Q3 2025 Flexsteel Industries Inc Earnings Call
Speaker Change: Good morning and welcome to the Flexsteel Industries 3rd quarter fiscal year 2020-25 Arnie's conference call. All participants will be in a lesson only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by 0.
Speaker Change: After two days presentation, there will be an opportunity for you to ask questions, to ask a question, you may press star, then one on your turn phone. To withdraw your question, please press star, then two.
Please note, this event has been recorded.
Speaker Change: I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flexsteel Industries. Please go ahead.
Speaker Change: Thank you, and welcome to today's call to discuss Flexsteel Industries' third quarter fiscal year 2025 financial results. Our earnings release, which we issued after market closed yesterday, Monday, April 21st, is available on the Investor Relations section of our website at www.flexsteel.com on our news and events.
Speaker Change: I'm here today with Derek Schmidt, President and Chief Executive Officer.
Speaker Change: On today's call, we will provide prepared remarks. We will then open the call to your questions.
Speaker Change: Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements which can be identified using words such as Estimate, Anticipate, Expect, and Similar phrases.
Speaker Change: 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.
Speaker Change: Such risks and uncertainties include but are not limited to those that are described in our most recent annual report on Form 10K as updated by our subsequent quarterly reports on Form 10Q and other SEC filings as applicable.
Speaker Change: These forward-looking statements speak only as a 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 .
Speaker Change: 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 .
Speaker Change: And with that, I'll turn the call over to Derek Schmidt, Derek.
Derek Schmidt: Good morning, and thank you for joining us today to discuss our third quarter results.
Derek Schmidt: We continue to execute well and delivered strong results in the quarter.
Derek Schmidt: Our growth strategies are working and enabling us to continue our solid sales momentum as we delivered sales growth of 6.3% compared to the prior year quarter which represents our sixth.
consecutive quarter of mid-single to low-double digit year-over-year growth.
Derek Schmidt: Encouragingly the drivers of our growth remain broad-based as we grew in both our core markets and in our new and expanded market initiatives.
Derek Schmidt: Within core markets, we continue to see significant success from new product introductions that bring increasing value to consumers and from continued share gains with large strategic
where we continue to enhance our advantaged customer experience.
Derek Schmidt: Our focus on new and expanded markets remains an important growth contributor led by continued market penetration with our Z-Cliner lineup in ramping orders of new case goods product.
Derek Schmidt: April Highpoint Market begins this week and we have an exciting lineup of new product to showcase. That includes 25 new groups spanning all areas of our business.
We are expanding our Z-Ciner lineup with additional skews.
Derek Schmidt: Adding new bedroom dining and occasional groups to our case goods offering, and adding a plethora of sleek, stylish products with improved functionality to our stationary and motion-soft seating portfolio.
Derek Schmidt: New product has been an underpinning to our growth story over the past several years, and re-remain aggressive and continually bringing fresh looks with improved value to our retail partners.
Derek Schmidt: I'm also especially pleased with our continued profitability improvement in strong cash generation.
Derek Schmidt: Our adjusted operating margin of 7.3% in the quarter represents our eighth consecutive quarter of year-over-year improvement and our second highest quarterly adjusted operating margin over the past seven years.
Derek Schmidt: The levers driving our consistent profit improvement are unchanged and working effectively. And include sales growth leverage, strong operational execution and productivity, and product portfolio management.
Derek Schmidt: Additionally, we delivered operating cash flow of $12.3 million in the quarter and bolstered our ending cash to $22.6 million.
Derek Schmidt: Our strong financial position is a competitive advantage in this period of heightened economic uncertainty.
Derek Schmidt: As we look forward to the remainder of our fiscal year 2025, we enter our fourth quarter under a very tough economic backdrop with substantial uncertainty, following the release of the proposed US reciprocal tariffs on April 2nd.
Derek Schmidt: In the near term, we are assessing and developing responses to three key risks.
Derek Schmidt: First, the impact of tariff center business including margins, pricing, and supply chain design
Derek Schmidt: 2. The short-term volatility in demand, largely influenced by tariff and economic uncertainty 3. The midterm outlook for the US economy, consumer spending, and ultimately consumer demand for furniture
I'll be elaborate on each of these individually, beginning with tariffs.
Derek Schmidt: As we've shared previously, we have completely moved out of China for finished good product sourcing in our primary tariff exposures, now reside in Vietnam and Mexico.
Derek Schmidt: Currently, Vietnam production supports roughly 55% of our revenue and our Mexican operations support almost 40% of sales.
Derek Schmidt: While we have seemingly avoided tariffs on Mexico for now, our product source from Vietnam are impacted by the 10% tariffs which took effect on April 5th and remain in effect as the two sides negotiate a new trade agreement.
Derek Schmidt: Should the initial 46% reciprocal tariff rate that was announced on April 2nd, but subsequently delayed 90 days, ultimately going to effect on Vietnam goods, it will have wide reaching
Derek Schmidt: Both on Flexsteel's business and the overall US furniture industry.
Derek Schmidt: As context, Vietnam was the primary beneficiary of replacing China-made furniture after the U.S. increased tariffs on China in 2019, and is currently the largest exporter furniture to the U.S. at 37% of furniture imports in 2024.
Derek Schmidt: While we have taken steps to identify alternative sources in other countries beyond Vietnam,
Derek Schmidt: The other major furniture exporters, like Cambodia, Thailand, Indonesia and Malaysia, have similarly large proposed reciprocal tariffs, leaving the overall industry heavily exposed
Derek Schmidt: Our current belief is that long-term 46% tariff on Vietnam is untenable for both countries.
Derek Schmidt: and that the parties won't negotiate a lower rate, although the timing of such a deal is difficult to predict.
Derek Schmidt: Exports make up a large percentage of Vietnam's GDP and the US accounts for roughly 30% of their total exports, so Vietnam has significant incentive to negotiate.
Derek Schmidt: They have already expressed a strong desire to make a deal with the US, and took preemptive actions to cut tariffs on US goods and increase commitments to purchase more US goods in services.
Derek Schmidt: While we await clarity on a potential U.S. Vietnam deal, we have taken several steps to minimize our short-term tariff exposure.
Derek Schmidt: Most notably, we have implemented modest tariff surcharges on new orders for some parts of our business effective April 9th, although these surcharges do not completely opt that the 10% tariff on Vietnam imports.
Derek Schmidt: Furthermore, we have and will continue to look for cost efficiencies and other savings to partially offset the impact of tariffs.
Derek Schmidt: If Vietnam tariffs are implemented at significantly higher rates than the current 10% from extended duration, we will take the necessary steps to realign our sourcing.
Derek Schmidt: While reconfiguring, our global supply chain would not be easy or fast.
Derek Schmidt: and tariffs could have an adverse impact to margins in the short term.
Derek Schmidt: I do feel confident that we are prepared to swiftly optimize our network if required.
The second rift mentioned is short-term demand volatility.
Derek Schmidt: As a result, we've seen a slowdown in incoming orders from retailers since the Chair of Announcement and even some large order cancellations.
Derek Schmidt: While we started the fourth quarter with a healthy backlog of $78.3 million that would normally give a strong confidence in continuing our momentum of your over your sales growth.
Derek Schmidt: The risk of continued muted retail orders and additional order cancellations only grows The longer the uncertainty around tariffs persist.
Derek Schmidt: As a result, our forecasted range of growth for the fourth quarter is broader than usual.
Derek Schmidt: The third risk and likely the most significant is the midterm outlook for the U.S. economy and consumer spending.
Derek Schmidt: As a result of the new tariffs, many economists now expect significantly higher US inflation for the next year, along with slower economic growth and even a likelihood of a recession if the higher proposed tariff rates are eventually implemented and sustained for an extended period.
Derek Schmidt: While we remain hopeful, the U.S. Administration can successfully negotiate with its trading partners to reduce or eliminate the reciprocal tariffs and minimize the impact on the U.S. economy. Our outlook for the industry over the next year is moderately pessimistic.
given the external challenges to consumer spending.
Derek Schmidt: As such, we are prepared to navigate multiple demand scenarios and as we've demonstrated over the past few years, we can deliver share gains even in challenging industry conditions.
Derek Schmidt: To summarize, we are executing well on what we can control and remain confident that our strategies are working and we remain well positioned to continue gaining share.
Derek Schmidt: I'm encouraged by our financial performance and believe that our financial strength will enable us to effectively navigate near-term market choppiness while continuing to smartly invest in key growth enablers.
Derek Schmidt: like exceptional talent, product development, innovation, customer experience, and marketing, which are all critical to our continued industry health performance and long-term shareholder value creation.
Derek Schmidt: I'll be back momentarily to share my closing thoughts. With that, I'll turn the call over to Mike who will give you some additional details on the financial performance for the third quarter and the financial outlook for the fourth quarter.
Mike Ressler: The third quarter net sales were $114 million, or growth of 6.3% compared to net sales of $107.2 million in the prior year quarter.
Mike Ressler: As Derek mentioned, this marks our sixth consecutive quarter of your Rear Sales Growth and with near the high end of our guidance range of $110 to $115 million.
Mike Ressler: The increase in sales was primarily driven by higher unit volumes and to a lesser extent pricing from ocean freight surcharges.
Mike Ressler: From a profit perspective, GAAP operating loss was $5.1 million in the third quarter, driven by a $14.1 million non-cash impairment charge related to our least facility in Mexico.
Mike Ressler: In 2022, we commenced a 12-year lease for a manufacturing facility in Mexico to support strong demand that was elevated following the pandemic.
Mike Ressler: Subsequently, US Furniture Demand reverted to pre-pandemic norms, and as a result, we pivoted to sub-leasing the space in the short term, while maintaining the option to utilize the facility in the longer term.
while we had previously secured multiple short-term sub-lease tenants.
Mike Ressler: The facility is unoccupied and substantial changes in trade relations between the US and Mexico in early 2025, as well as the US and the rest of the world have caused foreign investment in expansion in Mexico to greatly diminish.
Mike Ressler: As a result, we've concluded that the caring amount of the right-of-use asset associated with the lease is no longer fully recoverable and recorded an asset impairment charge of $14.1 million in the quarter.
Mike Ressler: When excluding the $14.1 million impairment charge, as well as the $0.7 million gain from sale of a building formerly part of our Honeyberg Indiana Distribution Center complex,
Mike Ressler: Adjusted operating income was $8.3 million, or 7.3% of net sales.
Mike Ressler: The 7.3% adjusted operating margin exceeded the high end of our guidance range of 6.0% to 7.0% and is a 210 basis point increase from the prior year quarter.
Mike Ressler: Our adjusted operating margin performance was driven by sales growth leverage, favorable mix of new product with higher margins, ongoing operational efficiency, and discipline spend controls as we navigate dynamic market conditions.
Mike Ressler: From a balance sheet and cash flow perspective, the company generated $12.3 million of operating cash flow in the quarter, and ended the quarter with cash on hand of $22.6 million.
Mike Ressler: In the quarter, the company received $0.8 million in proceeds from the sale of a building that was previously part of our Honeyberg, Indiana Distribution Center Complex.
Mike Ressler: We also invested an additional $1.4 million in CAPEX, primarily for modernization of ERP systems.
Moving to our outlook, as Derek noted,
Mike Ressler: The tariff situation is very dynamic and there is a high level of uncertainty from the potential impact of new trade policies on consumer demand and the furniture industry.
Mike Ressler: We believe we have strategies in place to effectively navigate the current environment, but a significant change in macroeconomic factors could materially impact our outlook.
Mike Ressler: For the fourth quarter, we expect sales between $109 and $116 million. Reflecting minus two to positive 5% growth compared to the prior year quarter. We entered Q4 with a strong water backlog of $78.3 million.
Mike Ressler: and anticipate that many retailers will pull ahead demand and build inventory to avoid potential tariff increases.
Mike Ressler: However, if consumer demand drops and sell throughout retail slows significantly, we would anticipate softer orders in the back half of the quarter, which will ultimately impact
Mike Ressler: We expect Girl's margin between 21.0 and 22.0% in the fourth quarter.
Mike Ressler: Our growth margin assumes 10% tariffs remain in effect on Vietnam imports for the remainder of the quarter, and also assumes that our Mexico imports to the US will remain tariff free under U.S. NCA.
Mike Ressler: Should paraphrase change on either Vietnam or Mexico, it could have a material impact on our gross margin in the quarter.
Mike Ressler: We recently implemented modest surcharges on some parts of our business to partially offset the cost of tariffs.
Mike Ressler: but anticipate tariffs to have an overall dilutive impact on gross margins.
Mike Ressler: We work closely with our supply chain partners to minimize the impact on retail pricing and consumer demand.
Mike Ressler: We expect SDNA costs between $16.5 and $17.0 million and we will continue to prioritize high ROI investments in new product, innovation and marketing to accelerate our growth strategy.
Mike Ressler: We project operating margin in the range of 6.0 to 7.3% for the fourth quarter and expect a free cash flow for the quarter and the range of 4 to $7 million.
Near-term priorities for cash remain resourcing new innovation.
Customer Experience Initiatives and Funding Capital Expanditures.
Mike Ressler: For the fourth quarter, we expect capital expenditures between 0.5 and 1.0 million dollars, primarily for modernization of our ERP systems and supply chain maintenance.
Mike Ressler: Besides tariffs, the most significant drivers of variability and the fourth quarter guidance range are consumer demand and competitive pricing conditions which will be shaped by macro economic factors.
Mike Ressler: to reiterate our outlook assumes no major economic impact from near-term U.S. policy changes.
Mike Ressler: including Trade and Terrace, which could materially change our business forecast.
Mike Ressler: If we gain better clarity and there is a material change in our outlook, we will update our guidance.
Derek Schmidt: As Derek noted, we have multiple strategies that we are working to both strengthen our supply chain agility and resilience and mitigate tariff risks. Now, I'll turn the call back over to Derek to share his perspectives on our outlook.
Derek Schmidt: The external environment is exceptionally dynamic right now, as major influences on the U.S. economy and I'll look for consumer spending can change daily.
Derek Schmidt: Until there is greater clarity and confidence in the stability of both the outlook for U.S. trade policy and economic growth, we expect business conditions to remain volatile and challenging.
Derek Schmidt: As a company, we face similar unpredictability over the past five years, and as a result, we've learned to adapt to and thrive in new situations I'll be at trying.
Derek Schmidt: As a company, we have two main priorities near term to ensure we remain competitive and can continue to outperform.
Derek Schmidt: First, we will stay hyper focused on executing our strategies. They are working and enabling us to deliver strong sales growth and financial results, and we won't be here from that formula that has supported our success over the past few years.
Derek Schmidt: While we will certainly manage spending prudently to quickly respond to changing consumer demand in this dynamic environment.
Derek Schmidt: We will not diminish our commitment to providing an exceptional customer experience.
Derek Schmidt: and investing in new products, innovation and marketing, as these are foundational to our strategies and continue success.
Derek Schmidt: Second, we will continue to strengthen our supply chain agility and planning to minimize
Derek Schmidt: We have strong relationships through our value chain, and have confidence that we can work collaboratively with our partners in the short term to address the effect of tariffs while minimizing the impact on consumer prices.
Derek Schmidt: In the long term, we remain assured of our ability to reconfigure and optimize our supply chain if required due to permanent changes in global trade policies.
In summary, Flexsteel is financially strong and performing well.
Derek Schmidt: We are navigating a turbulent time for the industry, but we enter this period of rising uncertainty advantaged with excellent sales momentum, good profitability, and a strong balance sheet and cash generation.
Derek Schmidt: While challenging business conditions present risks, we also see great opportunities to strengthen our competitive position and customer value proposition by aggressively investing for long-term growth, at a time when we anticipate that other competitors may pull back investments in response to slowing demand.
Derek Schmidt: We have confidence that we can thrive in periods of disruption and maintain our focus on positioning the company for sustainable, long-term, profitable growth.
Derek Schmidt: With that, we will open the call to your questions. Operator?
Thank you very much.
Derek Schmidt: We will now begin the question-announcement session. To ask a question, you may press star then one on your telephone keypad.
Derek Schmidt: If you're using a speakerphone, please pick up your handset before pressing the keys.
Derek Schmidt: If at any time your question has been addressed and you would like to withdraw your questions, please press star then too
Derek Schmidt: At this time, we will pause momentary to assemble a roaster.
Antony Levitsovsky: The first question comes from Anthony Lebiedzinski with Celody and Company. Please go ahead.
Speaker Change: Good morning, Derek. Good morning, Mike. Certainly nice to see these sales and earnings of performance in the quarter.
Antony Levitsovsky: So, I have a few questions here. First, as far as just the quarter, as the March quarter progressed, just wondering if you guys saw any notable changes month to month in terms of your order patterns or delivered.
Derek Schmidt: Anthony, it's Derek, I'll start. In terms of March, typically...
Derek Schmidt: But compared to prior year year growth was still pretty consistent with the other periods in the quarter. What I will emphasize though, and I mentioned this in my earlier comments.
Derek Schmidt: Following the April 2nd announcement of tariffs, we have seen a significant slowdown in orders since that period. I think retailers, for the most part, are in wait and see mode. They're
Derek Schmidt: where the trade discussion is going to go, how it's going to impact consumers.
Derek Schmidt: And so we saw some of this behavior during the pandemic.
Derek Schmidt: I'm hoping that this week at Highpoint Market will get better clarity from retailers on certainly how they're feeling, what their intentions are.
Derek Schmidt: We'll be looking to sift out what retailers want to stand in the office.
Derek Schmidt: and which ones are going to play a little bit more defensive posture in this period. But there certainly I say nothing remarkable in March, but certainly a step function change here in April following the tariff announcements.
Speaker Change: And Derek, you mentioned and you prepared remarks how you're focused on new products which you've talked about this previously but also just having an advantage customer experience. So with that in mind, do you guys have a goal that as far as how much of your revenue you want to derive from new products? Has that changed given that? And so that's how much of your revenue you want to derive from your revenue you want to derive from your revenue you want to derive from your revenue you want to
Give it the tariff announcements that we've heard.
Speaker Change: No, I think, you know, as I've noted in the past, Anthony, it's a big part of our overall success strategy. If you look at our sales for both the quarter as well as your date, I mean, over half of our sales currently are from new products that have been launched in the last couple of years.
Speaker Change: So, it's a huge driver of our continued kind of growth and what I'll emphasize is that as we think about navigating through this period of uncertainty
and you know this Anthony because you know us.
Speaker Change: I mean we're going to be very prudent in terms of
Speaker Change: where we add structural costs, how we manage kind of spending. What we will not pull back though is our commitment to driving new product introductions, innovation, spending on marketing because it is so core to our overall strategy.
Speaker Change: So, to your question is, yeah, we're going to continue to be very aggressive around bringing new product and innovation in the market, you know, regardless of the external environment.
Speaker Change: That's encouraging to hear. And then, you know, just thinking about the tariffs, so you guys have put in some sort of charges, just wondering if you could perhaps quantify what's embedded in your guide and just curious to know if you've seen
Speaker Change: Any of your notable competitors respond with their own tariff surchargers, or you just curious how it's to what you're seeing from the competition.
Yeah, Anthony, this is Mike.
Speaker Change: Yeah, we've seen competitors implement surcharges and obviously they vary based on their supply chains, etc. Within our guidance, it assumes that the current 10% Vietnam tariff we have in place remains intact.
Speaker Change: We implemented a modest surcharge on some of our dealer direct on some of our dealer direct product categories where customers are importing containers.
Speaker Change: Pricing on our product that we fulfill a lot of our warehouses.
Speaker Change: We, you know, we typically carry four to, you know, are six to probably 10 or 12 weeks of safety stock.
Speaker Change: So, in the quarter, we don't expect that there will be a substantial impact in terms of the tariffs around our overall profitability.
Speaker Change: There will be a minor amount of delusion to our operating margins, but we would expect if those tariffs remain intact and or if they change, there would be a larger impact into the Q1 time frame.
Speaker Change: Gotcha. And then you're just thinking about product sourcing, obviously, as you called out, you know, Mexico and Vietnam are the vast majority of where you source your products from in the past you guys have talked about, you know, other countries to kind of all over. So are you?
Speaker Change: It sounds like you are kind of speeding up that process a bit, I guess, in terms of looking at other
Speaker Change: potential sources, if you could maybe expand on that and then if you were to do more sourcing out of other countries.
Speaker Change: Do you think your gross margins could be comparable to what you've been posting here lately or how should we think about that?
Yeah, it's...
Speaker Change: Situation's fairly dynamic as you can appreciate Anthony, so what we have done and what we'll continue to do is look for as many alternative sources as possible.
So, what we've already lined up is, you know.
Speaker Change: potential suppliers in other Southeast Asian countries, so depending on ultimately where trade negotiations go country by country. Certainly we'll have some agility to reshape our portfolio based upon a. [inaudible]
kind of tariff-optimized mix.
Speaker Change: We've more aggressively started to seek out potential suppliers in other parts of the world, grants that aren't as maybe sophisticated in terms of furniture supply chain and don't have the infrastructure, but again, I think we are taking the appropriate steps.
To make sure, again, we have options [inaudible]
Speaker Change: and as soon as we have more clarity ultimately on where the trade policy and tariff discussions go, I think we can move fairly quickly to optimize our supply chain given ultimately where things land.
Speaker Change: Got it. And I think in terms of your discussion around kind of margins, you know, depending on the magnitude, ultimately, of where tariffs land, it will determine the margin impact as Mike kind of suggested, you know, near term, they're going to be slightly diluted.
Speaker Change: Certainly, if tariffs end up being much larger than 10%, it will be even more dilutive.
Well, we anticipate attempting to do, though, is working with...
Speaker Change: Our value chain partners, and that's retailers, that's suppliers, to collectively figure out how do we minimize the tariff impact consumers?
Speaker Change: in this kind of economic environment. I think consumer spending is going to be challenged. So it's our mutual best interest to figure out how we minimize passing certainly any significant pricing on a consumer, so that would be our approach.
Speaker Change: Gotcha. Alright, well it does sound like you guys are certainly well prepared and could have some market share gains given all the disruptions so I think that's all I had here. Best of luck to you guys and look forward to seeing you at high point.
Sounds good. Thanks, Anthony. Thanks, Anthony.
Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Derek Schmidt for any closing remarks.
Derek Schmidt: In closing, I want to thank all of our Flexsteel employees for their hard work and dedication in driving the company's strong performance during the third quarter. I'm also thankful to all of you for participating on today's call. Please contact us if you have any additional questions, and we look forward to updating you on our next call. Thank you.