Flexsteel Industries Inc

NASDAQ:FLXS

Earnings Call Transcript 2025-Q1

[Operator]

Good day, and welcome to the Flexsteel Industries First Quarter Fiscal Year 2025 Earnings Results. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mike Ressler, CFO. Please go ahead

[Michael Ressler, executive]

Thank you, and welcome to today's call to discuss Flexsteel Industries first quarter fiscal year 2025 financial results. Our earnings release, which we issued after market close yesterday, Monday, October 21 is available on the Investor Relations section of our website at www.flexsteel.com under News & Events.

I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks, and we will then open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements which can be identified using words such as estimate, anticipate, expect and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Such risks and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings as applicable.

These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on our website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'll turn the call over to Derek Schmidt, Derek?

[Derek Schmidt, executive]

Good morning, and thank you for joining us today. I am pleased to share with you our first quarter results. We continue to execute well and delivered strong sales growth, sizable year-over-year profit improvement and continued positive free cash flow in the quarter. While industry demand remains lackluster due to challenging macroeconomic conditions, we continue to build growth momentum and delivered roughly 10% sales growth in the quarter, which represents our fourth consecutive quarter of mid-single to low double-digit year-over-year growth.

Encouragingly, the sources of our growth are numerous, which gives me increased confidence that our growth momentum is sustainable. Most important, we continue to drive growth both through share gains in our core markets and new growth in expanded markets and largely attribute our growth success to the investments we've made in new product development, innovation, customer experience and marketing.

Given the attractive returns from these investments, we will continue to aggressively pursue new investment opportunities that both unleash incremental growth in our core markets and accelerate penetration in expanded markets with long-term profit potential. While I'm thrilled with the success of our consistent top line growth over the past 12 months, particularly considering industry headwinds, I'm also especially pleased with our progress driving meaningful year-over-year profitability improvement.

Operating margin was 5.8% in the quarter, up compared to 2% in the prior year quarter, and represents our fifth consecutive quarter of year-over-year adjusted operating margin improvement. The levers driving our consistent profit improvement are unchanged and working effectively and include sales growth leverage, strong operational execution and productivity and product portfolio management.

As we look forward to the remainder of our fiscal year 2025, our outlook for the industry and broader economy remains largely unchanged from what I shared last quarter. While there are certainly some bright spots to highlight, namely the start of the Fed's interest rate reductions, progress taming inflation and continued strength in the labor markets, we expect that weak consumer demand will continue to be a headwind for the industry in the near term, given the cumulative toll of inflation on consumer spending, the absence of a meaningful housing recovery and ongoing uncertainty over the U.S. presidential election and consequences on potential policy changes impacting the economy.

Despite challenging industry conditions, we remain optimistic about our ability to continue growing profitably in a difficult environment. and remain committed to our strategies and investments to pursue new growth. The High Point furniture market kicks off this week, and we will be showcasing another impressive round of new product introductions. In total, we're introducing 27 new product groups and 10 line extensions, comprising 237 unique SKUs.

This magnitude of introductions combined with a very successful new product launch this past spring at April market will make calendar 2024 a record year for new product activations for Flexsteel, and will be a key driver of continued growth both in fiscal year 2025 and beyond. We continue to pursue products with unique innovations informed by validated consumer insights, This approach is ensuring that we bring differentiated, relevant products to market, notably with great collaboration between our marketing, product and sourcing teams. We've developed a comprehensive new recliner program that offers consumers a very simple, personalized shopping experience that fits within 100 square feet of retail space. Branded Perfect Match, this program consists of 5 unique tiers of recliners with a logical progressive feature set and pricing strategy.

All the new recliners also feature our new soft-close mechanism, a notable value addition for consumers. The program is turnkey for retailers and includes powerful consumer-oriented messaging and marketing through point-of-sale materials, digital landing pages and website content. We expect 90% of our retailers to place this program by the end of the calendar year and for the program to be a key part of our continued core market growth in the second half of the fiscal year.

October High Point market will also feature expansions to our Charisma brand, Zecliner lineup and case goods collections, all of which are important drivers in our expanded markets growth strategy. Another important growth element where we are making notable strides is expansion with our largest, most strategic customers in the core independent retail channel. With individual account plans tuned and tailored for each of these accounts, we believe we have a formula that significantly enhances our value proposition to these large growing retailers.

What's leading to an increased placement in store and online with these customers is a powerful combination of exclusive new product development, fabric and cover collections that elevate each retailer's unique merchandising strategy, co-investment and demand generation initiatives, prioritize production scheduling and a differentiated customer experience, in turnkey marketing content. Demonstrated success with several existing customers is paving the way to expanded distribution with new customers, especially in attractive, growing and under-penetrated geographical markets.

At the same time, we are growing our independent furniture retail distribution, we also continue to make good progress in expanding our brand's reach into the big box and e-commerce channels. I'm proud of our team's strong start to fiscal year 2025 and encouraged by our trajectory and prospects for continued profitable growth.

I'll be back momentarily to share my thoughts on our outlook. With that, I'll turn the call over to Mike, who will give you some additional details on the financial performance for the first quarter and the financial outlook for the second quarter and full year fiscal 2025.

[Michael Ressler, executive]

For the first quarter, net sales were $104 million or growth of 9.9% compared to net sales of $94.6 million in the prior year quarter. As Derek mentioned, this marks our fourth consecutive quarter of year-over-year sales growth and near the high end of our guidance range of $100 million to $105 million.

Sales orders for the quarter were $100.8 million or 9.4% above prior year quarter orders of $92.1 million. Sales order backlog at the end of the period was $60.5 million. From a profit perspective, the company delivered GAAP operating income of $6 million or 5.8% of sales in the first quarter. The 5.8% operating margin was near the top end of our guidance range of 5.0% to 6.0% and a 380 basis point increase from the prior year quarter.

From a balance sheet and cash flow perspective, the company generated $2.4 million of operating cash flow in the quarter, higher profit and effective working capital management more than offset annual cash outflows for cash incentives and software and insurance renewals. The company received $1.2 million in proceeds from a life insurance policy in the period and invested $0.4 million in CapEx, primarily for modernization of ERP systems.

We ended the quarter with $98.3 million of working capital, a cash balance of $5.7 million, and a balance on our line of credit of $3.6 million.

Moving to our outlook. Sales guidance for the second quarter is between $103 million and $107 million, reflecting 3% to 7% growth compared to the prior year quarter. Sales growth will be driven primarily by unit volume growth and to a lesser extent, pricing from ocean freight surcharges to offset higher ocean freight costs.

Regarding profitability, we expect gross margins between 21.5% and 22% in the second quarter, driven by sales growth leverage, partially offset by higher ocean freight costs. We expect gross margins to expand modestly throughout the fiscal year with sales growth leverage, cost savings initiatives and profitability of new product mix more than offsetting supply chain inflation. We will continue to prioritize investments that accelerate our growth strategy and generate the highest return on investment and expect SG&A costs between $16.5 million and $17.0 million for the quarter.

We project operating income as a percentage of sales in the range of 5.5% to 6.5% for the second quarter and expect operating income margins to improve throughout the year in parallel with forecasted gross margin improvement. The most significant driver of variability in the second quarter guidance range are consumer demand, competitive pricing conditions and ocean freight rates, all of which will be shaped by macroeconomic factors.

Regarding our cash flow outlook, we expect free cash flow for the quarter in the range of $5 million to $10 million and expect to be debt-free by the end of the quarter. Near-term priorities for cash remain resourcing new innovation and funding capital expenditures. For the second quarter, we expect capital expenditures between $0.5 million and $1.0 million primarily for modernization of our ERP systems and supply chain maintenance.

Now I'll turn the call back over to Derek to share his perspectives on our outlook.

[Derek Schmidt, executive]

Thanks, Mike. While macro conditions will likely continue to suppress industry growth in the near term, I believe that our exceptional talent, combined with the foundational growth investments we've made have positioned us to successfully drive attractive top line growth and even stronger earnings throughout fiscal year 2025.

We have a balanced, diversified portfolio of growth initiatives supported by tight alignment of both financial and human resources that gives me confidence that our growth momentum is sustainable. Similarly, I'm excited about our prospects for continued profitability improvement throughout the remainder of fiscal year 2025 and beyond. We have ample manufacturing and distribution capacity to support continued growth with minimal fixed cost investment, and as such, believe the earnings growth potential of the company is compelling with additional sales volume leverage.

In summary, Flexsteel is financially strong, growing sales, improving profitability, generating cash and aggressively investing for the future. We have confidence in our ability to continue delivering healthy results in fiscal year 2025 and as important to position the company for long-term profitable sustainable growth.

With that, we will open the call to your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski, analyst]

Certainly terrific performance in a tough environment. So first, I just wanted to see if you could talk about the sales gains that you saw? Maybe just separate the core business versus sales from your growth initiatives. Can you speak to that, please?

[Derek Schmidt, executive]

We're seeing really nice...

[Operator]

I apologize there. The speaker line was muted. Go ahead with your question again there.

[Anthony Lebiedzinski, analyst]

Let me repeat the question because I didn't hear your answer, Derek. So again, just wanted to focus in on just kind of if we could separate the sales gains in your core business versus what you're seeing as far as sales growth from your growth initiatives?

[Derek Schmidt, executive]

Yes. Encouragingly, Anthony, we're seeing growth across all aspects of our growth initiatives. So we saw a really nice growth in our core business. I won't give you a specific number, but from a dollar perspective, the majority of our year-over-year sales dollar growth was from our core business, and we've got really nice traction and momentum, especially with our growth initiatives with strategic accounts.

But then in terms of expanded markets, we're seeing positive year-over-year growth across the vast majority of our initiatives in that bucket. So Zecliner, case goods are lower kind of price more modern kind of Flexsteel. So I feel really good about just again how we're performing over the entire breadth of our growth initiatives.

[Anthony Lebiedzinski, analyst]

That's great to hear. And then just wondering if you could comment on what you're seeing as far as the actual sell-through to consumers from your retailers, are you seeing similar trends as the sell-in to the retailers. So just wondering if you could speak to that.

[Derek Schmidt, executive]

Yes, I actually spent a good portion in the last 3, 4 weeks, actually visiting retailers across the United States. And the vast majority of them are in really good inventory positions. So we're seeing a pretty balanced view of incoming orders and outgoing shipments. So in terms of our book of business, the 2 are moving in parallel. All that said, I mean, what we're still consistently hearing from retailers is that traffic levels are down, business is down and most retailers are cautiously optimistic that once we move past the uncertainty of the presidential election, we'll see our normal kind of seasonal kind of pick up going into the holiday season.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And then you talked about also your sales to e-commerce retailers still weak, which has been a continuation of recent trends. I mean, do you have sort of a time frame as to when you think that could potentially reverse? How do you think about that?

[Derek Schmidt, executive]

When we talk about kind of e-commerce, we almost need to bifurcate the different portions of our business. So actually, our big box in Flexsteel e-commerce business was up 10% year-over-year. If you look at just our e-commerce business for our homestyles brand, that was down 26%. So it's that portion of our business, Anthony, you understand that's ready-to-assemble furniture, lower price points and that part of the market has become extremely competitive.

It's also, I think, the conditions for that -- those price points have probably been worse than the higher price points. So it's a tougher category, more competition. And so it's really that part of our business, that's a drag. But I'm still continuing to be very pleased with how we're performing in big box and e-commerce for our Flexsteel brand.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And then looking at the SG&A, it was actually down in dollars actually versus last year. So what drove that? I know you spoke to structural cost savings in your press release. So maybe if you could just provide some more details as to what you're doing there and how should we think about SG&A going forward?

[Michael Ressler, executive]

Yes, Anthony, I'll take that one. So the savings we're realizing this year is really a result of kind of actions we took last year. So we've got a smaller executive leadership team in place. And we've also just -- like we do in our operations, we reviewed all of our SG&A spending and look for areas to remove some costs that wasn't generating a high ROI. So on a go-forward basis, we expect to try to manage SG&A spending in that 15.5% to 16% range because we want to continue to reinvest back in the business, but also going to be thoughtful not to add too much structural costs just given kind of the dynamic environment.

[Anthony Lebiedzinski, analyst]

Got you. Okay. That makes sense. Okay. And then my last question here. So I guess looking at your comment about having ample manufacturing and distribution capacity. So assuming that pricing doesn't change much, I mean how much do you think you guys can do in terms of annual revenue before you need to think about expanding that manufacturing and/or distribution capacity.

[Michael Ressler, executive]

Yes. What we said, Anthony, is that our current network can support 20-plus percent growth both within our manufacturing as well as kind of within our distribution network.

[Anthony Lebiedzinski, analyst]

Got you. I look forward to seeing you and the new products at High Point later this week.

[Michael Ressler, executive]

Great. Thanks, Anthony.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Derek Schmidt for any closing remarks.

[Derek Schmidt, executive]

Thank you. In closing, I want to thank all of our Flexsteel employees for their hard work and dedication in driving the company's strong performance during the first quarter. I'm also thankful to all of you for participating in today's call. Please contact us if you have any additional questions, and we look forward to updating you on our next call. Thank you, and have a good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.