FLEXSTEEL INDUSTRIES INC Q2 FY2025 earnings call

• Continued strong momentum with 8.4% sales growth, fifth consecutive quarter of mid single to low double digit growth.
• Expanded operating margin and strong free cash flow, allowing payoff of remaining bank debt and cash accumulation.
• Improved traffic trends and sales close rates during holiday season, positive retailer response to new products launched in October.
• Broad-based growth across core markets and expanded market initiatives.
• Progress in supply chain agility and resilience, investment in product development, innovation, customer experience, and marketing.

For the second quarter, net sales were $108.5 million, up 8.4% from the prior year quarter. In terms of product segments: The Flexsteel branded core markets grew 7%. The Homestyles ready-to-assemble brand, sold online, was down almost 30% due to hyper-competitive low-cost Chinese imports. Expanded market initiatives (Zecliner, Flex, Casegoods, Charisma) saw 92% year-over-year growth. Vietnam production supports roughly 50% of current revenue, and the Mexican operation supports almost 40% of sales.

• Third quarter sales guidance: $110 million to $115 million, 3%-7% growth vs prior year quarter, driven by unit volume and pricing from ocean freight surcharges.
• Excluding tariff impacts, gross margin expected 21%-22% in third quarter, with sales growth leverage offsetting dilution from ocean freight and Mexico wage inflation.
• SG&A costs expected $16.5 million to $17.2 million.
• Capital expenditures for third quarter: $0.7 million to $1.0 million, primarily for ERP system modernization.

• Tariffs on Mexico and Canada introduce uncertainty, with Vietnam production supporting ~50% of revenue and Mexican operation ~40% of sales.
• Need to mitigate risks by identifying new high-quality supply sources in lower tariff risk countries and broadening dual sourcing from multiple countries.
• Reconfiguring global supply chain in response to tariffs would be challenging, but working to optimize network.

Q: What were the main reasons for revenue being better than guidance and how to parse core business vs growth initiatives?

A: Derek Schmidt said broad-based growth across most elements, with Flexsteel branded core markets up 7%, Homestyles down ~30%, and expanded market initiatives up 92% year-over-year, driven by new product development, innovation, marketing, and enhanced customer experience.

Q: About gross margin and ocean freight, what's the thinking?

A: Mike Ressler said rates are volatile, lower than first quarter but still dilutive, with plan to adjust accordingly but recover costs without margin increase.

Q: Thoughts on SG&A going forward?

A: Derek Schmidt said will be thoughtful about adding structural costs, aiming for SG&A in 15%-15.5% of sales range while reinvesting in high ROI initiatives.

Q: Impact of 25% tariff on Mexico?

A: Mike Ressler said potential $1.5M-$2M monthly cost increase, with strategies like vendor negotiations, cost structure reevaluation, and product resourcing; Derek Schmidt added plans to find diversified suppliers, dual source, and restructure supply chain if needed.

Q: Cash priorities going forward?

A: Mike Ressler said near term will maintain cash cushion, with capital allocation strategy to reinvest 70% in high OI initiatives and consider returning capital to shareholders if no attractive options.