Flexsteel Surges After Transformational Results (NASDAQ:FLXS)

It’s Still Time To Buy Flexsteel

I last wrote about Flexsteel Industries, Inc (NASDAQ:FLXS) way back in August when the company reported 4th quarter results. The results weren’t awesome when compared on a YOY basis but those comparisons belied the underlying story. Flexsteel spent the past fiscal year cutting costs, streamlining operations, expanding North American capacity, and basically setting itself up for a great 2021. And the fiscal Q1 results more than back that up.

Flextsteel Industries Is Leveraging Growth

Flexsteel is the U.S. largest manufacturer and importer of wooden and upholstered furniture. And it’s seen a strong rebound in demand for its products. Over the quarter revenue for its products jumped 63% on a sequential basis, just shy of 5.0% YOY, to $105.24 million despite the divestiture of the non-performing businesses. The part I want to focus on, however, is the adjusted earnings. On an adjusted organic level, the company’s core retail and eCommerce DTC business saw growth in the range of 18% which is a number that makes me think restructuring was a good idea.

Moving down the report, gross margins increased significantly due to the restructuring. Gross margins grew 450 basis points to near-historic peaks and drove strong bottom-line results. At the bottom line, GAAP earnings are down more than 50% from the prior year but the all-important adjusted EPS came in at $0.80 or up $0.80 from last year’s break-even quarter. Looking forward, the company is expecting to maintain margins in this range and that should not be a problem.

While this company does not give guidance and there are no analysts estimates to work with there is some information that points to ongoing strength in 2021. The record backlog. The companies’ backlog increased 60% YOY to $89 million or roughly 89% of this quarters total revenue.

“The strategic decisions made last quarter to accelerate our transformation and heighten focus on our core retail and e-commerce furniture businesses have made us stronger and more agile to meet surging demand with a more efficient network. The Company is financially strong with over $36 million of cash and no debt. We invested in increased inventories in the first quarter to support our customers and are expecting to receive a record number of inbound shipments in our second quarter to meet continued strong demand,” said CEO Jerry Dittmer.

Flexsteel Industries Is On Track For A Big Dividend Hike

Flexsteel Industries has a long history of dividend payments if not one with consistent growth. The flipside of that coin, however, is that by prudent dividend management the company has managed to maintain one of the strongest balance sheets on Wall Street. That said, the most recent dividend cut was one made preemptively to combat the pandemic and one that need not linger too long.

At $0.05 quarterly the new payout is only 22% of what it was pre-pandemic. This opens the door to a rather large increase when the dividend is reinstated, $0.22 is 440% more than $0.05. Assuming a $0.22 quarterly payout the company’s payout ratio is a mere 27.5% which should be no problem for them to cover. Now that executive pay cuts and other cost-saving efforts have expired it’s time for this one to go as well.

Until then, investors will have to be satisfied with buybacks. The company bought back $13.7 million worth of stock in fiscal 2020, $9 million in the 4th quarter, and just declared a new allotment. The new buyback plan is worth another $30 million to shareholders over the next 3 years.

The Technical Outlook: If Flexsteel Passes $30 It’ll Hit $45 By Year-End

The technical outlook for Flexsteel is robust, to say the least. The company’s turnaround plan is clearly visible on the weekly charts and price action is set up to run higher. The next hurdle is resistance at the $30 level but it looks like it is already wearing down.

The indicators are strongly bullish, MACD is convergent with the recent high and stochastic is trending in the high-end of its range, so higher prices are expected. Once the $30-level is broken the stock will have a clear run-up to the $35-$40 region where price action may pause before making the move to $45.