All right, we'll go ahead and get started. Next company is Flexsteel Industries. This is a company, it's a good example of kind of how we find companies to present. One of our sponsors recommended this company. We spoke with Derek and his team, and they did our conference first in Chicago, I think, this year. This is the first time in Dallas. So we're really happy that you came all the way from Iowa to visit with us, and I'm going to turn it over to you.
All right, thanks, David.
All right, good afternoon, everyone. I do recognize quite a few faces in the room, but just maybe to calibrate me, how many of you, by show of hands, are not familiar with Flexsteel? You're kind of learning just - okay, maybe about half the room. All right, that helps. If you've got questions as I go through this, we'll keep it pretty informal. Raise your hand, don't necessarily wait to the end. I'll give you an overview of the company, who we are, our business model, how we compete, why we believe currently we're outperforming our industry, and why we believe that's sustainable kind of longer term.
Flexsteel is about an almost 132-year-old company. What I'll tell you is that we've transformed the business pretty substantially in the last five years. We are purely focused on residential home furnishings now.
If you were to rewind five years ago, we were in a plethora of businesses. We were making seats for high-end RVs. We were doing hospitality, healthcare, commercial office. Really, at the onset of the pandemic, we took a strategic look at our portfolio, understood, again, where we believe we had a competitive advantage, a right to win, and could earn an attractive kind of return on capital, and we exited all those businesses and focused on residential furniture, where we believe, again, we're well positioned to compete and differentiate.
This past year, we landed at 114 - I'm sorry, $413 million. The current year that we're in, we just finished our first quarter. We're guiding towards $427 million-$440 million, so that's 3%-7% growth in an industry that has been declining for the majority of the last 18, 19 months. From a sourcing perspective, we manufacture our own product.
About 50% of our mix is what we produce, and the other 50% is kind of sourced. And I'll walk you through why we believe that hybrid model is the most resilient and flexible. 1,500 employees, seven locations. So that's the high-level kind of viewpoint. Let's talk about what we actually sell. So I'm going to give you a perspective on what we sell, how we sell it, and who we sell it to. So from a product perspective, we are a whole home solution provider. That being said, you can see from this chart that the majority of what we sell is squarely in what I'll call a living room.
We are a leader in leather motion furniture. So motion furniture, stationary furniture is our bread and butter. It's our core.
That being said, there's a lot of other rooms in the home that are relevant that we have solutions. And so you see some of this: bedroom, storage, outdoor, dining. I'll talk to you a little bit about this new category called health and wellness. But these are all areas for us to expand and further our penetration. So part of our strategy is we're going to continue to innovate, drive new product introductions, drive innovation in this core kind of living room space. But we are building and advancing capabilities to be highly relevant in all these other spaces of the home.
From a brand perspective, Flexsteel is the company. We have a Flexsteel brand, but we have multiple brands within the overall company.
Really, our methodology and our mindset here is that we're going to have different brands for different consumers, and we will tune and tailor the value proposition for each of those brands or sub-brands to meet the unique needs of those consumer segments. So if I start from Flexsteel on the top right-hand side, mass-market brand positioned in terms of premium quality, comfort, and durability with a premium price. Not high-end expensive, but again, we are a step above from a price point, a step above, say, La-Z-Boy, which would be well-known in the market.
But we are not high-end like Restoration Hardware or Arhaus or some of those companies like that. So that's where Flexsteel competes. We've got two brands underneath the Flexsteel brand. One's called Flex, and the other one's called Zecliner. How many of you are familiar with a company called Lovesac? Okay.
Flex is a product that competes against Lovesac. So it is modular. It is small parcel shippable. We believe that we've got a better product at a lower cost to serve that kind of market. Zecliner is a new, actually, category that we created. We did some research. 7% of U.S. adults don't sleep in their bed at night, either because they've got sleep apnea, acid reflux, or like me, I snore too loud and my wife kicks me out of the bedroom. So where do those 7% of U.S. adults sleep? They typically sleep on their couch or their recliner, which was never built for sleep.
We drove innovation to actually build a chair that was designed to sleep comfortably in for eight hours, and we branded it Zecliner. It's doing phenomenal. So that's a sub-brand. Charisma is a step below Flexsteel.
Still at that price point, lower price point, but superior quality kind of comfort, but it is meant to reach a lower price point, to reach a younger consumer with a more modern aesthetic, and then on the lower right-hand, Homestyles is our ready-to-assemble furniture, so you will find this on Wayfair, on Amazon, on HomeDepot.com. If you Google Homestyles, you will see ready-to-assemble kitchen carts with thousands and thousands of five-star reviews. We've been doing business in this category, and we're a strong leader.
Okay, let's talk about sales distribution, so there's a lot of places you can buy furniture. Our kind of core business is the independent retail channel, so if you think just about, for those of you here in the Dallas metro, you got Nebraska Furniture Mart, you got Weir's, you got some other folks like that, that is our primary sales distribution.
We have 1,400 customers, independent retailers across the U.S. We cover every geography, and that's roughly about 85% of our business. That being said, there's a lot of other places where people can buy furniture other than traditional furniture stores. We have started to expand our penetration into new channels. I mentioned Amazon, Wayfair as key retailers for Homestyles. We've started to sell our other brands through these e-commerce sites with success. We're really positioning our entire brand portfolio with these e-commerce leaders. In the last 18-24 months, we've started to sell to Costco.
You will find Flexsteel products now on Costco with very strong reviews. That relationship is building momentum. Most importantly, we have figured out how to manage that relationship profitably.
You will hear, if you do some research, that there's a lot of companies that have failed to actually do business with Costco from a profit perspective. So we've learned quickly where we can and where we can't make profits, and we believe we've got a sustainable model going forward. And this last bucket is a really small portion of our business, direct-to-consumer. It is something that we are not investing overly aggressively in, but it is a capability that we want in our portfolio long-term, largely because there is a demographic, a younger consumer that prefers to transact directly with brands
. And I want that capability in our portfolio so that we have access to that consumer in the future. So you can transact.
We have several sites that you can buy our product on, but this is one area where, when we talk about acquisitions, has appealed to us.
Thank you, Derek. Relative to that website, Lovesac sells a lot of product online. Is the Flex product sold there? And is there a way to—is there a play there at all?
Yeah. So you can buy Flex on the site. What we have found is there's a lot of consumers that buy Flex at Costco, and they realize it's, again, it's a modular solution. And so they realize, hey, they want to modify. They want to buy another piece. Or we've got all these hubs. You can buy a pet bed hub. You can buy a hub that's got outlets and USB things. So that Costco consumer is actually going to our website to buy that.
You can buy—for our Zecliner, for our sleep chair, you can buy sleep kits to actually form fit. So again, that's largely what we're doing on our sites. So we're starting to build that capability internally. But again, for us to scale it in a meaningful way, we'd probably look at a smaller acquisition in the future. Okay.
All right, let's talk about our operations. So from a domestic standpoint, by the way, 99% of our sales are in the U.S. We do sell some into Canada through Wayfair, through Amazon, but we're primarily a U.S.-based seller. We've got a strong domestic footprint. So we've got three plants in Juárez, Mexico, right on the other side of El Paso. We've got another facility that is not running in Mexicali. We've got distribution centers in the Northeast and the central. And then we've got what we call pool points in the upper Northwest, lower Southwest, and then Southeast.
And those pool points basically give us the ability to get in market quickly with great customer service without having the fixed cost investment of a large warehouse.
What's important to note from an investment perspective when I talk about our margin expansion potential, this supply chain, this domestic supply chain probably has the ability to support 20%-30% growth without any major investment, so a big part of our operating margin expansion potential in the future is really around sales leverage. And it's because we've got the infrastructure to support that growth. I also mentioned that about 50% of what we sell is sourced globally. The vast majority of that comes from Southeast Asia.
I will note, because tariffs are top of mind, that we've reduced our China footprint to less than 10% of what we source, and we've already lined up suppliers in other areas and other countries so that if, or maybe when tariffs do increase on China, we can immediately transition that without any disruption. Okay.
Then we're constantly looking for other sources, again, to make sure that we've got a resilient supply chain. What we learned during the pandemic is that we were better positioned than our competitors to react to all the supply chain disruptions. We gained share, and we were able to compete effectively. What we've done since the pandemic is really build a more robust, well-diversified, and agile supply chain. Because at some point, there's going to be another major global supply chain disruption. I think we're very well positioned to navigate that.
Let's talk about differentiation. I said, all of our brands, whether it's Flexsteel, Charisma, again, at those price points, we differentiate ourselves based upon quality, comfort, and durability. More importantly, the derivation of the comfort, quality, and durability comes from various forms of innovation.
Our legacy form of innovation is what we call this Blue Steel Spring. It's where the name Flexsteel comes from. So if you were to rip apart a common sofa, you will find sinuous spring in there. Flexsteel has a unique patented kind of Blue Steel Spring. It is strips of a unique alloy that, again, if you've got kids and they jump on your sofa for five years nonstop, it's not going to lose its comfort. It's going to lose its durability. We have a limited lifetime warranty behind our products because of that. That's how we differentiate on quality.
I talked about the Flex product that competes against Lovesac. We have our own IP in terms of the assembly process, how you put that together.
We believe we've got a better product, 20% lower cost, better comfort, better durability, and speed of assembly because of our patented kind of assembly system. And then I also talked about lastly, our Zecliner, our sleep chair, and how we've innovated around that to develop a solution for, I think, a growing relevant need that was not being met in the market. So what are we doing? My challenge to my organization is we have to innovate. You walk into a furniture store and it all looks the same. And so how do you really separate yourself from everybody else?
For us, it's we got to continue to pound the quality, durability, comfort story, but there has to be marketing behind that, and there's got to be relevant innovation. So I gave you the example of Flex and what we've done around that.
I gave you the example of Zecliner and what we've done around that. What I will tell you is this is a core part of our strategy, and we are investing heavily both in terms of internal resources and external resources to make sure, again, we're coming up with relevant innovations to continue to kind of differentiate ourselves. Otherwise, furniture can quickly become a commodity business. Let's talk about the investment thesis, so I've got a personal belief that there's significantly better days ahead for the furniture industry.
Demand went through the roof during the pandemic, but then it quickly fell as people shifted to spending their money on experiences. If you look at furniture retail sales data, there were 19 consecutive months of year-over-year declines, so it's been a tough go for the industry.
But I believe, though, that I'm bullish on the long-term trends, largely because there is a pent-up demand for housing in our country. And I couldn't tell you when it's going to be unleashed or exactly what the triggers are going to be. But at some point, there is such an imbalance between demand and supply that we are going to start to see some light to a housing recovery. And that is going to be a boon for our industry. And we are figuring out how to grow consistently despite the challenges in the industry.
So I believe we're also well positioned that when this housing recovery comes, that we're going to see outsized growth. The other thing that's going to be a driver is just generational shifts. What I like in terms of furniture is very different than what my 20-year-old kids like.
We have an opportunity as a company to continue to serve our legacy consumer base, but also position the company to be highly relevant to younger consumers, but that will generate demand, so I'm bullish on the overall long-term industry outlook. How we think about growth going forward, I really bifurcate it. I think about our core business, so I described, remember those dimensions around where Flexsteel competes. We compete in the living room.
We compete with, or we go through independent retailers, and I would characterize maybe the legacy consumer as someone that looks like me or several of you in this room. We are going to continue to prioritize our core markets and grow share, and how we're going to do that is really threefold. One, we are going to continue to develop compelling new product with innovation.
Number two, we are realigning ourselves with who we believe are the strongest, most capable retailers in this market for the long term. So we've got 15 accounts that we call strategic accounts, and we're putting resources, and we're developing a differentiated value proposition for them. And they are a key reason why we are growing faster than the rest of the industry right now because we're gaining share with those customers. We also have an opportunity, I think, to penetrate specific geographies where we're under-indexed. We are really strong in the Midwest.
We are really strong in the Northeast. We've got a presence in Texas. We've got a presence in Florida, but we are under-indexed in these geographies. And they are geographies where people are moving to, and they are growing. And so we have specific sales strategies to make sure, again, we're penetrating new distribution.
So that's how we're going to continue to grow in our core market. Now, on the flip side, there are new markets that we are pursuing. So think about those three dimensions that I characterized earlier. On the product side, it means that we are going to penetrate new rooms like dining, like the bedroom, like outdoor, like storage, like this health and wellness. That's white space for us. It's a really small portion of our business today, and I think we've got the capabilities to be very relevant and grow. From a sales distribution standpoint, I described 85% of our business goes through independent retailers.
There's a lot of other places where you can buy furniture. And we're starting to develop those relationships and extend our brand portfolio with the large e-commerce players like Amazon, Wayfair. We are starting to penetrate what I'll call big box retailers.
So I described our relationship with Costco. We've got a relationship that's emerging with HomeGoods, BJ's Wholesale, Macy's. Again, where our brand makes sense for these big box retailers, those are opportunities for us to continue to extend our brand. And then the third dimension is really around consumer segments. We are repositioning our brand portfolio to be relevant to younger consumers. So the Flex product that I described is specifically to go after a younger consumer. That Charisma brand that I described earlier is a new brand that we launched here in the last two years.
It is targeted towards a younger consumer. I can see potentially another acquisition in the next several years, again, that would augment that and help address, again, younger consumers. So again, we're trying to reposition. And the key growth accelerators where we're investing, number one is consumer research.
I gave you a great example of, hey, we went out and we discovered that 7% of U.S. adults don't sleep in their bed at night. So we are spending, we're not just manufacturing furniture, but we're trying to understand the consumer needs and identify areas where they're either underserved or undermet. We're spending money on innovation. We're good at marketing through our retailers. We're spending money at getting better at marketing directly to consumers. So that is really our business model to grow. Industry outlook near term, I think it's going to be pretty choppy probably for the next six to nine months.
I just spent a week with my CEO peers in the industry, and by and large, people are thinking that the industry recovery is somewhere in the second half of calendar 2025.
That said, we've strung together four consecutive quarters of mid-single-digit to low double-digit growth in conditions that are pretty challenging. So what we're doing is working, I believe, is a combination of our talent, our culture, the investments we've made in product innovation and marketing, all put together that's allowing us to outcompete. And I believe that that momentum is sustainable. Let's talk about profit. So if you go back in the last several years, we've made some significant headway in terms of profitability. You see our operating margin on this chart.
Go all the way back, several years ago, we were at 1%. This past year that we finished, 4.4%. What we're guiding to this year is 5.8%-6.5%. And we believe we've got a clear line of sight to getting over an 8% operating margin here in the next several years.
Key drivers of that, I mentioned number one, sales leverage. We've got the infrastructure. We've got the fixed cost structure to support that type of growth. Two, we are rapidly rotating our product portfolio. So 40% of our products today were launched or new within the last couple of years. We have a higher target margin threshold for new products today than the legacy portfolio. So as we continue to bring new products in at a higher margin, it will lift the overall company average, and then I got a great operations team.
They do a phenomenal job of driving productivity, which is critical in this industry. My one beef with the industry is they can't take and hold on to pricing.
And so inevitably, there's inflation, but I've got an operations team that can drive cost savings consistently year in and year out to offset that inflation so that we don't compress our margins. So feel good about the momentum we have on the market, not only on the sales side, but the margin side. The other compelling aspects, I think, of the business model is it generates a lot of cash. So this is not a capital-intensive industry. We've taken actually steps over the last three years to reduce our inventories in half. We believe we can grow without any major inventory investment.
The CapEx here runs between $3-$5 million, probably 1% of sales. And that's really just kind of core maintenance. Unless we grow 30-40%, we won't have to make any major investments either in manufacturing or warehousing.
Cash flow, as a result of that, we produce some really, really attractive cash flow. Last year was $31 million. We're guiding to $20 million-$30 million. What do we do with that cash? I think we've proven that we're disciplined allocators of capital. So currently, I mean, what we've targeted here is reinvest back in the business 70% of that cash flow and then return about 30% to shareholders either through dividends or buybacks. We've got a proven track record. If we don't have attractive prospects to invest in, we will return the cash to shareholders.
Over my tenure in the last five years, we've reduced our outstanding shares by over 30%. So pretty sizable share buyback plan and then ultimately, we think the overall profile for the company is pretty attractive, so we've given our guidance here for the current year that we're in.
So we've already had one quarter behind us, but you see pretty attractive growth rate, nice margin improvement, attractive cash flow generation. What I'm more excited about is where I believe the organization has the potential to go in the next several years. So we've kind of penciled in. We believe we can get to $750 million through a combination of both organic growth as well as a handful of small acquisitions.
We believe we can get our operating margin at 8% and continue to generate significant free cash flow, either again to go find potential acquisitions, or if they're not the right acquisitions, we'll return it to shareholders. Okay. What questions can I answer? Appreciate your time. Yes, sir.
I'm curious how you look at marketing to grow that direct-to-consumer. Down here, you said it's not as big, but less active everywhere on TV.
I would think that actually maybe helps you if you're spending your money on Google to say, "Oh, let me search for this."
Yeah.
We're cheaper on Wayfair.
Yeah. So when we talk marketing, let me bifurcate it. So there is marketing that we do really well today through our sales distribution. So if you walk, are you native to Dallas?
Yes.
So if you walk into a Nebraska Furniture Mart or a Weir's, again, that retail sales associate in that store, they understand the Flexsteel brand. It's really important to them because we've consistently delivered great product with great quality. And so that when they sell that product to their consumer, they know we're going to take care of them. And so given the choice, when you walk into their store, they trust our brand and they'll take you to our brand.
That's where the brand really matters today. Now, the other side of the coin is, remember I just said younger consumers, they've got a preference to interact directly with brands and transact directly. That's where we need to spend money to raise awareness of the Flexsteel brand really with younger generations in different geographies where we're not as well known. So it's really a two-pronged model. We're going to continue to market and keep our mind share of that retail sales associate who's really important, but at the same time, grab more mind share of the consumer.
Howard?
More a question on the industry than your company. And congratulations on your performance relative to the industry. Housing has done relatively well despite prices and mortgage rates, etc. What's your explanation for the general decline of furniture? Are people just not filling their rooms or not replacing existing furniture?
What are your thoughts on that?
Yeah. Great question, Howard. If you go all the way back to the pandemic, I think we've gotten miscalibrated in terms of where consumers historically have spent their money. So in the year or two years after the pandemic hit, guess what? We were all spending time at home. And so what did we do? We pulled all that demand forward. I mean, we bought new furniture. We remodeled our kitchen, kind of did all those things. And then when COVID was kind of behind us, we had to catch up on all the other experience-related things that we forgot about during the early years of COVID.
And so all of a sudden now, people are doing vacations. They're going to ball games. They're going to movies, Broadway shows, etc. My opinion is that the pendulum swung over here. It swung over here.
I believe we're starting to head back to what I would consider normal equilibrium. My view is likely the furniture as an industry has probably hit the bottom. Now, I don't believe we're going to see a nice big spring upward until we get a housing recovery, but I believe the worst is behind us. As I've traveled the last couple of weeks and talked to retailers, they're actually expressing some optimism since the election. They've seen more foot traffic through their stores. And so again, that's one big uncertainty that we've taken off the table.
So hopefully, as we get into this transition with the new administration, if we can keep the economy growing, avoid any major geopolitical tensions, I think consumers will continue to build confidence and start to spend money on those tangible discretionary items that they've been postponing. Yes, sir.
How quickly can you shift your manufacturing, the outsource piece, from one country to another?
Yeah. In terms of countries, fairly quickly. Just like I talked about, we've spent significant time realigning ourselves with who we believe the winners are from a customer perspective. We've also done the same thing from a supplier perspective. And the vast majority of our suppliers are already thinking through what are their plan Bs, plan Cs. So the majority of our suppliers are Chinese-owned. They did the transition from China to Vietnam.
They're already building manufacturing capability in Cambodia and Thailand. They are moving even the raw materials out of China, things like fabric, things like leather. We used to actually make the Blue Steel Springs that went into our sourced product in China. That has moved to Vietnam. So I'll give our suppliers credit.
They are thinking ahead and they are prepared for multiple scenarios.
Other questions? Yes, sir.
I'll ask you questions that require sales for its owners.
Are you talking about the Zecliner?
Yeah, the Zecliner.
There's several models, but it can go as high as $29.99.
And the lowest one is around $14.99. Yeah.
At some point in the supply chain disruption, though, aren't you fully at the mercy of the shipping? I mean, you can manufacture how you want, but isn't that.
That was the huge disruptor during the pandemic. Whether it's, yeah, you've got the shippers have too much control over pricing. Can you work around the pricing? You get things in the wrong area and all of a sudden your ports are clogged up. Or guess what? The port workers strike.
So yeah, any company that imports anything outside the U.S. is vulnerable, I think, to those supply chain shocks. And we've seen more disruption, I think, in the global shipping industry in the last four years. But again, that's an opportunity to learn. And so what we've tried to build is capabilities to react to different sets of circumstances. So again, we use a variety of different ports, right? And we've realigned ourselves with more capable freight forwarders. We now have a mix of both variable as well as fixed contracts in terms of ocean freight.
So I think we've learned and become stronger as a result of some of those things. But yeah, I mean, any importer is vulnerable to those shocks.
What we're going to get around is start making it in Mexico plants.
Yeah. And actually, many of our new products now are dual-sourced.
What I mean by dual-sourced is that typically low mix, so high volume, low mix would be produced in Asia, and then all the custom would be produced in Mexico. So that if anything happened either on the Mexico side or the Asia side, those frames are already designed and they're already being built in multiple factories in the world.
Yes, sir.
Could we just get a sense of your capacity utilization on your manufacturing facilities and where that's crowded?
Yeah, it's about 70%. 70? Yeah. So as I suggested earlier, we've got about we can support about 20%-30% growth both in our warehouses as well as our production facilities without any major investment. Yes, sir.
So I'm curious. I don't know your business too well, but your stock prices had a phenomenal run this year.
Looking at other furniture makers, it's just been a memorable experience for the last three years. I'm just curious, going back to the beginning of Flex, what are you doing differently or what do you see differently from your competitors?
Yeah. Again, I'll go back. Recall my opening statement when I talked about the histories. We've gone through a fair amount of transformation in the last five years. And so I've got an executive team of eight individuals, six of which are new in the last four or five years. So I think we've brought on a lot of new talent. We've made some investments in new product and innovation, and we're starting to see the fruits of all that coming together. And that's what gives me confidence that our growth momentum is sustainable. I believe that we're thinking and moving more aggressively than our competition.
And it's because we've got great people with a tremendous sense of urgency, and they're empowered to go try things and take risks. It's kind of a squishy answer, but that's truly what I believe. And we do have a brand that resonates, especially with retailers. And we've been able to grow. Growth actually propels more growth. And so we are having different levels of discussions with retailers now because they see exactly how we're performing in a difficult environment. And they're like, "Okay, Flexsteel's doing something right. Maybe I need to reconsider my business.
Maybe I've got 10 frames on my floor that are Flexsteel. Maybe I need to think about putting 15 or 20 on the floor." So I think we're having different levels of discussions with retailers and customers because of the success that we're having. Was there another hand?
Another question?
I just think you need to see being in early stages. Which advertising or digital advertising channels have you been kind of experimenting with and how have the early results been?
Yeah. To be honest, we're not spending a lot of money. I mean, we've got Instagram. We've got Facebook. I mean, we do pay for Google searches, but the level of investment isn't substantial. I'm really looking for a potential acquisition to make a leapfrog kind of step function change in that capability. All right. I appreciate everyone's time. Have a great afternoon.