Q1 2026 Flexsteel Industries Inc Earnings Call

Speaker #3: Good day and welcome to the Flexsteel Industries first quarter fiscal year. 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero.

Speaker #3: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone.

Speaker #3: To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flexsteel Industries.

Speaker #3: Please go ahead.

Speaker #4: Thank you. And welcome to today's call, to discuss Flexsteel Industries first quarter, fiscal year 2026 financial results. Our earnings release, which we issued after market closed yesterday, Monday, October 20th, is available on the investor relations section of our website, at www.flexsteel.com/newsandevents.

Speaker #4: I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks, and then we'll open the call to your questions.

Speaker #4: 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 #4: 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 #4: Such risks and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K, as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings, as applicable.

Speaker #4: These forward-looking statements speak only as the data 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 #4: The press release available on the website contains the financial and other quantitative information to be discussed today. And with that, I'll turn the call over to Derek Schmidt.

Speaker #4: Derek?

Speaker #5: Good morning and thank you for joining us today. I am pleased to share with you our first quarter results, we continue to execute well, and delivered strong sales growth and sizable year-over-year profit improvement in the quarter.

Speaker #5: While industry demand remains lackluster due to challenging macroeconomic conditions, we continue our growth momentum and delivered 6.2% sales growth in the quarter, which represents our eighth consecutive quarter of year-over-year growth.

Speaker #5: Encouragingly, the sources of our growth remain diverse and balanced across our core market initiatives, and new and expanded market efforts. In our core new products and share gains with strategic accounts continue to drive growth.

Speaker #5: In new and expanded markets, growth is primarily driven by ramping sales in both our case goods and health and wellness product categories. We feel confident that our growth strategies are working and will continue to drive future sales increases propelled by focused investments, consumer research, new product development, innovation, and marketing.

Speaker #5: While I'm pleased with the success of our consistent top-line growth over the past two years, particularly considering industry headwinds, I'm also especially pleased with our progress driving meaningful year-over-year profitability improvement.

Speaker #5: Operating margin was 8.1% in the quarter, up 230 basis points compared to 5.8% in the prior year quarter. And represents our tenth consecutive quarter of year-over-year adjusted operating margin improvement.

Speaker #5: The levers driving our consistent profit improvement are unchanged and working well, and include benefits from sales growth leverage, effective cost control from strong operational execution and productivity gains, and disciplined product portfolio management, including improved margin profiles from new products.

Speaker #5: As we look forward to the remainder of our fiscal year 2026, our outlook for industry demand in the broader economy is restrained. While the US economy remains resilient, and the prospect of additional Fed interest rate reductions and the relatively strong labor market, albeit slowing, provides some optimism for economic growth, a weak housing market, combined with shaky consumer confidence, are expected to be headwinds for the industry near term.

Speaker #5: Based upon feedback from our retail partners, weekly consumer traffic and sales were especially uneven during the recent quarter, suggesting that consumer sentiment remains fragile given mounting concerns about inflation and slowing employment growth.

Speaker #5: Additionally, tariffs present a major risk to US furniture demand near term. While we successfully took pricing and cost reduction actions to largely mitigate the adverse impact of the reciprocal tariffs announced in August, on September 29th, the White House issued new and larger Section 232 tariffs on imported timber, lumber, and their derivative products, including upholstered furniture.

Speaker #5: Although the new Section 232 tariffs will not stack on top of the existing reciprocal tariffs, they will be larger and have a broader impact on Flexsteel's business than the previous reciprocal tariffs.

Speaker #5: For context, in recent quarters, the sourcing mix of our sales was roughly 70% from Asia, largely from Vietnam, which are mostly subject to a 20% reciprocal tariff, and the other 30% of our sales mix was manufactured at our facilities in Mexico, and was exempt from tariffs, as our product is USMCA compliant.

Speaker #5: Under the new Section 232 tariffs, there is no exemption for USMCA-compliant products. As a result, all of our upholstered furniture, sourced from both Vietnam and Mexico, will be subject to the new 25% tariff effective October 14th, which will subsequently increase to 30% at the end of the calendar year.

Speaker #5: Over 90% of our sales are currently classified as upholstered furniture under the harmonized tariff schedule code. So most of our portfolio will eventually be subject to the 30% tariff.

Speaker #5: While the new Section 232 tariff will have a dramatic impact on Flexsteel's business, it is also expected to be highly disruptive to the entire U.S. furniture industry.

Speaker #5: While sourcing mix between furniture imports and domestic production varies by product category, it is generally estimated that imports comprise 65 to 70% of total US furniture consumption.

Speaker #5: The availability of skilled labor in the US produced furniture is already lacking, so scaling domestic production will be challenging near term in our opinion.

Speaker #5: As such, we anticipate the tariff change to result in broad price increases for furniture in the US, dampen consumer demand, and compress industry margins in the short term, for suppliers, manufacturers, and retailers.

Speaker #5: As a company, we've had to adjust to major external shifts several times over the past few years. For example, when 2019 tariffs were implemented on China, when upheaval occurred in global supply chains during the COVID pandemic, and when furniture demand dived following a remarkable pandemic-driven surge.

Speaker #5: As we've demonstrated in the past, our company is agile and ready to respond to major shifts in market dynamics, while remaining steadfast in our execution of our growth strategies and key investments to continue gaining market share.

Speaker #5: We entered this tumultuous period with a solid balance sheet, healthy profitability, and a strong competitive position, and we are well situated to navigate this challenging environment while continuing to invest and gain share.

Speaker #5: While we're hopeful that either Vietnam or Mexico, or both, reach trade agreements with the US that lessen the tariff exposure to furniture, we are aggressively pursuing a multi-pronged response plan to mitigate as much of the tariff impact on our business as possible.

Speaker #5: In the short term, we increased tariff surcharges on our impacted products this month to partially offset the increased cost of tariffs. We were thoughtful in our pricing decisions to maintain our competitiveness versus other market alternatives, and to minimize demand declines.

Speaker #5: We are also prudently pulling back on discretionary expenses while still funding our most critical growth investments. In the midterm, we are evaluating larger structural cost reduction opportunities and alternative supply chain sources.

Speaker #5: In the near term, we expect the net impact of the tariff change and our subsequent pricing response to adversely impact demand and dilute margins.

Speaker #5: However, I am confident that we will identify and execute the right strategies in the mid- to long-term to continue our current trajectory of profitable growth and shareholder value creation.

Speaker #5: Despite the near-term turmoil from tariffs and challenging industry conditions, I remain optimistic about the fundamental drivers of long-term industry growth and Flexsteel's position to continue gaining share.

Speaker #5: We remain committed to our existing strategies and investments to pursue new growth, many of which will be highlighted at the upcoming High Point Furniture Market, which kicks off this week.

Speaker #5: We will be showcasing another impressive round of new product introductions at market. In total, we're introducing 26 new product groups and 226 unique SKUs.

Speaker #5: New product has been a significant catalyst for our recent growth, and the magnitude of introductions in this market combined with successful new product launch at April market will put calendar 2025 on track for a record year of new product activations.

Speaker #5: There are many elements driving our new product success, but it starts with our increased investment in consumer insights. We listen closely to consumers, and we leverage that feedback to ensure every design is shaped by real insights and proven demand.

Speaker #5: That's why our furniture connects with everyday life. It's comfortable, durable, and stylish in ways that matter to consumers right now. Those consumer insights are also driving our innovation.

Speaker #5: And there will be several new innovations revealed this week at market. We're introducing our new sub-brand, Pulse, which offers power motion furniture with a built-in immersive sound system that transforms seating into a high-performance entertainment experience.

Speaker #5: With precision-tuned theater-quality audio, and synchronized vibration-integrated directly into the furniture, Pulse surrounds you in sound that you can feel. Pulse was specifically developed with innovative engineering to differentiate our solutions through superior sound quality, ease of wireless connectivity, and dynamic acoustic distribution to optimize sound by application.

Speaker #5: Such as movies, music, and gaming. We also continued to innovate in the health and wellness category, where our research shows growing demand for premium, wellness-oriented seating.

Speaker #5: While we continue to expand our Z-Cliner lineup of solutions to address consumers' need for improved sleep, we are expanding beyond sleep to innovate in other health and wellness areas such as restoration.

Speaker #5: We're introducing our new Zen series, which will lead the way in creating a sanctuary in the home. People today are pulled in every direction: work, family, constant noise, and they rarely have a space to reset.

Speaker #5: What makes Zen unique is that it looks and feels like beautiful living room furniture while giving consumers a spa-like experience at home. It's our way of helping consumers find their Zen.

Speaker #5: A perfect balance of everyday style and restorative wellness. The Zen series will bridge the gap between wellness and design, positioned between massage and traditional recliners.

Speaker #5: Zen provides consumers with a place to reset in their home with a perfect blend of comfort, style, and built-in wellness technologies, like heat, massage, and ventilation.

Speaker #5: Lastly, we remain committed to growing our case goods business through our Statements sub-brand, positioned for its superior quality, design, and durability. Consumer research has validated these attributes as top considerations when purchasing case goods furniture.

Speaker #5: We're introducing seven new collections at market, all developed with distinct on-trend designs and unique features, including lighting, discrete power, hidden casters, and custom finishes and hardware.

Speaker #5: In addition to our investments in consumer insights, innovation, and new products, we are also elevating our success through powerful marketing in three distinct but complementary ways.

Speaker #5: First, we are using our consumer insights to tailor marketing positioning and messaging to support product launches targeting specific consumer needs. We've seen great success in retail adoption and consumer engagement from these efforts.

Speaker #5: Second, we are investing in driving consumer traffic to the stores of our retail partners. Flexsteel has invested in paid search, paid social, and email demand generation activities to engage consumers and direct them to retail stores.

Speaker #5: We are partnering with our retailers in unique value-added ways to capture more consumers and mutually increase sales. And third, we're investing to improve the in-store brand experience.

Speaker #5: As we drive more consumers to retail stores, we are devoting time and energy to offering stronger, point-of-sale materials to support the in-store experience. Our point-of-sale items clearly display our brand and value proposition, helping educate consumers, and guide their shopping journey.

Speaker #5: As a result, we've seen exponentially higher sales of products supported by our point-of-sale materials versus those that aren't. To summarize, I'm proud of our team's strong start to fiscal year 2026, encouraged by our outstanding execution of our growth strategies and investments, and confident in our ability to navigate the challenging conditions with tariffs near term to ensure we maintain our long-term trajectory of profitable growth.

Speaker #5: 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 Q1 and our financial outlook.

Speaker #2: Thanks, Derek. For the first quarter, net sales were 110.4 million dollars, or a growth of 6.2% compared to net sales of 104 million dollars in the prior year quarter.

Speaker #2: As Derek mentioned, this marks our eighth consecutive quarter of sales growth compared to prior year periods, and exceeded the upper end of our guidance range of 105 to 110 million dollars.

Speaker #2: The increase was driven primarily by our source sauce seating products, partially offset by lower unit volume and our made-to-order soft seating products, and home styles branded ready to assemble category.

Speaker #2: The current quarter includes roughly 2.4 million dollars in pricing from tariff surcharges. Sales order backlog at the end of the period was 66.7 million dollars, which was relatively flat to backlog at the end of the prior quarter.

Speaker #2: From a profit perspective, the company delivered GAAP operating income of $9.0 million, or 8.1% of sales, in the first quarter. The GAAP operating margin exceeded the top end of our guidance range of 6.0% to 7.3% of sales.

Speaker #2: The outperformance to our guidance range was primarily due to leverage on our fixed cost due to higher sales, and 0.7 million dollars in favorable foreign currency translation on our peso denominated assets in Mexico.

Speaker #2: Resulting from the peso strengthening against the US dollar in the quarter. As Derek mentioned, through pricing actions and cost reduction initiatives, we were largely able to mitigate the impact of tariffs in the quarter.

Speaker #2: Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of 38.6 million dollars, working capital of 116.9 million dollars, and no bank debt.

Speaker #2: Higher profit and effective working capital management offset annual cash outflows for cash incentives, software, and insurance renewals. Given the level of uncertainty regarding the impact of tariffs on our business, we believe it is appropriate to pause on providing any forward-looking guidance at this time.

Speaker #2: As the impact of tariffs, pricing actions, consumer demand, and our cost savings efforts become clearer, we will continue to share more information. With that, I'll turn the call back over to Derek to share his closing perspectives.

Yeah, what was referring to their Anthony was really. I mean weekly weekly store traffic in sales as well as our orders were, were very volatile. Um, and to give you an example, um, the weeks leading up to Labor Day were extremely weak, um, the week and the week after kind of Labor Day, extremely strong. And then immediately after that, um, demand and and store traffic dropped again, so it's been difficult for us to get a strong pulse on really the overall health of. I think the, you know, the furniture consumer because there's been so much volatility, especially on a week to week basis, um, that that typically isn't normal, um certainly in in in our business or um, kind of the industry.

And I, I, I would, I would certainly um, probably attribute that to, I mean, number 1 the uncertainty around tariffs, but then again, there's there's some uncertainty around, just the overall macro environment. Um, and so I think, uh, you know, consumer confidence, like I said, is a bit shaky. Um, and and so it's not surprised entirely surprising that. We saw stronger sales around a holiday period. I think, um, strain consumers are, are looking for deals, um, in this type of, uh, macroeconomic environment. And I think that will be

True, as we go into the holidays as well.

Understood. Okay, all right. And then, you know, thinking about the the new tariffs, uh, you talked about the putting in place, tariffs, sir charges. Um can you comment it as far as like what the level of the store charges was? And I know you're not giving guidance, but maybe you could just help us think about. Like, um, as far as the impact of those search charges may have, uh, um, on your sales and, you know, growth margins.

if, if any any kind of, you know, there's still help with would be certainly beneficial

Are in stock Source business. Um, when the 20% tariff, uh, reciprocal Tariff was in place. We had an 8 and a half percent, uh, price per charge on those products. Um, and that, uh, increased to 15%, um, to cover eventually when the Tariff goes to to 30%. So effectively, um, we're headed toward a 30% tariff, and we're passing half of that increase along through through search charges. Um, and then similarly, on our made to order business out of our Wares facilities, EU. I mean, you understand prior to the uh, October 14th section, 232 tariffs going into place. We are USMC compliance. So, there was no tariff, um, on that part of our business that is going to 30% here by the end of the calendar year. So we did, um, similar to our source business, put a 15% pricing, S charge, um, on those products.

Mhm. Okay, so I guess it's totally and then tell us about the impact.

Yeah, yeah, yeah. I think, um,

Certainly there will there will there will be some demand decline as a result of these price increase and not only for Flex deal. But I think across the industry um certainly on the source side, we're seeing all of our competitors take um similar if not larger price increases in the market. Um so I think that will certainly impact demand um to what magnitude I think.

Is to be determined here in the coming weeks and coming months.

Understood. Okay, and I know you guys have done a great job as far as folks focusing on new products. Um, can you speak to like as far as like, do you guys have a goal in mind? As far as you know what percent of your sales, you want to come from new products? Or how do we think about that and and um, and and as far as pricing, on those new products relative to the Core Business. Uh, how should we think about that?

Yeah, I think our long-term goal is um, you know, 30 to 40% of sales, um, being derived from new products. And we Define that as new products launched within the last 3 years, um, to give you, you know, context here in the first quarter. Um, our sales, uh, um, comprised,

A little over 50% from from new products. So we are certainly delivering on that goal. Um, we know it's a huge Catalyst for the success. We've had and over the last 2 years and and we're investing aggressively in terms of how we think about pricing when we introduce new products. Um, we're constantly trying to cannibalize ourselves. So really, the intent is to constantly bring new and improved value to our retailers and to our consumers. Um, so we're aiming for better quality better Comfort, better functionality, um, at at, at a better value

Um, and so, in terms of price, it's really, um, we're looking to bring better.

Better value to the market at similar, if not, um, lower prices than our current product.

Gotcha. All right and then you've got done a nice job. Also um with your case goods business uh certainly understand. It's it's a relatively small piece of of the overall business but um, thinking about, you know, the going forward, you guys have a goal in mind. As far as how much you want to increase. Uh, case goods, you know what, what percent of sales could that be at some point?

What I will tell you, Anthony. We do have internal goals, um, or um, it hasn't been to share that. Um,

Um, 2 public, just for competitive reasons. Um, the case with category, to be honest, has been more challenged than other product categories in the industry. Over the last couple of years, that said, said it's still a very very large category, um, for overall US, furniture consumption. Um, and I'm really pleased with the the magnitude and the quality of new product, um, that we've come out with over the last several years. So I still, I I I feel strongly that we're well positioned here to, to gain our fair share. Um, and I do believe that it's going to be a critical growth driver in the years to come

Um, and I think, you know, as we start to ramp those up more significantly, I think we'll be, um, more open to sharing details around how we think about our portfolio composition.

Gotcha. Okay, and my last question. Uh, so, you know, the the tax rate was lower than last year and lower than what we had expected it. Was there anything?

That, and how do we think about the tax rate for the balance of the year?

Yeah, Anthony. Um, in the quarter, there were a couple discrete items. Um, number 1, just uh, change and reserved for uncertain, tax positions, or uncertain tax positions. Um, and then also a little bit higher R&D tax credit, um, and lower foreign taxes were kind of the driver. Um, but I would just say I want to go forward basis, you know, we expect the right to be a little bit, you know, a couple bases couple hundred basis points higher kind of for the remainder of the year.

Understood. Well, thank you very much and best of luck and I look forward, yeah, look forward to seeing the new products in the High Point.

All right. See you on Friday. Thanks.

again, if you have a question,

Or then 1.

Our next question comes from bill dellum with tatone capital. Please go ahead.

No, thank you 2 questions. First of all, relative to your comment that competition uh, is responding in a similar or larger way. Would you please quantify the magnitude of of price increases that you are seeing relative to your, um, 8 and 15%? And then secondarily. Um, I was a little confused when you referenced, uh, you had products that were usmca compliant but

Sounds like the recent tariffs are changing that dynamic. Would you, uh, provide, uh, um, uh, I guess a fuller picture and fill in the blanks on the dynamics there, please?

Yeah. Also, maybe Bill. I'll start with your last question and then move to your first one in terms of the USMCA compliance. So when the reciprocal tariffs were put in place, um, the uh um,

You know, there was an exemption for usmca compliant product with Section, 232 tariffs, that includes the ones that the White House have put on um, aluminum steel. There is no exemption for usmca compliance. So, again, it's a matter of how um, the new Proclamation was written um certainly our hope is that as Mexico. Canada continued to negotiate. Um, with the admin, the the US Administration that um, they can influence and potentially um, you know, get an exemption for usmca compliant. But as of now, the way the proclamation is written, um, there is no exemption. Um, so, so that's why the change it. It's, it's specifically how the tariffs were were written. Um, in terms of your first question regarding, uh, pricing competitiveness for our Source Products. Um, again, I described

How we're going from a current 8 and a half percent sir, charge up to 15. Um we've gotten you know, a plethora of of competitive information but we're seeing some of our main competitors. Go as high as um, 21% and 25%, um, relative to our 15%. Um, now there's some other competitors that are that are slightly lower, um, but by and large, we're seeing, um, the competitive Set uh, pass through, um, these latest tariff increases Almost 100% to to retailers and to Consumers.

So that at least gives us um, some confidence here that we are not weakening our competitive position, um, versus versus other Alternatives in the market.

Taking that 1 step further. Have you heard from uh, any uh, portion of your retail customers that because you are taking prices up 15% versus these higher numbers. That, uh, you may be getting more business from them.

Uh, certainly is the possibility. I think Bill. It's um, too early to speculate on that. Um, as as I noted in my comments earlier, going into our, um, semiannual, uh, High Point Market this week. Um, we will have the opportunity to converse with, um, hundreds of our retailers. And so, I think we'll get a better pulse on how they're feeling.

About the changes and and and their view on how they think it's going to impact consumer demand. Um but I think it's it's going to take us probably another 5 6 7 weeks here to really get our arms around um how how the consumer is going to respond to these pricing changes in the market.

Great. Thank you. Congratulations on a good quarter.

All right, thanks Bill.

This concludes our question and answer session. I would like to turn the conference back over to Derek Schmidt for any closing remarks.

In closing, I want to thank all of our Flex Seal employees for their hard work, and dedication and driving the company's strong performance during the first quarter.

I'm also thankful to all of you for participating in today's call.

Please contact us if you have any additional questions. We look forward to updating you on our next call. Thank you, and have a great day.

Conferences. Now, conclude