Flexsteel Industries, Inc. (NASDAQ:FLXS) Q3 2024 Earnings Call Transcript April 30, 2024
Flexsteel Industries, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Flexsteel Industries Third Quarter Fiscal Year 2024 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.
Mike Ressler: Thank you, and welcome to today’s call to discuss Flexsteel Industries’ third quarter fiscal year 2024 financial results. Our earnings release, which we issued after market close yesterday, April 29th, is available on the Investor Relations section of our website at www.flexsteelindustries.com under News & Events. I’m here today with Jerry Dittmer, Chief Executive Officer; and Derek Schmidt, President. 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 the website contain 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 Jerry Dittmer.
Jerry?
Jerry Dittmer: Good morning, and thank you for joining us today. I would like to start by acknowledging what was in our press release yesterday that I will be retiring from my role as CEO at the end of fiscal year 2024. I am honored to have served in this role and work alongside an incredible group of hard-working and dedicated individuals here at Flexsteel. I am proud of the foundation we have built and confident in the organization’s ability to continue achieving long-term profitable growth. I would also like to congratulate Derek Schmidt, who will assume the role of Chief Executive Officer upon my retirement. Derek is a well-accomplished leader, and I’m confident in his ability to continue driving results and executing on both our near-term and long-term strategies.
With that, I am very pleased to share with you our third quarter fiscal year 2024 results. While headwinds from macroeconomic challenges persist in our industry, we continue to execute our strategic initiatives and delivered sales growth of 8.2% when compared to the prior-year quarter. The increased sales along with our commitment to operational efficiency and prudent cost savings drove increased operating income when compared to same quarter of the prior year, even with the addition of $2.6 million in restructuring costs related to the closure of our Dublin facility. While we expect the business environment in the near term to remain challenged, our team isn’t deterred and remains intensely focused on continuing to profitably grow our business throughout the remainder of fiscal year 2024 and the long term.
I’ll now turn the call over to Derek to discuss our results and an update on our growth initiatives. I’ll be back at the end of the call with some closing comments on what we see ahead.
Derek Schmidt: Thank you, Jerry, and good morning, everyone. First, I’d like to thank Jerry for his invaluable contributions to the company. Since joining Flexsteel almost 5.5 years ago as President and CEO, his leadership has been instrumental in transforming our 130-year-old company. Under his direction, the company has crafted an exciting vision focused solely on the residential furniture market, has strengthened talent and improved culture and has accelerated investments in innovation and customer experience to drive long-term growth. Recently, Flexsteel was named by Newsweek as one of the most trustworthy companies in America, which is a true testament to Jerry’s leadership. On a personal level, I’m also deeply grateful for Jerry’s coaching, mentorship and support over the many years we’ve worked together.
He has established a foundation and trajectory for the company to continue to thrive for many years to come. Thank you, Jerry. Turning back to the business. Like Jerry, I am very pleased with our third quarter results. We are competing well, gaining share and growing the business in a challenging industry environment, where many industry participants continue to report double-digit year-over-year declines. The investments we have made in innovation, new product development, and customer experience enhancements are all paying off, and our strategies to pursue growth in new markets are working, and we see it in our results. We grew our top-line by 8.2% in the fiscal third quarter, continuing the strong momentum from the second quarter when we grew sales by 7.5%.
As was noted in the earnings press release, when excluding the $1.5 million impact from the prior-year’s ocean freight surcharge elimination, sales growth related to unit volume and product mix was a robust 9.9% in the quarter, further reinforcing our strong sales execution. And while we expect sluggish industry conditions to persist for the next six to 12 months, we remain confident in our ability to continue our growth into the fourth quarter of fiscal 2024 and into fiscal year 2025 from both continued share gains in our core business and increasing momentum in our market expansion initiatives. Part of our confidence in maintaining our growth momentum stems from our success at the recent High Point Market a few weeks ago. While overall market attendance was solid, and up 1% versus prior year’s market, the number of customer appointments in the Flexsteel showroom was impressive and increased by 29% versus prior year’s market, a clear indication that our customers are leaning into Flexsteel as a preferred partner.
In addition, we showed the biggest lineup of new products in my four years with Flexsteel, 36 new groups and 16 line extensions. When compared with recent markets, that lineup represented almost a 40% increase in new product introductions. Most importantly, based on positive customer feedback and commitments, we are activating almost 90% of all the new products shown at market, which is an exceptional success rate. A good portion of the new product was squarely focused on our core business, which gives us optimism that we can continue to gain share and modestly grow the core even with persistently sluggish industry conditions. At the same time, we advanced all our market expansion initiatives at April High Point Market. First, we launched multiple new collections under our new brand, Charisma, which is intended to reach younger consumers with lower-priced on-trend products.
The product was very well received, and we’ve added both design and engineering talent this year to quickly expand the Charisma offering over the next 18 months. Second, we expanded our Flex collection with new hubs and other accessories to further improve its modularity and appeal to younger consumers. And for our independent retail partners, Flex is now available in custom fabrics produced in four weeks or less. Third, Zecliner, our proprietary sleep chair offering was expanded with new fabrics and a new Zofa solution, which is effectively two Zecliners connected by a center council. We continue to invest in powerful POS, or point-of-sale, materials to help our retailers tell the differentiated Zecliner story in store, as our customers who leverage our POS materials experience on average a sales lift 3 times larger than those who don’t use it.
We are also embarking on national digital and print marketing campaigns to broaden consumer awareness of Zecliner and to drive increased demand for our sleep solution to our customer stores. Fourth, we launched a broad set of compelling on-trend case good products, with superior quality under the Flexsteel brand across bedroom, dining and occasional. These are large product categories where the company is underpenetrated. We now have the design talent and advantaged supply chain to compete effectively in these categories and gain share. Fifth and lastly, we had highly productive business development meetings at market with multiple big box retailers and e-tailers, which included both existing and new potential customers. They value the Flexsteel brand, and we’ll continue to pursue opportunities to expand our sales distribution where it is profitable and sustainable long term.
While I’m excited about our top-line growth and future growth prospects, I’m equally energized by our improved profitability, which is being propelled by four drivers. First, new products with higher margin profiles. We raised the threshold for new product margins and expect product life cycle management will continue to improve our gross margin over time. Second, we’re executing well operationally and delivering a strong cost savings within our supply chain. Third, we’ve remained disciplined with pricing and pull-back promotions where needed to improve overall profitability. And fourth, we are achieving leverage of fixed costs through higher sales volume, which we believe will continue to be an important driver of operating margin improvement going forward as we grow the business.
The key takeaway is that our strategies are working and we are growing and gaining share under challenging industry conditions. We must remain aggressive with our investments in pursuit of new growth to continue our positive sales momentum and we have robust plans to continue growing through both our core markets and expansion into new markets. We are rapidly improving profitability with more gains expected in the fourth quarter of fiscal 2024 and into fiscal 2025. We are generating strong free cash flow and strengthening our balance sheet, and we are investing to continuously improve our customer experience, and to drive new innovation that will differentiate us and strengthen our market leadership long term. The future is bright, and I’m excited about what lies ahead for our organization.
With that, I’ll turn the call over to Mike, who will give you some additional details on the financial performance for the third quarter and the outlook for the fourth quarter of fiscal year 2024.
Mike Ressler: Thanks, Derek. For the quarter, net sales were $107.2 million, slightly above our guidance of $101 million to $106 million provided during our second quarter fiscal 2024 earnings call. We carried our positive growth momentum from Q2 into Q3 and delivered growth in both our core business as well as growth from our market expansion initiatives. Sales orders for the quarter were $111.5 million, reflecting growth of $12.2 million, or 12.3% compared to the prior-year quarter. Our healthy order backlog of $61.5 million at the end of the third quarter, along with strong order trends, give us confidence that we have sustainable growth momentum throughout the rest of fiscal 2024 and into fiscal 2025. From a profit perspective, the company delivered GAAP operating income of $3.0 million or 2.8% of sales in the third quarter, in line with our previously disclosed guidance of 2.5% to 3.5%.
When excluding the $2.6 million in restructuring charges related to the closure of our Dublin, Georgia facility, adjusted operating income was $5.6 million or 5.2% of net sales. The meaningful increase in our operating income was driven by higher sales and gross margin expansion. Gross margin improved to 21.7% in the quarter compared to 18.8% in the prior-year quarter, a result of our team’s relentless focus on cost savings, operational execution, pricing discipline and product portfolio management. Selling, general and administrative expenses decreased to 16.5% of net sales in the quarter compared to 16.7% of sales in the prior-year quarter. The decrease was due to leverage on higher sales, partially offset by investments in our strategic growth initiatives and higher incentive compensation.
Moving to the balance sheet and statement of cash flows. We continue to strengthen our balance sheet, ending the quarter with $4.6 million in cash, working capital of $96.2 million and a balance on our revolving line of credit of $14.2 million. Our inventory optimization initiatives enabled us to reduce inventory by $8.6 million in the quarter while maintaining exceptional service levels for our customers. Our increased profit, combined with improved working capital levels allowed us to pay down our debt by 21% when compared to the fiscal second quarter. Turning to our outlook. The company reiterates its full year fiscal 2025 guidance. For the fiscal fourth quarter, we reiterate our sales guidance of $107 million to $112 million. We project GAAP operating margin in the range of 3.5% to 4.3%, which has been updated to reflect non-cash charges related to the revaluation of equity awards associated with our CEO transition and retirement.
We expect adjusted operating margin in the range of 5.2% to 6.0% of net sales, reflecting an increase in the low end of our previously disclosed guidance range of 5.0% to 6.0% following our strong Q3 performance. Looking at gross margin, we expect gross margin in the fourth quarter to land between 21.5% and 22.0% of net sales with cost savings from the Dublin plant closure of $0.4 million to $0.5 million, offset by higher ocean freight costs. We will continue to prudently manage SG&A spending with a focus on investing in our growth initiatives and expect SG&A costs between $17.5 million and $18.0 million for the fourth quarter, excluding restructuring charges and non-recurring stock compensation expense related to the revaluation of equity awards.
Most significant drivers of variability in our forecasted guidance ranges, our consumer demand changes, supply chain disruptions due to global conflict or political instability and competitive pricing conditions, all of which will be largely influenced by external factors. Regarding our cash flow outlook. In the fourth quarter, we expect free cash flow in the range of $5 million to $11 million. Near-term priorities for cash remain reducing debt, resourcing new innovation, and funding modest capital expenditures, mainly related to cost savings projects and business system updates. In the fourth quarter, we expect capital expenditures to be between $0.2 million and $0.4 million. We expect debt levels at the end of fiscal 2024 to be in the range of $4 million to $10 million.
The effective tax rate for fiscal 2024 is expected to be in the range of 30% to 32%. Now, I’ll turn the call back over to Jerry to share his perspectives on our outlook.
Jerry Dittmer: Thanks. While we remain cognizant of macroeconomic factors, which could impact our current outlook, I am optimistic about our ability to continue to gain share and confident we can maintain our profitable growth trajectory, both in the near and long term. We have great momentum and are well positioned to successfully deliver improved earnings and an even stronger balance sheet over the remainder of fiscal year 2024 and into fiscal year 2025. With that, we will open up the call to your questions. Operator?
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