Flexsteel Industries 2026 Q4 Earnings Call

Please go ahead. Thank you, and welcome to today's call to discuss Flexsteel Industries' fourth quarter fiscal year 2026 financial results.

Our earnings release, which we issued after market close yesterday, Monday, August 17th, is available on the investor relations section of our website at www.flexsteel.com under News & Events. I'm here today with Derek Schmidt, President and Chief Executive 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 on 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 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. 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. With that, I'll turn the call over to Derek Schmidt.

Derek? Good morning, and thank you for joining us today.

I am pleased to share our fourth quarter and fiscal year 2026 results. While the operating environment became increasingly challenging throughout the year, particularly during the second half, our team continued to execute at a high level and delivered another year of strong financial and strategic progress. During fiscal year 2026, we generated sales of approximately $459 million, representing 4% growth over the prior year, despite a weak and highly variable demand environment for furniture. We expanded adjusted operating margins to approximately 7.5%, generated record adjusted earnings per diluted share of $4.94, and produced more than $47 million of free cash flow. Our strong cash generation enabled us to return meaningful capital to shareholders through share repurchases, and we recently increased our dividend by 25% while maintaining a strong balance sheet.

These results are encouraging given the number of external challenges our industry faced during the year. Demand remained inconsistent, tariff policies continued to evolve, geopolitical events created heightened macroeconomic uncertainty, and inflationary pressures intensified as rising energy prices drove higher transportation and material costs. Despite these headwinds, our organization remained agile, disciplined, and focused on execution. I believe our performance this year demonstrates the resilience of our business model and the progress we've made strengthening our operating capabilities over the past several years. Turning to the fourth quarter, net sales were modestly above the prior year period, continuing a streak of 11 consecutive quarters of year-over-year growth. While we are never satisfied with modest sales growth, the quarter must be viewed within the context of an increasingly difficult demand environment, which weakened significantly following the start of the war with Iran. Consumer confidence remains subdued. Affordability challenges continue to pressure discretionary spending.

Ongoing uncertainty related to the conflict in the Middle East has weighed on economic sentiment. Even consumer shopping at higher price points have become increasingly value conscious in recent months. Importantly, many of the strategic initiatives driving our long-term growth continued to perform well. Our health and wellness category once again delivered positive year-over-year growth, and we continued to make progress with strategic accounts and key new product introductions. While growth rates moderated along with the broader market, these initiatives continue to outperform the overall business and reinforce our confidence in the long-term opportunity ahead. From a profitability perspective, we delivered adjusted operating margins of approximately 7.1% in the quarter.

While this was below the prior year period, which benefited from an unusually large foreign currency gain, profitability was sustained sequentially from the third quarter and remained strong relative to both our historical performance and industry norms. Our results continue to reflect the benefits of disciplined product portfolio management, operational productivity improvements, and prudent management of selling and administrative expenses while continuing to fund critical growth investments. Beyond the financial results, I am particularly pleased with the strategic progress we made during fiscal year 2026. Over the past several years, we have invested heavily in strengthening our consumer insights capabilities, accelerating innovation, improving product development processes, and expanding our marketing capabilities. During fiscal year 2026, we continued building on these investments and further strengthened our ability to bring relevant products to market that resonate with both consumers and retail partners. We believe these capabilities are becoming increasingly important competitive advantages.

Better consumer insights lead to better products. Better products improve retail adoption and consumer demand, and stronger marketing builds brand awareness and drives traffic to our retail partners. Together, these investments are helping us create a more durable growth platform, capable of generating long-term share gains across a variety of market conditions. As we look ahead, however, we remain measured in our outlook for the near term. Consumer demand remains uneven. Inflationary pressures have increased, and visibility remains limited. Rising energy costs are creating additional pressure across transportation, freight, and raw material inputs. The tariff environment also remains highly fluid, with uncertainty surrounding both future trade policy and potential changes to existing tariff structures. As a result, we expect industry conditions to remain challenging as we enter fiscal year 2027. While the near-term environment may remain difficult, our strategy and priorities are unchanged.

We will continue to operate with agility, maintain disciplined cost control, protect our strong financial position, and invest in the capabilities that we believe will drive long-term growth and shareholder value creation. We have successfully navigated periods of disruption before, and I am confident that the combination of our balance sheet strength, operating discipline, and strategic investments position us well to continue strengthening our competitive position over time. With that, I'll turn the call over to Mike, who will provide additional details on our fourth quarter financial performance and outlook for Q1 fiscal year 2027.

Thanks, Derek. For the fourth quarter, net sales were $115.4 million, or growth of 0.7%, compared to net sales of $114.6 million in the prior year quarter. The increase was driven by a $2.9 million increase in sales of soft seating products, partially offset by a $1.8 million sales decline in our ready-to-assemble products sold under the Homestyles brand. Sales of Flexsteel branded bedroom, dining, and occasional case goods products were down roughly $0.3 million in the quarter. Sales order backlog at the end of the period was $70.1 million, an increase of approximately 5.5% compared to the same period in the prior year. On a sequential basis, backlog is down approximately 11.8% from third quarter. The sequential decline in backlog aligns with historical patterns driven by softer demand leading into the summer season.

From a profit perspective, the company delivered GAAP operating income of $16.3 million, or 14.2% of sales in the fourth quarter, compared to operating income of $14 million or 12.2% of sales in the prior year quarter. GAAP operating margin of 14.2% includes a 780 basis point benefit from IEEPA tariff refunds received in the quarter and a negative 70 basis point impact from costs related to the exit of our Homestyles branded ready-to-assemble product category, including employee separation costs and inventory liquidations and write-downs. Excluding the impact of these items, adjusted operating margin was 7.1% of sales in the current quarter, compared to adjusted operating margin of 9.0% of sales in the prior year quarter. Prior year quarter adjusted operating margin included a 160 basis point benefit from favorable foreign currency translation.

Regarding refunds received for previously paid IEEPA tariffs, the company evaluated the appropriate accounting and business considerations for those funds and, based on the facts and circumstances of the matter, recorded a reduction to cost of goods sold in the period. Priorities for cash and liquidity include funding investments in consumer insights, innovation, new products, and marketing to execute our growth strategy and strengthen our competitive advantage. During the quarter, the company made the decision to exit the ready-to-assemble product category, which has become increasingly competitive, difficult to sustain a competitive advantage, and no longer generates attractive returns. Over the next three to six months, we expect to monetize remaining inventory and prepare our Huntingburg, Indiana, distribution center for sale, which currently only services the ready-to-assemble category and is not required to support our long-term growth priorities. Moving to the balance sheet and statement of cash flows.