All right. Hello everyone, and thank you all for continuing to join us throughout the day here at the Lytham Partners Fall 2026 Investor Conference. Again, my name is Robert Blum, managing partner here at Lytham Partners. Up next, Derek Schmidt, Chief Executive Officer, and Michael Ressler, Chief Financial Officer at Flexsteel, will be taking us through the company's slide presentation. As a reminder, the company trades under the ticker symbol FLXS on the Nasdaq. Derek and Michael, thanks so much for participation today. The floor is all yours.
All right. Thank you, Robert. Good day, everyone. I'm Derek Schmidt, President and CEO of Flexsteel Industries. Before we begin our discussion today, we would like to remind you that our dialogue does include forward-looking statements that are subject to risks and uncertainties as outlined in our Safe Harbor statement and SEC filings. We encourage you to certainly review those materials, as our actual results may differ materially from what we discuss today. From an agenda perspective, I will first provide a high level overview of our company and our strategy. Then Mike Ressler, our CFO, will then cover the components of our investment thesis as well as our financial outlook. To start, I would like to first summarize our investment thesis, which is really based upon five elements.
First, I think you will see today that we have got a demonstrated track record of gaining share and feel like we are well positioned to benefit from a potential industry recovery. Second, you will see that we have got a differentiated operating model, and it is really anchored around a deep understanding of the consumer, which drives relevant innovation, which is then brought to market effectively through what we believe is an advantage execution model. I think you will also see that we have successfully driven margin expansion over the past several years, and we feel we have got a clear path to continue that improvement in the years to come. You will also see that we have got a relatively low capital intensity model and a disciplined working capital management, which has enabled us to drive strong, consistent free cash flow generation. Lastly, you will see that we are also disciplined capital allocators.
We allocate capital productively when we can generate returns above our cost capital, and where we have excess cash, I think we have demonstrated that we will return capital effectively to shareholders. Mike will actually dive in a little bit deeper on each of those slides, but wanted to give you an overview. I think this next set of charts clearly outlines in a visual manner what we have talked about. The chart on the left hand with the green bars shows that we have got 11 consecutive quarters of growth. If you were to look at the industry during this same period of time, you will see the majority of these periods were actually negative from an industry perspective. We have gained share. We feel good about our capability to do that going forward.
Growth has slowed here recently, largely due to the uncertainty due to the Iran war, certainly some inflation from higher diesel, from fuel costs, et cetera. We feel good about our growth trajectory going forward. At the same time, you will see the blue bars. Over the last four years, we have meaningfully expanded our operating margins. When you put together the share gains along with that margin expansion, we believe we have driven some attractive shareholder returns. You can see the results in terms of share appreciation over the last year, three years, and certainly we are committed to continuing to put up great results and create value for our shareholders. If you start to think about a company from a high level view, on the left-hand side, you will see our financials. A little less than a half a billion of sales is what we finished last fiscal year.
USD 34 million in adjusted operating income at 7.5% operating margin. We generated meaningful cash, almost USD 50 million in free cash flow. Strong balance sheet. We ended the period with USD 17 million of cash on the balance sheet, no bank debt, and feel good about certainly our financial strength and our ability to continue to navigate what I think in the short term is going to be a difficult industry environment. Although we are only a half a billion in sales and this industry is USD 120 billion plus, we are a top 10 manufacturer. It gives us certainly economies of scale that create an advantage. We are widely distributed throughout the U.S. through roughly 2,700 different storefronts, and we will talk to you about the expansiveness of our sales distribution.
We will also talk about our operating model, and the fact that the way we support our supply chain is a hybrid kind of formula that consists both of our own manufacturing capabilities as well as very strong partners that we source from. In terms of thinking about our business and what it looks like, I am going to share perspectives from three different dimensions. First, when you think about our products, and we think about our products in the form of where they go in the house and what functionality they provide, you will see that we have a very strong leadership position within the primary living area. Think about your family room, living room. About 83% of our sales today, our target is at that space in the home. One area that is significantly growing and we believe has a tremendous amount of potential is health and wellness.
It is not necessarily a room in your house, but it is an area where consumers are increasingly, they value their health and wellness. We are finding, again, unmet, underserved consumer needs, and we are bringing relevant solutions in the form of furniture, and we are having success. You will also see there is bedrooms and dining where we have got a significant or relatively insignificant portion of our sales. But we have made meaningful investments around product marketing, and we believe we have the potential to significantly grow our presence in those rooms in the home. Again, we have got a leadership position in one space, but we clearly have an opportunity to expand our penetration in other areas of the home beyond the primary living room. When you think about our sales distribution, we do have strong, broad, omnichannel sales distribution today, but we are heavily concentrated in independent retail.
The good news there is we have got 1,400 different partners across the U.S., strong brand awareness and affinity. We are having success with large regional players that we call strategic accounts. We have developed a value proposition for them that we believe is unique and is allowing us to grow exponentially faster with those retailers. At the same time, we want to make sure that our brand is everywhere where consumers want to buy furniture, both today and the future. That consists of national accounts that are growing their share and growing their importance with the consumer. That includes large e-tailers like Amazon, Wayfair, as well as big box retailers like Costco and Macy's. Again, this is an opportunity for us to continue, I think, to grow with leading independent retailers, but at the same time, grow our presence with national accounts.
Lastly, I want to talk a little bit about how the Flexsteel brand and our portfolio brand is positioned. When you think about the furniture market, we clearly play in the middle as it relates to price points. But I would describe our positioning within the middle at the upper end, and we compete on superior comfort, quality, and durability. That is what the Flexsteel brand is known for. At the same time, I will talk about we are doing increasingly more consumer research. We are identifying specific consumer needs, and we are building sub-brands underneath the Flexsteel brand umbrella that are tuned and tailored to meet those specific consumer needs.
Sub-brands like Pulse, Recline, or Zen, we will talk a little bit about those, but the way we go to market is through brands and brands that are tailored to specific consumer needs, and we believe that methodology allows us to compete and win effectively. I mentioned earlier about our operations. We do have a unique hybrid operation model where, you see in the right-hand chart, we have to have our own domestic operations. We have got three manufacturing facilities in Juarez, Mexico, that actually produce about a third of what we sell. Then we have distribution capabilities, you will see here, DCs in Pennsylvania, Indiana, Kansas, and then transfer points in other areas of the country so that we can actually service customers through all 50 states effectively. At the same time, we have got really strong, capable partners, primarily in Asia, that we also source from.
The majority of that is coming from Vietnam. Having this dual capability of both global sourcing capabilities and North American manufacturing distribution really has allowed us to really be more agile and responsive to external changes and potential disruptions in our supply chain. We see this really as a competitive advantage, both now and the future. When you think about our team, what I will tell you is we have got a phenomenal team. They bring diverse experience, both within the furniture industry and outside of the industry. I also highlight the fact that this leadership team is stable. We have been together, the majority of us, for four or five years. Again, very results-driven executives. It is stable, it is effective, and I feel like, again, it is really part of our competitive advantage and what is allowing us to win.
We are a values-driven company, and our values really shape how we operate. I will talk about strategies here in a minute. The values that we emphasize are we have got to be consumer driven, we have to be agile. We are results driven. We think about empowering our people, really executing as one team, and then constantly thinking about innovation and how we create solutions that solve real consumer problems. I think it is those values, again, that allow us to deliver and execute our strategies extremely well. At the same time, I think it is important for us to convey that we are also a responsible business partner. Where it makes sense economically, we are doing the right things from a sustainability, responsible material sourcing, recycling, we support our communities, and certainly, we keep our employees safe.
We deliver results, but we deliver it in a responsible way that considers all of our various stakeholders. Next, I want to turn to our strategy. Our strategy can probably be summarized through four strategic pillars. As I mentioned earlier, it starts with the consumer. We are spending more and more research and investment dollars around understanding consumers, their needs, their unsolved problems. Again, we are using those insights then to drive industry-leading innovation that solves real consumer problems that they are willing to pay for. Once we have those innovations, we have a disciplined execution model that we believe delivers those solutions with the right service level, speed, and financial outcomes that drive value.
At the end of the day, we talk about probably our most important pillar is exceptional people and culture, because the other three do not happen without having very talented people that are empowered and can make a difference every single day. I have talked a little bit about differentiation, but again, the way we position the Flexsteel brand, we are really delivering value through unmatched quality, comfort, and durability, and we tell that story in a powerful way through innovation and compelling design. One of the examples I will give you, several years ago, we did research, and we discovered that 7% of U.S. adults can not consistently sleep in their bed at night. That might be due to a host of different issues, sleep apnea, acid reflux, health issues, et cetera. Where do they sleep?
They sleep in their couch or their Recline, which was never designed to sleep in comfortably. We used that insight then to go back and actually create and design a chair that was specifically built to sleep in comfortably for eight hours plus a night. We called it Zecliner. We put some really powerful marketing around it, and we are having tremendous success with this product. This is a great example of how we are trying to replicate this through a lot of the other sub-brands that you noted earlier. This is a great example of how we go to market and how we try to differentiate ourselves through the consumer research and innovation. We also have clarity around sources of growth.
We've got a balanced portfolio of growth initiatives that both encompasses where we operate today, our core markets, but also positions Flexsteel to grow in new or expanded markets. Visually, you see here that we can think about core and expanded markets through three dimensions, product categories, sales distribution, and consumers. The exciting thing is that our growth isn't dependent on one area. We actually have a very finite set of exciting growth initiatives, and we've been able, I think, to pull these levers, and drive the consistent growth of the last 11 consecutive quarters that we have. With that, I'm going to turn it over to Mike, who's going to talk about our investment thesis.
Thanks, Derek. Overall, the investment thesis is relatively straightforward. It starts with, Derek highlighted our ability to outgrow the market and gain share. That's really been driven by the differentiated operating model that Derek spelled out, centered around understanding the consumer, what are those unmet needs, and then bringing innovative solutions to market, to address those needs, and then operating at an exceptional level across the entire value chain through that process. In addition to growth, Derek highlighted margin expansion potential. We've significantly improved margin over the last several years. We believe that we have clear levers to what it's going to take to continue to expand margins in the future. When you add sales growth leverage, operating margin, as well as working capital and capital discipline generates strong cash flow.
That gives us flexibility to look for opportunities to reinvest back in the business and/or return excess capital to shareholders, which we'll go into each one of these areas. What gives us confidence that we're gaining share and that we are outperforming the market, this slide kind of summarizes it, but if you look at the chart on the left, U.S. retail furniture sales year-over-year growth, you can see since the COVID furniture demand boom, that the overall market has been pretty challenged. Despite that, the chart on the right, which you've seen earlier, just illustrates we've been able to deliver 11 consecutive quarters of growth. We believe that our operating model is working, and we're well positioned to continue to outperform the market, even if conditions remain challenged, or if we're well positioned, if we see some type of improvement in the industry.
Near term, we're not expecting a significant improvement in industry conditions. But long term, we are bullish on the prospects for an industry to improve. There's kind of two things, starting with housing. Housing has been relatively depressed since the COVID demand boom with existing home sales at 75% of pre-COVID level. There's a lot of pent-up demand there. We're expecting at some point in time that demand will get unleashed. When there's housing churn, it creates churn for furniture purchases, and we're well positioned there. The second one is just when you look at the demographic of consumers. As younger consumers enter different life stages and their purchasing power increases, we believe we're well positioned to meet those evolving consumers and service them.
From an operating margin perspective, you can see we've improved operating margin from just above 1% in fiscal year 2022 to 7.5% in our most recent fiscal year end, which ended in June at 7.5%. The three drivers that have driven that we believe will continue to be drivers in the future starts with number one, sales growth leverage. We've got ample supply chain capacity to support our growth ambitions without significant investment in additive fixed costs. As we grow the top line, we will benefit from volume leverage. The second main driver there is, and I call it product portfolio optimization. This is where we're bringing new innovative products to market that are more profitable than legacy products, as well as shaping demand and our growth to the highest profitable categories in our portfolio. Lastly, operational execution. Our teams are hyper-focused on continuous improvement.
We've got really strong leaders. They've built strong teams and processes around driving productivity. We're going to continue to drive productivity through our entire supply chain to more than offset inflation. Our growth and profitability improvement over the last several years has resulted in significant earnings momentum. You can see we just reported $4.94 adjusted diluted earnings per share for June 30, 2026. Our operating model is designed to create shareholder value. The other attractive part of the business is low, relatively, capital requirements for the business. You can see on an annual basis, CapEx runs at or below 1% of sales. The investments there are targeted towards high ROI, productivity improvement initiatives, as well as modernizing and maintaining our critical systems and equipment. Additionally, the team's been hyper-focused on optimizing working capital investment, which is illustrated on the chart on the right.
We've been able to bring inventory down from over $140 million in fiscal year 2022 to just above $90 million in fiscal year 2026, while maintaining exceptional service levels for our customers. When you stack sales and profitability improvements, as well as effective capital management, you can see it results in strong free cash flow generation. We generated over $47 million in free cash flow in this last fiscal year. We've significantly strengthened the balance sheet from fiscal year 2022 to fiscal year 2026. We're well positioned to navigate challenging market conditions, but also it enables us to reinvest back into the business, into our growth initiatives or return excess capital to shareholders. From a capital allocation perspective, our priorities are one, 60% reinvestment back into business, as we talked about, the growth initiatives that Derek laid out, as well as some of our capital needs.
40% return to shareholders. What I would tell you is that we're financially disciplined. We're not going to make investments in the business if the return's not attractive and above our cost of capital, and we've got a track record of returning excess capital to shareholders responsibly. You can see at the chart on the left, I think we returned over $160 million over the last seven years to shareholders. Lastly, longer term, I would say we aspire to grow our business to $750 million in sales. Obviously, that would come with some acquisitions there. To get adjusted operating margin at or above 8%, which you can see results in significant earnings per share and shareholder value creation. Appreciate, certainly, the time and the consideration and your interest in Flexsteel.
Very good. We will leave it there. Derek, Mike, thanks so much for your participation here. Again, thank you to everybody, of course, for watching. If you would like to schedule a meeting with the company here, send me an email. That is blum@lythampartners.com. To learn more about Lytham, make sure you visit our website, follow us on LinkedIn and subscribe to us on YouTube to stay connected on future webcasts such as the one here with Flexsteel. We hope you enjoy the rest of the conference. Again, Derek, Mike, thanks so much for your participation.
All right. Thanks, Robert.