Flexsteel Industries (NASDAQ:FLXS) held its fourth-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.
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Summary
Flexsteel Industries reported fiscal year 2026 sales of approximately $459 million, marking a 4% growth over the prior year, with adjusted operating margins at 7.5% and record adjusted earnings per diluted share of $4.94.
The company faced a challenging demand environment due to inflation, geopolitical events, and evolving tariff policies, yet managed to expand margins and generate over $47 million in free cash flow.
Strategic initiatives in the health and wellness category and new product introductions continued to drive long-term growth, with plans to exit the underperforming ready-to-assemble product category.
For Q1 fiscal year 2027, Flexsteel Industries projects net sales between $111 to $115 million and operating margins between 6.5% to 7.0%, despite ongoing inflationary pressures and geopolitical uncertainties.
Operational highlights include a 25% increase in dividends, significant share repurchases, and strategic investments in consumer insights, innovation, and marketing to strengthen competitive advantage.
Full Transcript
OPERATOR
Good morning everyone and welcome to the Flexsteel Industries fourth quarter fiscal year 2026 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation there will be an opportunity to ask questions. To ask a question you may press star and then one on your touchtone phones. To withdraw your questions you may press star and two.
Please also note today’s event is being recorded. At this time I’d like to turn the conference call over to Mike Ressler, Chief Financial Officer for Flexsteel Industries. Please go ahead.
Mike Ressler, Chief Financial Officer
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 and 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 and with that I’ll turn the call over to Derek Schmidt.
Derek Schmidt, President and Chief Executive Officer
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 approximately $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 and ongoing uncertainty related to the conflict in the Middle East has weighed on economic sentiment.
Even consumers shopping at higher price points have become increasingly value conscious in recent months. Importantly, many of the strategic initiatives driving our long-term growth continue 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.
Mike Ressler, Chief Financial Officer
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 IEPA 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 IEPA 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 product 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 Huntingberg, 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, the company ended the quarter with a cash balance of $16.7 million, working capital of $94.6 million and no bank debt. Cash flow generated from operations in the quarter totaled $24.3 million, driven by strong net income and effective working capital management. During the quarter, the company repurchased roughly 1.3 million shares of outstanding stock for $62.6 million and paid $1.1 million in cash dividends, or $0.20 per share.
Turning to our outlook for Q1 fiscal year 2027, we project net sales of $111 to $115 million, or 1% to 4% growth versus the prior-year quarter. We anticipate sales growth from soft seating products to outweigh sales declines from the Ready to Assemble Homestyles branded product category that we are exiting. The key determinant to our top-line forecast with the largest variability will be consumer demand. From a profitability perspective, the Company expects operating margin in the range of 6.5% to 7.0%. Since the beginning of the conflict in the Middle East, we have experienced material supply chain inflation driven by elevated energy prices, including impacts to raw materials, sourced finished products, domestic transportation, and inbound ocean freight.
The Company implemented a wide range of initiatives including cost savings actions and a modest price increase to mitigate the impact of these cost pressures on our profitability while striving to maintain competitive pricing in the market. We anticipate our mitigation actions to mostly offset cost inflation. However, we may experience some dilution to gross margins and operating margins in the quarter depending on the effectiveness of our actions and the ultimate severity of supply chain inflation.
With that, I’ll turn the call back over to Derek to share his closing perspectives.
Derek Schmidt, President and Chief Executive Officer
Thanks, Mike. Fiscal year 2026 was a year that demonstrated both the strength of our strategy and the resilience of our organization. We delivered sales growth, expanded margins, generated record earnings, produced strong free cash flow, and returned significant capital to shareholders despite operating in one of the most uncertain environments our industry has faced in recent years. As we enter fiscal year 2027, we recognize that many of those external challenges remain.
Demand conditions continue to be uneven, inflationary pressures are building, and geopolitical and trade-related uncertainty remain elevated. While these factors may create near-term volatility, they do not change our long-term outlook for the business. Our focus remains squarely on what we can control: serving customers exceptionally well, driving innovation and product development, strengthening our brand, improving productivity, and allocating capital thoughtfully.
We believe our strong balance sheet, disciplined operating model, and continued investment in long-term growth initiatives position us well to navigate the current environment while continuing to create value for our shareholders. With that, we’ll open the call to your questions.
OPERATOR
And ladies and gentlemen, we’ll begin the question-and-answer session. If you’d like to ask a question, please press star and then one using a touchtone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. Our first question today comes from Anthony Lubodzinski from Sidoti.
Please go ahead with your question.
Anthony Lubodzinski, Analyst at Sidoti
Thank you, and good morning, everyone, and thanks for taking the questions. So, first, can you talk about the impact of pricing versus unit volumes in the quarter? I know it varies by product category, but if you could give us some additional details that would be very helpful.
Mike Ressler, Chief Financial Officer
Morning, Anthony. Yeah, so obviously pricing in Q4 of this year was meaningfully higher than what it was in the prior year. On average, I would say pricing was up probably 10% to 11%. But what we’re encouraged by is, given the magnitude of pricing that we had to take throughout the year to cover a variety of cost pressures, we did see unit volume declines, but not to the level that more than offset the pricing action. In areas where unit volumes are up, and what’s really encouraging, within some of our strategic growth areas such as our health and wellness category, the Zecliner product, we have the new Zen chairs — those are performing very well. We also see nice unit volume growth with strategic accounts. Areas where I would say volumes are probably underperforming, or where we’re down a little bit, is the made-to-order category, which we’ve kind of talked about. That category continues to be more challenged at retail. And then, obviously, case goods down a little bit. We’re encouraged by the momentum we’re gaining at the retail channel, but we’ve kind of scaled some of our growth ambitions across the national accounts for case goods.
Anthony Lubodzinski, Analyst at Sidoti
Understood. Okay. Yeah, thanks, Mike. And then I have a two-part question here. So as far as it relates to the Homestyles brand, can you give us a sense as to how much annual sales you were doing with the brand? And then I guess the second part here is that I assume that Homestyles was not contributing to the bottom line. Is that correct? And if so, how should we think about the bottom-line impact as you exit from Homestyles?
Mike Ressler, Chief Financial Officer
Yeah, Anthony. So the Homestyles business, that category has been challenged for a while, and it particularly got even more challenged when tariffs went into effect. But if you were to peel Homestyles out of our business, our growth in the quarter would have been closer to 2.3%. So just on around $12 million in sales this year. As far as profitability goes, it was lower performing in terms of gross profit versus our category average. So as we kind of work ourselves out of that, we will have some decline in sales, but would expect a little bit of improvement in our overall portfolio profitability, but relatively modest given the small amount of sales that contributed to the Company.
Derek Schmidt, President and Chief Executive Officer
Anthony, I’ll just add. So, as you start to think about your modeling, Homestyles was probably roughly about $12 million of sales in fiscal year ’26. So that will go away. What we’re encouraged by: overall sales for fiscal year ’26 were up about 4%. If you were to take the Homestyles drag out, we would have been closer to 6.5%, kind of closer to 7%. And we feel really good about that performance given the challenging environment that we operated in.
Anthony Lubodzinski, Analyst at Sidoti
That’s very helpful. And then, Derek, I thought your quote was interesting in your press release when you talked about that even consumers shopping at higher price points have become increasingly value-conscious. So with that in mind, how are you adapting your product portfolio and marketing messaging to try to take advantage of this?
Derek Schmidt, President and Chief Executive Officer
Yeah, maybe a little bit of context, Anthony. I would say that the upper-income consumers are still shopping and they’re still buying, but I think they’re more cognizant of the external landscape and the economic environment and a bit more cautious. That said, we’re actually not changing our strategy, we’re not changing our marketing message. Those are consumers we understand. We understand their needs, their problems, and we’re driving innovation to meet their needs better than the competitive alternatives.
And our marketing message is around why that innovation is differentiated and why it serves their needs better than the competition. So I don’t think we’re changing anything strategically or in our marketing message. But certainly we’re keeping a strong pulse on the health of the consumer across different income levels. But I think it’s not surprising, given the external environment and rising inflation, that consumers across all income levels are a bit more cautious.
Anthony Lubodzinski, Analyst at Sidoti
Right, okay. Yeah, thanks for that. And then, so as we think about gross margins, looks like excluding the tariff refunds and the one-time exit costs related to Homestyles, you guys were at about 23% for the fourth quarter. I know you mentioned that with the exit of Homestyles that should be a bit of a lift for the gross margin. But I know there are some pressures on ocean freight costs and other costs as well. So as we think about the different puts and takes about the gross margin, how do we think about the gross margins kind of on a go-forward basis?
Mike Ressler, Chief Financial Officer
Yeah. Anthony, in our Q1 outlook, we guided 6.5% to 7% operating margin. The biggest factors there would be the impact of all these cost pressures on our gross margin. So, clearly, we’ve had inflation on raw material inputs from poly to plywood to steel, freight costs, transportation costs and fuels impacting the cost to get raw materials and everything into our plants. We’ve experienced cost inflation on our sourced finished product, certainly seen recent spikes in ocean freight rates to bring finished product in.
So there’s a lot of moving parts. It’s super dynamic. What I would tell you is, like we’ve done in the past, we’re going to continue to approach it from multiple angles. We’ve implemented cost savings initiatives to help mitigate it, and we’ve also implemented a modest amount of pricing — what we believe can be absorbed in the market. But we’ll obviously watch what we see on unit volume demand, given we want to be very competitive in the market. So our target is to continue to mitigate the impact of that stuff. But certainly the severity of what happens with inflation could impact gross margins, and that’s kind of why we gave you that range in the operating margin for the quarter.
Derek Schmidt, President and Chief Executive Officer
The thing I’d add, Anthony, I wouldn’t necessarily characterize our guidance range of 6.5% to 7% as a new normal or even a floor. As you’re well aware, we’ve made some substantial structural improvements to the profitability of the business over the past couple years through product portfolio management, productivity, cost discipline, and improved execution. And longer term we remain confident in the structural profitability improvements that we’ve made.
I just think the near-term external environment will determine the pace of further improvement on our margin structure.
Anthony Lubodzinski, Analyst at Sidoti
Okay, gotcha. Yeah, thanks for that. And then as far as SG&A, that came in slightly ahead of our estimates. I know you guys continue to focus on driving innovation and consumer research and consumer insights. So how do we think about just SG&A going forward here as we look to update the models?
Mike Ressler, Chief Financial Officer
Anthony, what I would tell you is we’re going to continue to be prudent in managing SG&A spending, but we’re also going to continue to invest in those things that are enabling us to gain share and strengthen our competitive advantage. So think about it in terms of probably high-15, low-16 percentage range for your model.
Anthony Lubodzinski, Analyst at Sidoti
Okay, that’s very helpful.
And lastly for me, just as we think about capital allocation, so in fiscal ’26 you bought back a lot of your stock and you raised the dividend 25%. So going forward, how do we think about your capital allocation priorities?
Derek Schmidt, President and Chief Executive Officer
Yes. So I would say relatively intact. We want to continue to maintain a strong balance sheet, give us flexibility to operate in the dynamic environment that we’re in. We’re going to continue to fund the investments that we talked about that are driving our organic growth. And then if you look out beyond that, as you think about M&A and things like that, we’ll continue to evaluate investment opportunities, but they certainly would need to deliver an ROI above our cost of capital.
And if those things don’t exist, we’ll return excess capital to shareholders through dividend and repurchases based on the cash and capital needs of the business.
Anthony Lubodzinski, Analyst at Sidoti
All right, well, sounds good. Well, thank you very much and best of luck.
Derek Schmidt, President and Chief Executive Officer
All right, thank you, Anthony.
OPERATOR
Our next question comes from Balzan Tula Hanova from Freedom Broker. Please go ahead with your question.
Balzan Tula Hanova, Analyst at Freedom Broker
Thank you for taking the question. Congratulate you on this quarter. Strong quarter. Yeah. My question was about capital allocation, but Anthony asked this question, so I have no question anymore.
Derek Schmidt, President and Chief Executive Officer
Okay, thank you. All right, thank you for your interest.
OPERATOR
Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two again. That is star and then one to join the question queue. And we do have an additional question from Donald Hall from DMH Advisors. Please go ahead with your question.
Donald Hall, Analyst at DMH Advisors
Good morning, gentlemen. I believe I heard that in the fourth quarter you are exiting the ready-to-assemble category of your product line. Can you give us an idea of the magnitude that has on your revenue? Is it 10% of your revenue?
Mike Ressler, Chief Financial Officer
Yeah, we addressed that. Anthony asked that question. This year was approximately $12 million.
Donald Hall, Analyst at DMH Advisors
12 million. And then I believe I heard that in the first quarter you expect revenue to increase 1 to 4% in spite of that withdrawal. Did I hear that correctly? Okay, thank you very much.
Derek Schmidt, President and Chief Executive Officer
All right, thanks, Don.
Mike Ressler, Chief Financial Officer
Thanks, Don.
OPERATOR
And in showing no additional questions, we’ll be ending today’s question and answer session. I’d like to turn the floor back over to the management team for any closing remarks.
Derek Schmidt, President and Chief Executive Officer
All right. In closing, I want to thank our employees for their hard work, commitment and outstanding execution throughout fiscal year 2026. I believe the accomplishments we delivered this year, from strong financial performance to meaningful strategic progress, are a direct reflection of the talent, dedication and resilience of our team. And while we enter fiscal year 2027 facing a continued uncertain environment, we do so from a position of strength.
We have a strong balance sheet, a resilient operating model, a clear strategy, and a team that has repeatedly demonstrated its ability to adapt and execute through changing conditions. I remain highly confident in our ability to navigate these challenges while continuing to strengthen our business, gain share over time and create long term value for our customers and shareholders. Thank you again for joining us today and for your continued interest in Flexsteel Industries.
And we look forward to updating you on our progress next quarter.
OPERATOR
And with that, ladies and gentlemen, we’ll be concluding today’s conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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