Company plans to combat slowdown with aggressive, targeted product development, distribution strategy
DUBUQUE, Iowa — A review of Flexsteel’s latest earnings call for its third fiscal quarter offers a glimpse at where the company and its customers have challenges and opportunities in the months ahead.
First, here is a glimpse of a few of the challenges identified by company executives during the call:
According to company President and CEO Jerry Dittmer, one-third of the company’s retailers still have too much inventory. And moving this inventory is a challenge because of a slowdown in consumer demand.
Dittmer also noted that Flexsteel’s e-commerce business also remains challenged because of lackluster financial results at its four largest customers. He said that while e-commerce will remain a strong segment for the furniture business in the future, “right now, it’s at depressed levels even further down than we would have seen pre-pandemic at this point.”
And while company debt levels have fallen, the company expects its debt levels to be higher than anticipated, within the $10 million to $18 million range by the end of fiscal 2023 compared to a previous estimate of $4 million to $12 million in the same period.
Despite the challenges, the company sees plenty of opportunity on the horizon.
While Chief Operating Officer Derek Schmidt said that third-quarter sales were down year over year from the pandemic-driven highs of 2022, he noted that the company “delivered sequential sales growth of 6.4% from the second quarter” and expects similar growth in the fourth quarter.
“We anticipate building on that momentum going into fiscal 2024 to profitably grow even with headwinds related to an expected economic slowdown,” he said, noting that its confidence in its growth trajectory largely stems from its early success and continued focus on strategic growth initiatives in three key areas: new sales distribution, new product categories and new product segments.
Big box customers, he added, represent a key growth area in terms of new distribution. The company expects to “profitably grow” this channel to about 5% of total company sales this fiscal year with further growth planned in fiscal 2024.
As part of that planned growth in the segment, it recently launched its new small parcel modular contemporary upholstery line within the big box channel and said it also is expanding distribution of the line through multiple e-commerce partners in the fourth quarter.
Meanwhile, its Charisma brand is also targeting a new generation of Flexsteel customers with slightly smaller-scale upholstery at opening price points. It expanded the product offering at the recently concluded High Point Market with several new groups featuring sofas targeted to retail below $1,000. Initial feedback, Schmidt added, was strong as he noted customers liked the overall quality, comfort and price points.
Schmidt added that as the company pursues these growth avenues, “we are investing to renew and grow our core business, too. We are competing well and our customers validated this view during last week’s April High Point Market,” he added, noting that the company made a significant introduction of new on-trend product designs and covers at more competitive price points, while maintaining the differentiated comfort and quality that defines the brand.”
With such a targeted growth strategy, the company will be increasing spending in some areas as well. For example, the aforementioned increase in debt levels is based on investments in inventory to support its sales growth initiatives. During the fourth quarter it also expects capital expenditures to fall between $1 million and $1.5 million as part of an ongoing investment in expanding its ERP capabilities. Overall SG&A costs during the fourth quarter are expected to be between $16 million and $17 million, compared to $16.5 million in the fiscal third quarter.
The good news for investors is that the company remains profitable. According to Chief Financial Officer G. Alejandro Huerta, the company expects gross margins between 17% and 19% in the fourth quarter “as our growth and cost savings initiatives will drive margin expansion.”
“We are forecasting that the challenging macroeconomic environment will continue to temper the demand for our core product offerings,” he added. “However, our growth initiatives, which have begun to drive meaningful revenue, will help offset this and result in subsequent quarter-over-quarter sales growth.”
Added Dittmer, “The positive momentum we’ve gained in the first nine months of fiscal 2023 has me optimistic regarding our long-term profitable growth potential,” he said. “Slowing economic growth and waning consumer demand are obvious challenges for the industry near term. However, we remain focused on delivering our strategic initiatives by investing in our talent, systems and operational capabilities.”