Flexsteel Industries 2027 Q1 Earnings Call

Please go ahead. Thank you, and welcome to today's call to discuss Flexsteel Industries' first quarter fiscal year 2027 financial results.

Our earnings release, which we issued after market close yesterday, Monday, October 26th, is available on the investor relations section of our website at www.flexsteel.com under News and Events. I am 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 will turn the call over to Derek Schmidt.

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

I am pleased to share our first quarter fiscal year 2027 results. Despite a challenging macroeconomic environment and significant inflationary pressures across our supply chain, our team continued to execute well, delivering solid sales growth and profitability while advancing the strategic initiatives that we believe will drive long-term shareholder value. During the quarter, net sales increased 3.2% compared to the prior year toward the upper end of our guidance range and marked our 12th consecutive quarter of year-over-year growth. Excluding the impact of our exit from the Homestyles ready-to-assemble furniture category, sales in our continuing Flexsteel branded business grew approximately 5%. Encouragingly, our growth momentum extends beyond reported sales. Orders increased approximately 5% during the quarter, and our ending backlog grew 8.2% compared to the prior year.

These trends, combined with the continued performance of our key growth initiatives, reinforce our confidence in the underlying strength of our business. Our growth continues to be driven by several complementary initiatives, including new product introductions, share gains with strategic accounts, and expansion in our health and wellness category. These initiatives are performing well despite continued softness in the broader furniture market, providing further evidence that our investments in consumer insights, innovation, product development, and customer experience are strengthening our competitive position. From a profitability standpoint, our results were solid, although impacted by an unfavorable foreign currency translation loss late in the quarter. Reported GAAP operating margin was approximately 6%, below our guidance range of 6.5%-7%. However, our results included approximately $800,000 of unfavorable foreign currency impact related to the strengthening US dollar against the Mexican peso.

Excluding the 70 basis point impact, operating margin was solid and in line with our expectations for the quarter. Given the significant inflationary pressures we're experiencing, I am encouraged by our underlying operating performance and ability to largely offset these cost headwinds to maintain healthy margins. Ocean transportation rates have nearly doubled over the past six months, while domestic transportation costs have increased substantially with surging diesel fuel prices. These pressures, along with higher costs for materials and sourced products, are creating difficult operating conditions for our industry. Our teams continue to respond to these challenges with urgency and discipline, identifying cost savings opportunities, improving productivity, managing our product portfolio, and implementing modest pricing actions to mitigate these pressures. While we've offset a portion of the inflationary impact, these cost pressures are expected to remain a meaningful near-term challenge. Looking ahead, our outlook for the broader industry remains measured.

Consumer confidence continues to be weak, and households are increasingly selective about discretionary purchases as inflation and higher energy costs consume a greater share of budgets. Housing affordability remains challenging, and rising mortgage rates continue to constrain housing turnover, an important driver of furniture demand. Geopolitical uncertainty, particularly the ongoing conflict in the Middle East, continues to create volatility in energy and transportation markets. In addition, tariff policy remains a significant source of uncertainty, including the scheduled increase in Section 232 tariffs on upholstered furniture from 25% to 30% on January 1st, 2027. These factors could continue to pressure both industry demand and profitability in the near term, and we recognize the importance of remaining agile as conditions evolve. However, what gives me the greatest confidence in Flexsteel's future is not an expectation that the external environment will improve.

It's the progress we're making strengthening the capabilities that allow us to compete more effectively in any environment. Over the past several years, we've invested deliberately in becoming a more consumer-driven and innovation-led organization. What I'm particularly encouraged by today is how these investments are beginning to work together as an integrated system. We're listening more closely to consumers, translating those insights into meaningful innovation, sharpening our product platforms, and bringing differentiated products to market with stronger marketing and customer support. Our recent Fall High Point furniture market provided several compelling examples of that progress. First, we're strengthening our core made-to-order seating business through consumer-led innovation. Our research continues to reinforce that comfort, quality, and durability are among the most important factors influencing furniture purchases. Consumers value personalization, but they also want the shopping experience to be simple and intuitive.

These insights directly inform the introduction of our new 6000 series, featuring SixFlex, the sixth generation of our patented Blue Steel Spring technology, and our new Comfort Choice program. SixFlex advances the comfort and performance of our signature seating technology, while Comfort Choice allows consumers to select from three distinct comfort levels without adding unnecessary complexity to the buying experience. What excites me about this launch is that we're taking one of Flexsteel's most enduring competitive advantages, comfort and quality, and making it even more relevant to today's consumer. It's a strong example of how consumer insights and innovation can reinforce the core of our business. The response from our retail partners has been overwhelmingly positive to this new introduction, which provides us optimism about accelerated growth in this important category. Second, we're significantly expanding our opportunity in health and wellness.

Our consumer research has identified attractive opportunities across four distinct wellness needs: sleep, care, restore, and assist. Building on the success of Zecliner in sleep, we're expanding into care, specifically nursery seating, through our new Embrace brand. We're also expanding into restorative wellness through our Zen collection, and we're expanding our assist or mobility and independence solutions through our new Rise collection. Together, these four wellness platforms broaden our opportunity to serve consumers across different life stages, from young families to aging adults, with products designed around meaningful needs in the home. We believe our consumer-led approach positions Flexsteel to participate in attractive new categories while building on our long-standing strengths in comfort, ergonomics, and durability. Third, we're introducing differentiated innovation that creates new reasons for consumers to choose Flexsteel. Our Pulse immersive seating platform is a strong example.

With the introduction of Stratus, our second generation of immersive seating, we're elevating the home entertainment experience to a whole new level. By leveraging new innovation in advanced sound and sensory technology, we're delivering the first fully Dolby Atmos-certified solution that spans both the soundbar and the sound system integrated into the furniture, and in the process, setting a new bar for a truly amazing immersive seating experience. We're also expanding our partnership with nationally recognized broadcaster Dan Patrick to build awareness and consumer demand for Pulse, following our work together supporting Zecliner. This combination of meaningful product innovation and targeted marketing is an important part of how we're working to strengthen our brand and drive consumer traffic to our retail partners. Finally, we're continuing to strengthen our position in casegoods. Our Statements collection is benefiting from deeper consumer insights into how people shop for bedroom, dining, and occasional furniture.

We're focused on quality, coordinated designs, and functional features that simplify purchasing decisions while helping retailers present compelling whole home solutions. In summary, while these four initiatives span different product categories, they share a common foundation: understanding consumer needs, developing differentiated solutions, and executing effectively with our retail partners. That's the larger strategic point I want to emphasize. Flexsteel is becoming a more consumer-driven and innovation-led company, supported by increasingly disciplined execution. These capabilities are not operating independently. They are reinforcing one another, creating a stronger foundation for sustainable growth and market share gains. We recognize that the external environment may remain challenging. Consumer demand could continue to be uneven, and inflationary and tariff-related pressures may create additional volatility in our financial performance. But even in challenging markets, companies are rewarded that are focused, differentiated, and disciplined.