Flexsteel Beats Q2 Consensus In Transformational Quarter
Flexsteel Industries, Inc (NASDAQ:FLXS) has been on our radar for some time now. The company emerged as a pandemic-play and turnaround story early in the year and ensuring rebound has only surpassed our expectations. The company is one of North America’s largest importers/manufacturers of furniture and now reaping the benefits of previous labors. What I’m talking about is the rapid transformation that has streamlined operations, domesticated more of its production, reduced overall costs, and levered the company for accelerated profit growth in 2021. While the earnings forecast is good, the part that’s really interesting is the dividend and the outlook for another triple-digit distribution increase.
Flexsteel Has Another Blowout Quarter
The fiscal Q1 results/calendar Q3 proved the company’s transformation efforts were working. Focused on cost-cutting and sales, much of the effort went into the core retail business and eCommerce and the efforts paid out in spades. Total revenue rose 13.% sequentially and 15.7% YOY despite the impact of discontinued operations. Organic growth in the core retail business came in at +25% on strength in all categories. Breaking it down to brick&mortar versus eCommerce, sales at retail locations increased 28% versus a smaller 11% YOY gain in the digital channels. Discontinued operations in Vehicle and Hospitality offset organic growth by -8.0% and will continue to impact the YOY comparisons through the end of the fiscal year.
Moving down the report the news only gets better. The combination of cost-cutting efforts, structural changes, internal efficiencies, sales leverage, and declining inventory combined to produce a 490 basis point improvement in the gross margin. The gross margin rose to 20.5% versus the 15.6% reported in the prior quarter leading to robust earnings leverage. On a GAAP basis EPS of $1.73 are more than 200% higher than the previous quarter and reverse a loss in the previous year. The adjusted earnings, which account for discontinued operations and divestitures, came in at $0.79 and also reverse a loss in the previous year.
The company refrained from giving any guidance for the coming quarter but did provide some favorable comments. While noting the continued impact of the pandemic execs reported a record backlog of $101 million that was bolstered by a 49% YOY increase in the 2nd quarter. As for business, management noted that it “continued to see improvement in business conditions during the second quarter as retailers have reopened, however, there are supply chain challenges faced by the furniture industry due to labor shortages in Asia, limited availability of ocean containers, and inflationary pressures in key materials”. To that end, management has already begun work on a new facility in Mexico along with ongoing improvement to domestic operations.
Another Triple-Digit Dividend Increase Is On The Way
One of Flexsteel’s big attractions last year was the dividend. Not because it had been cut, but because the business transformation was exceeding expectations and a big dividend increase was expected. And we got one, a 100% increase to be exact, and there is another big increase brewing already. The pre-COVID distribution was $0.88 annually or $0.22 quarterly with a payout ratio in the range of 25%. Now, even with the recent increase to $0.10, the payout ratio for the annual basis is about 25% of YTD results. Assuming the company is at least as profitable as it was in the 2Q period not only could we see another dividend increase by the end of the year but it could be a triple-digit one. And there would be cash and cash-flow on hand to pay a special dividend as well.
The Technical Outlook: Flexsteel Is Poised To Rally
Price action in Flexsteel is holding steady in the early pre-market action but I wouldn’t count on that to last. The stock is in a clear uptrend and poised to make a strong rally that today’s news should fuel. Looking at the chart, I see a very strong bullish signal in the making. The price-action is bouncing from the short-term moving average and setting a new high that is backed up by the indicators. The indicators are showing a robust and trend-following buy signal that we think could lead this stock up by several price multiples.
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