Inventory Is The Flexsteel Advantage
Flexsteel (NASDAQ: FLXS) and the rest of the furniture industry have been working hard to improve their supply chains. That’s not a surprise, the world is struggling with supply chain issues right now, but you may be surprised to know this has been going on for years. Since the start of the Trump/Xi trade war in fact. The trade war sparked a massive outflow of manufacturing capacity from China that is only gaining momentum today. That move had the furniture industry optimizing itself even before the pandemic struck and now, nearly two years later, those efforts are still underway. What this means for Flexsteel is expanding domestic capacity and an inventory build that has it in the best position of nearly every other furniture maker on the market.
“We will be building inventory in the new DC over the coming months and expect to service customers by February 2022. Our inventory position remains an advantage relative to our competition and is a source of growth. Our inventory ended the first quarter at $193.7 million, an increase of $123.1 million, or 174.5%, over the past 15 months. As a result of this strategic investment, our in-stock position and service levels have improved significantly at a time when the industry will likely be strained for inventories in the coming months given the slowdown of furniture production in Vietnam during August and September due to COVID-19 shutdowns.”
Flexsteel Revenue Grows Along With Backlog
Flexsteel was expected to have a strong quarter and it delivered. What is clear is that business remains strong and the company’s effort to reposition for the post-COVID world is working. What is not clear is how deeply revenue was impacted by systemic headwinds. The company posted $137.68 million or about 1.0% in sequential growth, 31% in YOY growth, and 37% in 2-year growth despite significant divestitures so it may not matter for this small-cap dividend payer. The underlying business is strong and has the company on track for record-setting revenue and profits over the next year. Sales strength was driven by home furnishings which is up 40% YOY and offset by a decline in eCommerce. eCommerce sales are down nearly 20% from last year but that is against last year’s COVID-amplified bump of +40%.
Moving down to the earnings the details are less positive. The company reported a 470 basis point contraction in gross margin due to a 740 basis hit related to supply chain issues that were offset by 270 basis points of leverage and product mix. The gross margin came in at 17% of sales and left GAAP earnings at $0.61 and adjusted EPS at $0.48, both of which are down on a YOY basis and not expected to improve until later in the year. The company cited rising and “unreasonable” costs associated with container shipping that show no signs of abating. The good news is that efforts to open/expand new capacity should begin taking effect soon and will offset those costs. The new facility in Juarez is ramping production as we write this and expansion in Mexicali and Greencastle are both on track for operations in 2022.
Flexsteel Has A Dividend Increase On The Horizon
Flexsteel has a dividend increase on the horizon but it might be another 2 or 3 quarters before it comes. The company is currently paying out $0.15 quarterly or about 2.0% in yield which is still down from the pre-COVID levels with business above pre-COVID levels. According to Marketbeat.com data, the company is only paying 18% of its TTM earnings as well, so there is room in the cash flow to make an increase when the timing is right. The balance sheet is equally strong with cash on the rise, low levels of debt, and fortress-quality leverage and coverage ratios so no red flags there. The only negative in the outlook is inflation and supply chain headwinds that may give management pause.
The Technical Outlook: Flexsteel Might Be Bottoming
Shares of Flexsteel fell more than 2.5% in the session prior to the earnings release and is indicated lower in early premarket action now. Price action may be testing support but it is too soon to call a bottom much less a reversal. If price action is able to maintain the $29 level in today’s action, the bottom will be a little clearer. The indicators are consistent with bottoming at this level, both MACD and stochastic are showing divergences, so buying at this level may be strong. If price action can move up from here and cross above the short-term moving average we’d be even more confident in the bullish outlook. If not, this stock may continue retracing back to its 2020 bottom.
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