FLEXSTEEL INDUSTRIES INC Q1 FY2025 earnings call

• Continued strong sales growth with 10% growth in the quarter, fourth consecutive quarter of mid-single to low double-digit growth. - Operating margin improved to 5.8% in the quarter, fifth consecutive quarter of year-over-year adjusted operating margin improvement. - High Point furniture market showcases 27 new product groups and 10 line extensions, 237 unique SKUs. - Developed a comprehensive new recliner program with 5 unique tiers, soft-close mechanism, turnkey for retailers. - Progress with strategic accounts, expansion in independent retail, big box, and e-commerce channels. - Investments in new product development, innovation, customer experience, and marketing driving growth.

For the first quarter, net sales were $104 million, a growth of 9.9% compared to the prior year quarter of $94.6 million. Sales orders for the quarter were $100.8 million, 9.4% above the prior year quarter's $92.1 million. Operating margin was 5.8% in the quarter, up from 2% in the prior year quarter. The company generated $2.4 million of operating cash flow, ended the quarter with $98.3 million of working capital, a cash balance of $5.7 million, and a line of credit balance of $3.6 million. There is no detailed breakdown of revenue contribution by specific product segments provided in the transcript.

• Second quarter sales guidance: $103 million to $107 million, 3% to 7% growth vs prior year quarter. - Second quarter gross margins: 21.5% to 22%, driven by sales growth leverage, partially offset by higher ocean freight costs. - SG&A costs expected: $16.5 million to $17.0 million for the quarter. - Operating income as a percentage of sales expected: 5.5% to 6.5% for the second quarter. - Free cash flow expected for the quarter: $5 million to $10 million, expecting to be debt free by end of the quarter. - Capital expenditures for the second quarter: $0.5 million to $1.0 million for ERP system modernization and supply chain maintenance.

• Challenging macroeconomic conditions leading to lackluster industry demand. - Weak consumer demand due to cumulative toll of inflation on consumer spending, absence of meaningful housing recovery. - Uncertainty over US presidential election and potential policy changes impacting the economy. - Supply chain inflation and higher ocean freight costs affecting margins. - Intense competition in certain e-commerce segments like ready-to-assemble furniture with lower price points.

Q: Could you talk about separating the sales gains in the core business versus growth initiatives?

A: Derek mentioned that the majority of year-over-year sales dollar growth was from the core business, and there's nice traction with growth initiatives with strategic accounts, and positive year-over-year growth across the vast majority of initiatives in expanded markets like Zecliner and Casegoods.

Q: Comment on sell-through to consumers from retailers and if it's similar to sell-in to retailers?

A: Derek spent time visiting retailers, most are in good inventory positions, but traffic levels are down, business is down, and retailers are cautiously optimistic about post-presidential election seasonal pick up.

Q: Timeframe for e-commerce reversal?

A: Derek noted that big box in Flexsteel e-commerce business was up 10% year-over-year, but homestyles e-commerce was down 26% due to tough competition in ready-to-assemble lower price point market, no specific timeframe given but mentioned bifurcating e-commerce portions.

Q: What drove SG&A down and future SG&A outlook?

A: Mike said savings were from smaller executive leadership team and reviewing SG&A spending for areas with low ROI, expecting to manage SG&A in the 15.5% to 16% range going forward.

Q: When might manufacturing/distribution capacity need expansion with no pricing change?

A: Mike said the current network can support 20-plus-percent growth within manufacturing and distribution network before considering expansion.