Reduction in debt is expected to free up cash to help company achieve its expansion goals
DUBUQUE, Iowa — Flexsteel’s latest earnings report for its second fiscal quarter ended Dec. 31 had plenty of positives both on the revenue and earnings side of the business.
As previously reported, net sales were up 7.5% to $100.1 million, which was above its prior guidance range of $94 million to $100 million. For the full first half, sales also were up just over 3% to $194.7 million.
Meanwhile, net income for the second quarter totaled $3.05 million, or 57 cents per share, compared to $2.85 million, or 53 cents a share, the same period last year. For the full first half, its net income was just over $3.8 million, or 71 cents per share, compared to $3.14 million, or 58 cents a share last year.
But another key result that did not go unnoticed during its latest conference call was the repayment of $15.1 million in debt for the quarter, which the company said represented a 46% reduction in borrowings under its line of credit. According to its financial guidance, it expects to reduce its line of credit borrowings to zero sometime during fiscal year 2025.
This led Budd Bugatch, a senior research analyst at Water Tower Research, to ask one of the more relevant questions during the session: “Once the debt’s down to zero, what’s the use of cash look like?”
The first part of the answer from company President Derek Schmidt highlighted strategies the company has long communicated in prior earnings calls, namely penetration in new markets with relevant and value-oriented product throughout its line.
The second part of the answer? Acquisitions.
Schmidt said the company plans to look for value-enhancing acquisitions that would help accelerate its penetration of three key market segments: addressing the needs of young consumers, expand its product category penetration beyond the living room and expand its sales distribution beyond the independent retailer. Potential targets, he noted, include an outdoor company, a direct-to-consumer company or a company with a modern mid-priced lifestyle type of brand.
The reasoning follows recent acquisitions we’ve covered here in recent months, notably Hooker Furnishings’ purchase of outdoor resource Sunset West and home furnishings resource Bobo Intriguing Objects, Surya’s purchase of the Mitchell Gold brand and designs, Twin Star Home’s purchase of three outdoor furniture companies in the past several years, not to mention others including Karat Home’s purchase of Z Gallerie’s e-commerce business and GigaCloud Technology’s purchase of Noble House Home Furnishings.
These are just a few examples of companies expanding their market penetration and their appeal to their customer base. It appears that Flexsteel will have the same opportunity to grow its business, appealing to an expanded demographic, including younger customers, potentially with an even wider product mix.
Another potential ingredient that will free up cash to facilitate this? The closing of its Dublin, Georgia, upholstery plant and product development center, which the company said will save between $4 million and $4.5 million a year, while also improving the customer experience by reducing lead times, handling damages and overall costs associated with a facility that supports less than 5% of sales.
Obviously the closing is not good news for the estimated 150 workers impacted by the move. But it’s the type of thing that the investment community sometimes likes to hear, particularly when it has positive implications for the balance sheet. So does news of potential acquisitions for a company that is already viewed as a leader in its key categories, namely the living room.
But how all this materializes will also depend on the economy supporting its business, particularly heading into the second half of this calendar year, which marks the first half of its next fiscal year.
Today, the company estimates sales between $101 million and $106 million in its third fiscal quarter of 2024, and sales between $107 million and $112 million for its fourth fiscal quarter. Both estimates are above guidance of $94 million to $100 million for this latest quarter.
It also is anticipating GAAP operating margins between 2.5% and 3.5% for the third fiscal 2024 quarter and 4% to 5% for the fourth quarter — a direct impact of one-time closing costs for the Dublin plant — compared to 4.6% of sales in the second quarter.
Will the economy help Flexsteel achieve its goals? That remains to be seen. However, the company appears to have a strong foundation and strategy in place to make this happen. Stay tuned.