET.

Declining sales in a difficult market

Trex is a manufacturer of composite decking and wood alternatives. The company is tied to the construction and renovation industry and its value proposition includes higher initial costs in exchange for lower ongoing maintenance costs.

With the tough housing market and consumers feeling the impact of higher inflation, it’s no surprise that Trex is facing headwinds. The company earned $0.80 per share for the quarter, which was better than the consensus estimate of $0.78 per share. However, revenue of $376 million fell short of expectations of $388 million.

Higher utilization, cost reductions and other efficiency initiatives led to an 80-point increase in gross margin to 44.7%, which in turn led to a beaten profit margin. But Trex is not optimistic about the coming quarters. The company forecast third-quarter revenue of $220 million to $230 million, well below the consensus estimate of $290 million. For the full year, Trex expects revenue of $1.13 billion to $1.15 billion, compared to the consensus estimate of $1.24 billion.

“Given the uncertain economic outlook and weakness in the entry-level segment, we are cautiously adjusting our full-year revenue forecast,” CEO Bryan Fairbanks said in a statement.

Is Trex stock a buy?

Sales rose year-over-year, but not as much as analysts had hoped. Trex is the market leader in an attractive category, but it’s hard to say how quickly these headwinds will subside.

In theory, the much-discussed looming interest rate cuts should boost demand for homes and renovations. However, there remains significant uncertainty about consumer health, and Trex products tend to be more expensive than wood alternatives.

Trex remains an attractive long-term investment, and patient investors willing to ride out the downturn could make good profits here. However, buyers should not expect the stock to recover overnight.