Flexsteel Industries, Inc. Q2 FY2026 earnings call

• Industry demand is uneven, tariff policy is evolving, and consumer behavior is shifting. - Delivered 9% year-over-year sales growth and profit improvement, operating with agility, discipline, and focus on long-term value creation. - Performing well in core business with new product introductions and share gains with strategic accounts, and seeing progress in newer markets like health and wellness and case goods. - Investments in consumer insights, product development, and innovation improving new launch effectiveness, and stronger partnerships with retailers accelerating new product adoption. - Operating margin of 7.6% reflects disciplined management of business amid complex environment, with margin performance benefiting from sales leverage, productivity improvements, and product portfolio management. - Navigating tariff uncertainty by adjusting pricing, managing cost, evaluating sourcing alternatives, and maintaining strong customer relationships.

For the second quarter, net sales were $118.2 million, a 9% growth compared to $108.5 million in the prior year quarter. This marks the ninth consecutive quarter of year-over-year sales growth. The increase was driven by higher unit volume in sourced soft seating products and pricing from tariff surcharges, offset by lower unit volume in made-to-order soft seating and homestyles branded ready-to-assemble products. GAAP operating income was $9.0 million (7.6% of sales) in the second quarter, compared to prior year GAAP operating income of $11.7 million which included a $5 million gain from the sale of a manufacturing facility. Current quarter operating income increased 35% compared to adjusted operating income of $6.7 million (6.1% of sales) in the prior year quarter, driven by favorable sales mix of higher-margin new products and partially offset by investments in growth initiatives.

• Continues to pause on providing forward-looking guidance. - Expects margin dilution in the second half of fiscal 2026 as selling higher cost inventory burdened with 25% tariffs. - Actively evaluating broader cost reduction opportunities and alternative supply chain options to strengthen long-term position. - Confident in ability to identify and execute actions to support profitable growth over time.

• Tariff policy uncertainty, with evolving tariff structures impacting sourcing, pricing, and demand. - Uneven industry demand, inconsistent housing activity, consumer confidence, and discretionary spending patterns. - Macro-economic visibility is limited, leading to potential shifts in demand patterns. - Potential margin impact from tariffs as cost of sales becomes fully burdened, and variability in unit demand.

Q: As we think about the revenue increase on a consolidated basis, can you talk about unit volumes and pricing as far as how that impacted the quarter?

A: Tariff revenue in the quarter was roughly $9.5 million. Relatively flat versus prior quarter in unit volume, with some categories up and others down. Saw nice unit volume gains in many areas of soft seating business, offset by unit volume declines in made-to-order seating and homestyles ready-to-assemble business which was down almost 50%.

Q: As we think about new product introductions, can you share roughly what portion of your sales is now coming from new products? And as we think about the outlook going forward, can you talk about the pipeline for new products?

A: Over the last 6 to 8 quarters, 30% to 40% of overall sales is from new products. Has an exciting and focused pipeline of new product coming over the next 18 months, reluctant to give too many details due to competitive environment but confident in driving traffic to retailers through relevant products.

Q: Looking at the strategic accounts, are there additional retailers that you think you may be underpenetrated in or have potential new wins?

A: Strategic accounts represent about 20 large independent retailers. Vast majority have strong relationships, with a handful of emerging relationships with growth potential. Ample room for strategic accounts to drive exponential growth through share gains with existing and potential new retailers.

Q: As we think about the tariffs, how do we think about the confidence level to be able to offset that going forward? And about the gross margin?

A: In current quarter, tariffs were largely mitigated with pricing actions and cost savings. Expect margin dilution in back half of year as selling higher cost inventory burdened with tariffs. Working on other cost initiatives to offset tariff impact in midterm. FX had little impact on gross margins in the quarter, with a benefit from VAT receivable revaluation offset by impact on operating expenses.

Q: The tax rate came in a little bit higher than expected. Was there anything unusual here? And how do we think about the tax rate here on a go-forward basis for the balance of the fiscal year?

A: There was an impact in the quarter related to return of provision true-up related to foreign taxes. Expect tax rate going forward to be closer to full year tax rate reflecting.