DUBUQUE, Iowa — Flexsteel’s Q3 earnings call shed some additional light on ongoing cost inflation and the slowdown at retail that most everyone in the industry seems to be speaking about of late.
But first the good news: The quarter ended March 31 was another strong one, with Flexsteel posting $140.4 million in sales, up 18.6% compared to $118.4 million in the prior year period, representing its seventh consecutive quarter of double-digit sales growth. While e-commerce sales slid by $900,000 compared to the year earlier period, retail sales rose by $22.9 million, or more than 22%.
It also reported net income of $5.3 million, or 82 cents per share, up from $4.9 million, or 67 cents per share, for the prior year period. Flexsteel said it expects continued profitability moving forward despite some of the headwinds on the horizon.
Those headwinds include ongoing inflation, ranging from cost of materials to high transportation costs, including container rates. While easing some, container costs are still running higher than prepandemic levels, according to Flexsteel President and CEO Jerry Dittmer.
Flexsteel and others have previously addressed — and continue to address — these cost pressures through a mix of price increases and cost savings measures.
“While we continue to evaluate additional pricing actions as needed to combat inflation, we are elevating the intensity of our efforts to drive cost savings to both improve margins and maintain our price competitiveness in the marketplace,” Dittmer said.
The question is whether that will be enough as consumers begin to spend more on things like travel and entertainment.
“The other headwind is slowing consumer demand for furniture which is being driven by several factors,” Dittmer said. “First, demand is reverting to more normalized levels after an extraordinary period of pandemic-induced consumer buying for everything related to the home. We are consistently hearing from our customers that both online and retail furniture traffic has shifted downward.”
A second factor influencing demand is macroeconomic uncertainty, especially, regarding inflation which has driven consumer sentiment to a decade low recently. “The surge in food and gasoline prices is clearly taking a psychological toll on consumer spending habits,” he said.
Thirdly, he said, the mix of consumer spending is shifting away from goods and back towards “travel entertainment and services that were largely abandoned during the peak of the pandemic. This shift is likely to be evident in the coming months as summer travel picks up.”
In answer to a question during the call, Dittmer said a drop off in consumer spending is being seen across the country, not just certain markets.
“We are seeing the slowdown both in our home furnishings business and in our home sales online business,” he said, of activity in the past 75 days. “From February to now we’ve seen a pretty drastic slowdown… But its really not any part of the country There’s pockets all over.”
He noted that for furniture manufacturers like Flexsteel, the slowing demand will be further exacerbated by high retail inventories. Based on conversations with dealers at the recently concluded April High Point Market, he said the message from retailers was universal: “Warehouses were full of containers of product that they had ordered six to nine months ago, but that just recently arrived dure to supply chain delays.”
He added that until retailers can move some of this product, they won’t have room to replenish their flexible inventories in the short term.
Derek Schmidt, chief financial officer, noted that the third quarter sales were at the midpoint of Flexsteel’s original $135 million to $145 million guidance despite ongoing supply chain challenges.
Guidance for the fourth quarter is somewhat less, between $120 million and $135 million, which also hints of a slowdown at retail.
“While we are competing well, consumer traffic for furniture both online and in-store has recently slowed, albeit still above prepandemic levels,” he said, noting that demand for its Mexico product remains strong due to its competitive lead times. “Many of our large retailers also have warehouses full of sourced product, which finally showed up after months of supply chain delays.”
Such heavy inventory positions, he noted, “will further dampen demand for our in-stock inventory in the near term. We do expect demand for our North American manufactured products to accelerate given how competitive lead times currently compare to other manufacturers. But the increase in this part of our business will still be overshadowed by headwinds in other sourced product.”
He also noted that despite uncertainty regarding cost inflation near term, the company is projecting operating income as a percent of sales in the fourth quarter to range from 3.5% to 4.5%, which he said is consistent with third quarter results.
Yet he also concurred with Dittmer’s assessment about things being somewhat uncertain in the months ahead due to shifts in demand.
“We are starting to see not only a downward shift in overall consumer spending, but I think there’s a sizeable mix of people that are spending more of their disposable incomes on travel and entertainment, those things that they largely avoided during the pandemic. I think we’re going to see that continue at least throughout the summer. So I think conditions are going to be choppy here for the next six months, and depending on how the Fed handles inflation, maybe we can get back to a more normalized environment here later in the calendar year.”