Flexsteel Industries, Inc. (FLXS) Earnings Call Transcript

Good morning, and welcome to the Flexsteel Industries First Quarter Fiscal Year 2027 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flexsteel Industries. Please go ahead.

Thank you, and welcome to today's call to discuss Flexible Industries First Quarter Fiscal Year 2027 Financial Results. Our earnings release, which we issued after market close yesterday, Monday, October 26, and 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 then we will 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. Press release available on the website contains the financial and other quantitative information to be discussed today. And with that, I'll turn the call over to Derek Schmidt. Derek?

Good morning, and thank you for joining us today. I'm pleased to share our first quarter fiscal year 2027 results. Despite a challenging macroeconomic environment, and significant inflationary pressures across our supply chain, our team continued to execute well, delivering solid sales growth and profitability while advancing the strategic initiatives that we believe will drive long-term shareholder value. During the quarter, net sales increased 3.2% compared to the prior year toward the upper end of our guidance range and marked our 12th consecutive quarter of year-over-year growth. Excluding the impact of our exit from the Home Styles ready-to-assemble furniture category, Sales in our continuing Flexsteel branded business grew approximately 5%. Encouragingly, our growth momentum extends beyond reported sales. Orders increased approximately 5% during the quarter and our ending backlog grew 8.2% compared to the prior year. These trends, combined with the continued performance of our key growth initiatives reinforce our confidence in the underlying strength of our business. Our growth continues to be driven by several complementary initiatives, including new product interactions, share gains with strategic accounts and expansion in our health and wellness category. These initiatives are performing well despite continued softness in the broader furniture market, providing further evidence that our investments in consumer insights, innovation, product development and customer experience are strengthening our competitive position. From a profitability standpoint, our results were solid. Although impacted by an unfavorable foreign currency translation loss late in the quarter. Reported GAAP operating margin was approximately 6%, below our guidance range of 6.5% to 7%. However, our results included approximately $800,000 of unfavorable foreign currency impact related to the strengthening U.S. dollar against the Mexican peso. Excluding the 70 basis point impact, operating margin was solid and in line with our expectations for the quarter. Given the significant inflationary pressures we're experiencing, I am encouraged by our underlying operating performance and ability to largely offset these cost headwinds to maintain healthy margins. Ocean transportation rates have nearly doubled over the past 6 months, while domestic transportation costs have increased substantially with surging diesel fuel prices. These pressures, along with higher costs for materials and sourced products are creating difficult operating conditions for our industry. Our teams continue to respond to these challenges with urgency and discipline identifying cost savings opportunities, improving productivity, managing our product portfolio and implementing modest pricing actions to mitigate these pressures. While we've offset a portion of the inflationary impact, these cost pressures are expected to remain a meaningful near-term challenge. Looking ahead, our outlook for the broader industry remains measured Consumer confidence continues to be weak and households are increasingly selective about discretionary purchases as inflation and higher energy cost consuming greater share of budgets. Holding affordability remains challenging and rising mortgage rates continue to constrain housing turnover, an important driver of furniture demand. Geopolitical uncertainty particularly the ongoing conflict in the Middle East continues to create volatility in energy and transportation markets. In addition, tariff policy remains a significant source of uncertainty including the scheduled increase in Section 232 tariffs on upholstered furniture from 25% to 30% on January 1, 2027. These factors could continue to pressure both industry demand and profitability in the near term, and we recognize the importance of remaining agile as conditions evolve. However, what gives me the greatest confidence in Flexsteel future is not an expectation that the external environment will improve. It's the progress for making strengthening the capabilities that allow us to compete more effectively in any environment. Over the past several years, we've invested deliberately in becoming a more consumer-driven and innovation-led organization. And what I'm particularly encouraged by today is how these investments are beginning to work together as an integrated system. We're lifting more closely to consumers translating those insights into meaningful innovation, sharpening our product platforms and bringing differentiated products to market with stronger marketing and customer support. Our recent fall High Point furniture market provided several compelling examples of that progress. First, we're strengthening our core made-to-order seating business through consumer-led innovation. Our research continues to reinforce that comfort quality and durability are among the most important factors influencing furniture purchases. Consumers value personalization, but they also want the shopping experience to be simple and intuitive. These insights directly inform the introduction of our new 6000 series featuring SixFlex, the sixth generation of our patented Blue Steel spring technology and our new Comfort Choice program. SixFlex advances the comfort and performance of our signature seating technology, while Comfort Choice allows consumers to select from 3 distinct comfort levels without adding unnecessary complexity to the buying experience. What excites me about this launch is that we're taking 1 of Flexsteel's most enduring competitive advantages, comfort and quality, and they can get even more relevant to today's consumer. It's a strong example of how consumer insights and innovation can reinforce the core of our business. The response from our retail partners has been overwhelmingly positive to this new introduction which provides us optimism about accelerated growth in this important category. Second, we're significantly expanding our opportunity in health and wellness. Our consumer research has identified attractive opportunities across 4 distinct wellness needs, sleep, care, restore and assist. Building on the success of Z Kleiner and sleep, we're expanding into care, specifically nurse reseating through our new Embrace brand. We're also expanding in a restorative wellness through our Zen collection, and we're expanding our assist or mobility and independent solutions through our new RISE collection. Together, these 4 wellness platforms broaden our opportunity to serve consumers across different life stages, from young families to aging adults with products designed around meaningful need in the home. We believe our consumer-led approach positions Flexsteel to participate in attractive new categories while building on our long-standing strengths in comfort, ergonomics and durability. Third, we're introducing differentiated innovation that creates new reasons for consumers to choose Flexsteel. Our Pulse immersive seating platform is a strong example. With the introduction of Stratus, our second generation of immersive seating. We're elevating the home entertainment experience to a whole new level. By leveraging new innovation in advanced sound and sensor technology, we're delivering the first fully Dolby Atmos certified solution that spans both the sound bar and the sound system integrated into furniture and in the process setting a new bar for a truly amazing immersive seating experience. We're also expanding our partnership with nationally recognized broadcaster, Dan Patrick, to build awareness and consumer demand for pulse following our work together supporting Zer. This combination of meaningful product innovation and targeted marketing is an important part of how we're working to strengthen our brand and drive consumer traffic to our retail partners. Finally, we're continuing to strengthen our position in case goods. Our statements collection is benefiting from deeper consumer insights into how people shop for bedroom, dining and occasional furniture. We're focused on quality coordinated designs and functional features that simplify purchasing decisions while helping retailers present compelling whole home solutions. So in summary, while these 4 initiatives span different product categories, they share a common foundation, understanding consumer needs, developing differentiated solutions and executing effectively with our retail partners. And that's the larger strategic point I want to emphasize. Flex Steel is becoming a more consumer-driven and innovation-led company, supported by increasingly disciplined execution. These capabilities are not operating independently. They are reinforcing 1 another. Creating a stronger foundation for sustainable growth and market share gains. We recognize that the external environment may remain challenging. Consumer demand could continue to be uneven and inflationary and tariff-related pressures may create additional volatility in our financial performance. But even in challenging markets, companies are rewarded that are focused differentiated and disciplined. They reward companies that understand their consumers, support their customers and consistently bring compelling products to market. And that's exactly what we're working to do at Flex Steel. We're not standing still in a difficult environment. We're strengthening the core capabilities that have made it Flexsteel a trusted brand for generations while creating new reasons for consumers and retailers to choose us. Combined with our strong balance sheet, disciplined operating model and continued strategic investments, these capabilities give me confidence in our ability to no gate near-term challenges and drive long-term profitable growth and shareholder value. With that, I'll turn the call over to Mike, who will provide additional details on our first quarter financial performance and outlook. Mike?

Thanks, Derek. For the first quarter, net sales were $114.0 million, or growth of 3.2% compared to net sales of $110.4 million in the prior year quarter. As Derek mentioned, this marks our 12th consecutive quarter of sales growth compared to prior year periods and near the upper end of our guidance range of 1% to 4% growth. The increase was primarily driven by soft seating products partially offset by lower sales of our Homestyle branded ready-to-assemble category, which we are exiting. Sales of case goods were relatively flat versus the prior year quarter. Sales of our backlog at the end of the period was $77.7 million, which was up roughly 8% versus the prior year ending backlog. From a profit perspective, the company delivered GAAP operating income of $6.9 million or 6.0% of sales in the first quarter. The GAAP operating income included a $0.8 million or 70 basis point unfavorable impact from foreign currency translation of our peso-denominated Mexico assets resulting from the significant strengthening of the U.S. dollar in the quarter. Excluding the impact of the foreign currency translation loss, results were in line with expectations for the quarter. Gross profit margin for the quarter was 22.0% and compared to 23.5% in the prior year quarter. The decrease was primarily driven by a 130 basis point negative impact from foreign currency translation as the current quarter included a translation loss of $0.8 million, while the prior year quarter included a translation gain of $0.7 million. Inflation in ocean freight, domestic transportation, raw materials, and source finished goods driven by higher energy prices was mostly offset by cost savings, product portfolio management and modest price increases in the quarter. SG&A expenses for the quarter were $18.2 million or 16.0% of sales versus $17.0 million or 15.4% of sales in the prior year quarter. The increase was driven by investments in consumer insights, innovation, new product and marketing and demand generation to execute our growth strategy and strengthen our operating model. Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of $4.4 million, working capital of $80.5 million and no bank debt. Moving to the outlook. We project sales of $119.5 million to $123.0 million in the quarter or growth of 1% to 4% led by continued growth in soft seating products, partially offset by a decline in home styles branded ready-to-assemble products. The key determinant to our top line forecast with the largest variability will be consumer demand. From a profit perspective, we project operating margin in the range of 6.5% to 7.0% in the quarter. Relative to the first quarter, we expect volume leverage, cost savings initiatives product portfolio management and modest price increases to largely offset incremental energy-driven inflation we are experiencing within ocean freight, domestic transportation and materials. With that, I'll turn the call back over to Derek to share his closing perspective.

Thanks, Mike. As we look ahead, we recognize that the external environment remains challenging. Consumer confidence continues to be pressured by inflation and economic uncertainty while elevated transportation and material costs, geopolitical developments and evolving tariff policies create additional risk for our industry. While we can control these external forces, we can control how we respond. And I believe our first quarter results demonstrate that we're responding effectively. We delivered another quarter of sales growth, strengthened our order backlog and continued to gain traction across our key growth initiatives. All while navigating significant cost pressures. These results reinforce my confidence in both our strategy and the capabilities we've built to execute it. What excites me most is the progress we're making towards becoming a more consumer-driven and innovation-led company. Our investments in consumer insights, product development, innovation and marketing are increasingly working together to create differentiated products, strengthen our customer partnerships and generate new opportunities for growth. We're not relying on a recovery in industry demand to drive our success. We're focused on creating our own opportunities through better execution, stronger innovation and continued market share gains. And while we'll remain financially disciplined and agile in managing near-term challenges, we're equally committed to investing in the capabilities that will strengthen our competitive position and create sustainable long-term value. We believe our strong balance sheet, resilient operating model and increasingly differentiated growth strategy position Flexsteel well to navigate the uncertainties ahead while continuing to build a stronger business for our customers and shareholders. With that, we'll open the call to your questions. Operator?

[Operator Instructions] And our first question comes from Anthony Lebiedzinski from Sidoti.

Certainly nice to see another quarter of revenue growth here in your first fiscal quarter. So just curious for your core FlexSteel branded products, can you just talk about overall pricing versus unit volumes, what you saw in 1Q? .

Anthony. Yes, I would say when you look at pricing kind of on average versus the prior year, I would say it's up about 10%. Clearly, there's been a lot of changes with 25% tariff on upholstered furniture. So 10% increase overall on average. What's encouraging though is we did actually have meaningful unit volume growth within several of our key growth initiatives, including penetration and growth with strategic accounts. we've seen unit volume growth across several new health and wellness category items and then also we're seeing nice unit volume with our new immersive sound solutions we've introduced.

Got it. That sounds pretty good. Okay. And then -- so I know you touched on this a little bit here, but obviously, with the higher ocean freight costs and domestic transportation costs on the rise, you also talked about material costs as well. It sounds like you're looking to do some price increases. Can you perhaps share more details as to the extent of those price increases? And then -- you touched on the Section 232 tariffs. Will there be another price increase in January if that goes through as expected? .

Yes, Anthony, let me hit those points real quick. So yes, there's certainly been meaningful cost pressures on the business starting back to kind of before the conflict in the Middle East, we've seen ocean freight rates nearly double what they were 6 months ago. Certainly, everyone pays attention to what's going on with diesel and a lot of that's trickling through the supply chain into a lot of the raw material costs, et cetera. . Obviously, we take a balanced approach in terms of what we can do to mitigate that. Certainly, pricing is 1 of the levers, and we do that, but we're also mindful of the sensitivity around pricing and wanting to be competitive in the market. And we also are hyper-focused on delivering cost savings and productivity improvement initiative to get to kind of what we think is the right amount. And you could expect somewhere in the range of probably a 2% to 3% kind of price adjustment that we're looking at taking here on average . As it relates to tariffs going -- Go ahead.

No, go ahead, sorry. .