Flexsteel Flexes Its Muscles In The Second-Quarter

A Blowout Quarter For Flexsteel

Flexsteel NASDAQ: FLXS absolutely smashed all expectations for the fourth quarter. The combination of retail demand for furniture coupled with pent-up and delayed demand for commercial furniture pushed company revenues to an all-time high. More importantly, the company's efforts to reposition itself for profitability and pave the way for sustained future growth are paying off in spades. If you're looking for a small-cap dividend payer supported by secular growth trends this could be the stock for you.

Flexsteel Has A Record-Setting Quarter

Flexsteel did not just have a blowout quarter but a game-changing quarter in which revenue accelerated to triple-digit growth year-over-year. The earnings data from Marketbeat.com shows the $136.20 million in consolidated revenue is up 42% sequentially, 110% from last year, and over 63% in the two-year stack proving the long-term strategy is working. On an organic basis, X-vehicle seats and hospitality furniture, the company grew 123% and it looks like sales will not slow down anytime soon. In regards to new orders and backlogs, the company's retail backlog grew 238% to a record level.

Moving down the report, the details only get better. The company’s gross margin expanded more than 1,000 basis points on the back of repositioning,  sales leverage, and reduced inventory. The company is sitting on greatly reduced inventory due to the high demand/backlog environment and that situation should continue until the end of the year at least. In terms of the backlog, about 30% is “in transit”. As for earnings, the company reversed a loss in the previous year’s calendar second quarter to post adjusted earnings of $0.61 and beat the consensus by $0.80. More importantly, on a GAAP level, the EPS of $0.81 beat Wall Street's whisper number by $4.04.

The company did not give any formal guidance for future growth but did provide some very positive comments. The company is not only working to expand operations at its existing facilities but also to add new facilities in order to meet robust demand. That can only result in greater revenue and earnings in future quarters.

“Given my confidence in our team and our strong growth momentum, we enter fiscal 2022 well positioned to continue profitable growth. We begin the new fiscal year with a record retail home furnishings backlog of $152 million and are aggressively working plans and investments to expand capacity to both fulfill the current backlog and support future growth,” says Mr. Dittmer, CEO of Flexsteel.

A Dividend Increase Is In The Cards For Flexsteel

Flexsteel went into the pandemic with a fortress balance sheet and came out of the pandemic in nearly equally strong condition. The company's cash position has been whittled down over the past year but debt levels remain very low and free cash flow exceeded pre-pandemic levels in the fourth quarter. Based on the current payout of $0.15 and the pre-pandemic payout of $0.22 we see the $0.07 or nearly 50% distribution increase in the cards for Flexsteel. The company may not raise the dividend this quarter but we would expect to see the fiscal 2022 payout to meet or exceed the pre-pandemic level.

The Technical Outlook: Flexsteel Is In Reversal

Shares of Flexsteel corrected from a high set earlier this year but are now moving up off the bottom. Price action began moving higher the day before the calendar Q2 earnings were released and that move is extending in the pre-market action. In our view, this confirms a strong bullish entry signal that has been forming over the past few days and should lead the stock higher in the near to midterm. The next major hurdle is potential resistance at the $38 level. Once that has been exceeded we expect to see Flexsteel move back up to retest the recent highs for a gain near 50%.