Flexsteel Industries Q3 2023 Earnings Call Transcript

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Provided by Quartr
May 2, 2023

Key Takeaways

  • Q3 net sales were $99.1 M, down 29.5% year-over-year but still within the upper half of guidance.
  • Operating income was $2.1 M (2.1% margin), at the upper end of the company’s guidance due to cost control and strategic initiatives.
  • Strategic growth initiatives—including new distribution channels, the Charisma brand launch, and ZCLINER and Flex product lines—added approximately $12 M–$13 M in Q3 revenue.
  • Flexsteel reduced debt by $1.4 M during the quarter (totaling $20 M since fiscal 2022), further strengthening its balance sheet.
  • The company guided Q4 sales of $100 M–$110 M (1%–11% sequential growth) and projected operating margins of 2%–4%, noting continued macroeconomic headwinds.
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Earnings Conference Call
Flexsteel Industries Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Morning, and welcome to the Flexsteel Industries Third Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Alejandro Huerta, Chief Financial Officer for Flexsteel Industries.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to today's call to discuss Flexsteel Industries Third Quarter Fiscal Year 2023 Financial Results. Our earnings release, which we issued after market close yesterday, Monday, May 1st, is available on the Investor Relations section of our website at www.flexsteel

Operator

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Speaker 1

I am here today with Jerry Dittmer, President and CEO And Derek Schmidt, Chief Operating 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 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 and other SEC filings as applicable.

Speaker 1

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 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 will turn the call over to Jerry Dittmer. Jerry?

Speaker 2

Good morning, And thank you for joining us today. I am pleased with our performance in the Q3 despite the challenging macroeconomic environment. We remained on the offense during the Q3, delivering innovative new products and investing in our strategic initiatives. This drove sales for the quarter of $99,100,000 which was in the upper half of our guidance range. Our growth initiatives have begun to add meaningful revenue and partially offset the challenges posed by slowing consumer demand.

Speaker 2

These initiatives, along with a continued focus on controlling operating costs, enabled us to deliver operating income $2,100,000 or 2.1 percent, which was in the upper range of our guidance. Along with our growth initiatives, we have committed to driving working capital efficiency and continued dedication to reducing our debt, Further strengthening our balance sheet. During the Q3, we made strides in both areas As we maintained our working capital balances, but reduced our outstanding debt by an additional $1,400,000 We've paid down debt by $20,000,000 since the end of the fiscal 2022. We continue to see near term challenges due to a multiple macroeconomic headwinds. However, we do not plan to detour from our commitment to deliver to drive sales and margin expansion.

Speaker 2

Our organization is focused on navigating the challenges in the current environment, while positioning ourselves to deliver on our long term strategic initiatives. I'll now turn the call over to Derek to discuss our strategic initiative and operational priorities before Alejandro takes you through the further details of our financial results. I'll be back at the end of the call with some closing comments on what we see ahead.

Speaker 3

Thank you, Jerry, and good morning, everyone. Like Jerry, I'm very excited about the trajectory of our business. While 3rd quarter sales were down year over year from the pandemic driven highs last year, We delivered solid sequential sales growth of 6.4% from the 2nd quarter, expect similar Sequential quarter over quarter growth in the 4th quarter and anticipate building on that momentum going into fiscal year 2024 To profitably grow, even with headwinds related to an expected economic slowdown. The confidence In our growth trajectory largely stems from our early success and continued sureness in our strategic growth initiatives, which are focused on expanding our addressable market in 3 areas: new sales distribution, new product categories and new consumer segments. With respect to new distribution, we are executing well and gaining momentum with big box customers And expect to profitably grow this channel to 5% of our total company's sales this fiscal year, with continued aggressive growth planned in fiscal To address new consumers, earlier this year, we launched our new Charisma brand, targeting the style And price preferences of younger consumers.

Speaker 3

The initial launch was well received and last week we expanded the product offering To include several new on trend stationery groups with retail prices for sofas targeted below $1,000 Customer feedback on the new products was strong. The comfort and quality at this price point are exceptional compared to the competitive alternatives. We have conviction in the positioning of this new brand and our right to win with this targeted consumer and we'll continue investing in broadening the brand with new products. In new product categories, we have several encouraging wins. The launch of our new ZCLINER sleep solution recliner Started shipping in March and has been successful.

Speaker 3

We placed the product with more than 4.50 retailers, The majority of which have already sold through their initial orders. We've also recently placed ZCLINER with a major regional sleep store chain, And we're pursuing other distribution relationships in this channel. We also expanded the line recently and have more innovation planned for release at October's market. Our other major new product category initiative, Flex, which is a small parcel contemporary Furniture solution was successfully launched in the Big Box channel earlier this month and sold through much faster than we anticipated. We have another big box event planned for Flex in June, and we are ramping up distribution expansion efforts across multiple E Commerce Partners in the 4th quarter as well.

Speaker 3

While aggressively pursuing market expansion strategies, We are investing to renew and grow our core business too. We are competing well and our customers validated this view during last week's April High The energy in our showroom was outstanding. We continue to modernize the Flexsteel brand with the introduction of new On trend product designs and covers at more competitive price points, while maintaining the differentiated comfort and quality that defines the brand. Path for future growth at Flexsteel is exciting. We're investing in the right initiatives, strengthening our market leadership through innovation In building a strong culture focused on delivering an exceptional customer experience and strong financial performance.

Speaker 3

With that, I'll turn it over to Alejandro to give you additional details on the financial performance for the Q3

Speaker 1

For the Q3, net sales were $99,100,000 down approximately $41,400,000 or 29.5% compared to $140,400,000 in the prior year period. While down from the prior year, our sales results were within our guidance of $93,000,000 to $103,000,000 provided during our Q2 earnings call. From a profit perspective, the company delivered operating income of $2,100,000 or 2.1% of sales in the 3rd quarter, which was also within our guidance range of 1% to 2.5%. In addition, we recorded net income of $1,500,000 and earnings per diluted share of $0.28 Gross margin as a percentage of net sales in the 3rd quarter was 18.8%. As compared to the prior year quarter, We saw a 310 basis point improvement, primarily driven by a continued focus on managing and the realization of cost savings initiatives partially offset by volume decline, deleveraging our fixed costs and discrete pricing actions taken as competitors have become aggressive with price reductions to reduce inventory.

Speaker 1

SG and A expenses were modestly higher than in the prior year quarter by $200,000 mainly due to investment spending to drive our growth initiatives. Moving to the balance sheet and statement of cash flows, The company ended the quarter with a cash balance of $2,400,000 and working capital of 106.6 $1,000,000 which is a slight reduction of $500,000 during the quarter. The controlled working capital management resulted in a solid operating cash flow of $5,800,000 during the quarter. As previously communicated, debt reduction is a key priority. In the quarter, we reduced our outstanding borrowings By an additional $1,400,000 bringing our debt balance down to $17,700,000 as of the end of the quarter.

Speaker 1

Looking forward, the sales guidance for the Q4 is between $100,000,000 $110,000,000 which represents a 1% to 11% sequential quarter over quarter improvement. We are forecasting that the challenging macroeconomic environment will continue to temper the demand for our core product offerings. However, our growth initiatives which have begun to drive meaningful revenue will help offset this and result in subsequent quarter over quarter sales growth. Regarding profitability, our growth initiatives impact and continued focus on managing costs We'll allow profit margins to improve sequentially in the Q4. However, the challenges previously mentioned and continued pricing pressures will temper our profitability expansion.

Speaker 1

As such, we are projecting operating income As a percentage of sales in the range of 2% to 4% for the Q4, the most significant drivers A variability in the guidance range will be consumer demand and competitive pricing conditions, both of which will be shaped near term by macroeconomic headwinds. We expect gross margins between 17% 19% in the 4th quarter As our growth and cost savings initiatives will drive margin expansion. However, we see this partially offset by continued pricing pressures in the market due to the compressed demand previously discussed. If sales continue to improve as expected in the quarter, Gross margins should stabilize in the upper teens. In addition, we intend to prudently control SG and A costs and expect SG and A costs to be between $16,000,000 $17,000,000 in the 4th quarter, which is higher than the 3rd quarter As we are actively investing in our growth initiatives discussed, regarding our cash flow outlook, we expect working capital To be a use of cash for the quarter, driven mainly by an increase in receivables and a modest increase in inventory, partially offset by an increase in accounts payable.

Speaker 1

For the Q4, we expect capital expenditures to be between $1,500,000 as we continue to invest in expanding our ERP capabilities. We also may continue to opportunistically repurchase shares at a modest spending level if the stock price remains at a significant discount to our view of the intrinsic value. Based on our inventory needs to support our sales growth, we expect Debt levels to be higher than previously communicated with the range of $10,000,000 to $18,000,000 by the end of fiscal 2023. The effective tax rate for fiscal 2023 is expected to be in the range of 27% to 28%, excluding the impact of any revaluation of deferred tax asset valuation allowances. Now, I'll turn the call back over to Jerry to share his perspectives on our outlook.

Speaker 2

Thanks. The positive momentum we've gained in the 1st months of fiscal 2023 has me optimistic regarding our long term profitable growth potential. Slowing economic growth and waning consumer demand are obvious challenge for the industry near term. However, We remain focused on delivering on our strategic initiatives by investing in our talent, systems and operational capabilities. These will allow us to achieve our long term sales and profitability goals.

Speaker 2

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

Operator

We will now begin the question and answer Our first question will come from Anthony Lebiedzinski with Sidoti and Co. You may now go ahead.

Speaker 4

Yes. Thank you and good morning to all and thanks for taking the questions. So Good to see you guys certainly revitalizing the core and certainly looking to expand on your growth initiatives. So I guess, first, how much of the revenue in Q3 3 came from your growth initiatives. If you could guys give us a ballpark estimate, that would be great.

Speaker 3

Yes, Anthony. Overall, what we've talked about for the year is roughly $30,000,000 revenue from our growth initiatives, I think in the Q3 rough estimate is Probably between $12,000,000 $13,000,000

Speaker 4

Got you. Okay. Thanks, Derik. Okay. And Just looking at the breakdown of the sales for the quarter, you guys talked about e commerce versus retail.

Speaker 4

Just wondering just curious to get your thoughts in this post COVID environment. How do you guys think this will play out as far as sales to traditional retailers versus e commerce, how you see that evolving?

Speaker 2

Yes, this is Jerry. That's a good question. So the e commerce part of our business obviously is challenged. Our 4 largest customers have all have or will release their numbers and they're pretty depressed. And we, of course, see the same thing in the same trend.

Speaker 2

So that's one that we'll keep watching. I think in time, we still think the e commerce part It's a strong part of the future for furniture and for sales, but right now it's at depressed levels, even farther down than we would have seen pre pandemic at this point. For the other part of our business, it's really we're to the point now where it's kind of what's going on in the economy, which is one of the reasons See the guidance, the range we gave going forward, it's really orders in, orders out at this point in time. Luckily, we and our belief is a lot of our new initiatives, as Derek just gave you some numbers, are going to continue to kick in and will help us in the future. It's really going to come down, like I said, to what we're seeing from an economic standpoint with the consumer.

Speaker 2

And Right now, as you can see, a lot of our you just came out of market, a lot of our customers were down quite a bit. We've seen some of that effect, but again we're being offset by our new initiatives.

Speaker 4

Got it. Yes. Thanks, Jerry, for that. Okay. And then as far as inventory levels at retail, how would you describe that as far as what are you guys Seeing now versus maybe a few months ago, curious to get your thoughts on that?

Speaker 2

Yes. So we just came out of market. And overall, most of our retailers, especially our stronger retailers, are all feeling pretty good. They still have inventory? Sure.

Speaker 2

But they're at a place where they're feeling comfortable with them. We've started to see, like I said, reorders. We're starting to see some reorders a lot of the new things that we came out with, because they've got room in their DCs and that could handle a lot of those things. Going forward, there's still some. So I mean, I'd still tell you probably a third of our retailers still have too much inventory.

Speaker 2

And the biggest thing is it's just it's going out slower than they thought because the demand is a little bit slower.

Speaker 4

Okay. Yes, thanks for that color. And then certainly as far as gross margin, it was up sequentially and year over year. Maybe if you could just over like the puts and takes of that. I know maybe if you could just expand on that.

Speaker 4

And then while on the subject of gross margins, Is it reasonable to assume that over time you could get back to over 20% gross margins? How should we think about that?

Speaker 1

Hey, Anthony, it's Alejandro. I'll take that first and then I'll let Derek and Jerry add. As we think about the sequential growth expansion Quarter over quarter, as Derek mentioned, we're seeing meaningful revenue from our growth initiatives, which are all accretive to our margin profile. That combined with cost savings initiatives that we're taking that we're driving very hard and focused on within the group. What is hurting us a bit is the deleveraging of Fixed assets, as you know, we have Mexicali on our books that we plan that we have a plan for in the future.

Speaker 1

But that does that is fixed costs we're absorbing and in an overall capacity has been a little bit Below where we call it optimal. So we're seeing that as an offset. Long term, as we shared at your conference About 2 months ago now, we do see a path long term to getting above 20% again, but it is a slow growth That we see getting back to that level.

Speaker 4

Got you. Okay. Perfect for that. And then I guess the last question for me. How should we think about SG and A expenses in terms of core spending versus spending on the growth initiatives?

Speaker 1

Yes. So we are focused. So any SG and A expansion that we will have is going to come from our growth initiatives, Anthony. That is where we're focused. That is what we're driving.

Speaker 1

Our core will be maintained to ensure that it doesn't fall off and that we can continue to support it. But growth initiatives is where we will see incremental investment throughout the next few quarters as we grow those opportunities.

Speaker 4

Sounds good. I will thank you and best of luck.

Speaker 1

Thank you, Anthony. Thanks, Anthony.

Operator

It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Jerry Dittmer for any closing remarks.

Speaker 2

Great. Thanks. In closing, I'm grateful to all our Flexsteel employees for their outstanding performance and service during the quarter. I also want to thank Anthony for participating in the call and having questions for us today. If any of the other folks have any additional ones, please let us know.

Speaker 2

We look forward to updating you on our full year performance on our next call. Everybody have a great rest of the day. Thanks.

Operator

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

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