FLEXSTEEL INDUSTRIES INC Q3 FY2025 earnings call

• Delivered strong sales growth of 6.3% for the sixth consecutive quarter, with growth broad-based in core markets and new/expanded market initiatives.
• New product introductions driving success in core markets and new/expanded markets, with 25 new product groups to be showcased at April High Point market.
• Continued profitability improvement with adjusted operating margin of 7.3% for the eighth consecutive quarter improvement, driven by sales growth leverage, operational execution, productivity, and product portfolio management.
• Strong cash generation with operating cash flow of $12.3 million and ending cash of $22.6 million, providing a competitive advantage in economic uncertainty.

Third quarter net sales were $114 million, a growth of 6.3% compared to the prior year quarter of $107.2 million. The adjusted operating margin was 7.3% in the quarter, representing the eighth consecutive quarter of year-over-year improvement and the second highest quarterly adjusted operating margin over the past seven years. Operating cash flow for the quarter was $12.3 million, and ending cash was bolstered to $22.6 million.

• Fourth quarter sales expected between $109 and $116 million, reflecting minus 2% to positive 5% growth compared to prior year quarter.
• Gross margin expected between 21.0% and 22.0% for the fourth quarter, assuming 10% tariffs on Vietnam imports remain in effect and Mexico imports remain tariff-free under USMCA.
• Operating margin projected in the range of 6.0% to 7.3% for the fourth quarter, with free cash flow expected in the range of $4 to $7 million.
• Priorities include executing strategy, strengthening supply chain agility and resilience, and mitigating tariff risks while maintaining investment in new products, innovation, and marketing.

• Tariff impact on margins, pricing, and supply chain design, with Vietnam production supporting ~55% of revenue and Mexico ~40%, and potential 46% reciprocal tariffs on Vietnam goods having wide-reaching implications.
• Short-term demand volatility influenced by tariff and economic uncertainty, with slower retail traffic and order cancellations noted post-tariff announcements.
• Midterm outlook for US economy, consumer spending, and furniture demand being moderately pessimistic due to new tariffs potentially causing higher inflation, slower growth, and possible recession.

Q: How were order patterns in March and April, especially post-tariff announcements?

A: March was typical with light orders seasonally, but April saw a step function change following tariff announcements with slower orders and cancellations.

Q: Do you have a goal for revenue from new products, and has it changed due to tariffs?

A: New products drive over half of current sales, and commitment to new product introductions, innovation, and marketing remains strong regardless of uncertainty.

Q: Quantify tariff surcharges in guidance and competition response?

A: Guidance assumes current 10% Vietnam tariff remains, modest surcharges on some dealer direct product categories, and competitors have implemented surcharges varying by supply chains.

Q: Expansion of product sourcing and impact on gross margins?

A: Looking at alternative sources in other countries, with agility to reshape portfolio based on trade negotiations, and margin impact dependent on magnitude of tariffs, working with partners to minimize consumer price impact