Flexsteel Inventory: Current Q3 High-Line Development Of 8%+ Will Be Troublesome To Keep (FLXS)

Intro

We wrote about Flexsteel Industries, Inc. (NASDAQ:FLXS) in October final 12 months once we rated the inventory a ‘Maintain’ regardless of the established bullish technical pattern. Our reservations revolved round forward-looking margin uncertainty and bearish EPS revisions. As we see beneath, nevertheless, Flexsteel Industries emphatically nullified these issues over the previous 9 months returning effectively over 66% since our October 2023 commentary.

The one disclaimer regarding the inventory’s return over the previous 9 months is that shares have declined roughly 20% since early April. Subsequently, let’s go to Flexsteel’s latest quarterly earnings report back to get a strong learn on the corporate’s standing concerning profitability & valuation developments. Technicals apart, the connection between Flexsteel’s profitability & valuation developments is an important driver on the subject of investor curiosity all issues remaining equal.

Gross sales Development Of 8%+ In Q3 Of Fiscal 2024

Incoming CEO Derek Schmidt reported top-line development of 8.2% in Q3, which was an accelerated quantity given the 7.5% gross sales development within the second quarter. Though the upholstered furnishings area continues to be a difficult area for collaborating suppliers, the above developments exhibit that Flexsteel continues to outperform the typical development curve on this area which is encouraging.

Whether or not this development can final is one other query altogether however Flexsteel continues to double down on value-adding propositions (by way of its product line) leading to sustained market-share good points. The incoming CEO additionally pointed to new markets, innovation & improved advertising and marketing methods as technique of driving sustained top-line development. How a lot legs these methods have nevertheless stays to be seen.

Flexsteel Will Stay Beneath Stress To Develop High-Line Gross sales

From an traders’ standpoint, rather a lot was happening within the report and that is the place our first concern lies from a long-term perspective. For instance, Schmidt touched on how the finances Charisma model continues to develop its choices and the way this could enchantment to extra consumers over time from this age subset. Then we additionally discovered concerning the enlargement of Flex & the Zecliner sleep chair into new materials and the way the corporate should stay relentless in its pursuit of market-share good points over the upcoming years.

Given the above development developments, the pertinent query right here is how lengthy can Flexsteel proceed to develop its gross sales in an trade that’s nonetheless clearly struggling from an exterior demand standpoint. Up to now and from a long-term standpoint, the corporate wants a sustained trade tailwind for long-term share-price good points to ensue.

One other space, traders ought to ponder is the shortage of ‘repeat enterprise’ from end-customers in its enterprise mannequin. Prospects shopping for at stores & big-box outfits in the principle are most certainly brand-new end-customers each time. Moreover, it needs to be famous (as this level is linked to the distinctive buyer identified earlier) that regardless of the general 8%+ top-line development charge within the third quarter this 12 months, e-commerce gross sales for instance fell by double digits in Q3.

We state these issues as a result of it’s evident that Flexsteel wants manufacturing scale to develop its margins & enterprise accordingly. To extend the corporate’s return on capital (which is available in beneath 5% at current), it wants to show over its capital quicker than it has been doing. The corporate’s trailing net-profit margin for instance solely is available in at a mere 3.87% which continues to be too low for the inventory to be a convincing ‘Purchase’ in our opinion.

We acknowledge that new merchandise, improved provide chain dynamics, & extra volumes going by way of the system have helped develop margins however once more, we might pose the next query. When the squeeze comes (when it comes to exterior much less demand), how a lot of the above measures will have the ability to be maintained? Would they’ve the capability to carry up in a tougher buying and selling market? Time will inform on this entrance however now we have already seen

Valuation

This brings us to the corporate’s valuation. As we see beneath, excluding money move, Flexsteel’s trailing 12-month gross sales, belongings & dividend yield are all not as engaging as their respective 5-year averages. Moreover, Flexsteel’s present debt-to-equity ratio is available in at 56.24% in comparison with a 5-year common of 39.74% for a similar a number of. Flexsteel’s below-average trailing return on capital of 4.56% is also a key valuation driver and raises questions on whether or not the corporate will have the ability to persistently generate increased returns off its capital than the comparable value.

Suffice it to say, given the cheap valuation & rising profitability, traders appear to be shopping for the development story right here in FLXS. Backside-line earnings are anticipated to leap by 140% this fiscal 12 months adopted by a forty five%+ improve over fiscal 2024 within the following 12 months. Nevertheless, our take right here is that these lofty projections have already been priced into the share worth of FLXS which signifies that if there’s any contraction from these anticipated development charges, the share worth might certainly fall in consequence.

Up to now, given the weak point of the intermediate histogram within the technical chart above and the truth that an intermediate loss of life cross (crossing over of the inventory’s 10-week shifting common beneath its 40-week counterpart) is a definite risk over the close to time period, we imagine the appropriate ranking in FLXS in a ‘Maintain’. Bear in mind, the technical chart all the time provides a succinct image of what’s taking place in Flexsteel from a elementary standpoint so given this inventory’s cyclical historical past, it is smart to not Purchase FLXS inventory at this juncture.

Conclusion

To sum up, we’re reiterating our ‘Maintain’ ranking in FLXS regardless of the corporate’s latest topline development & profitability good points. Greater gross sales, a rising order e book, enhancing gross margin & upcoming value financial savings from the Dublin Plant closure all give weight to the bullish case right here. The inventory’s valuation nevertheless isn’t low cost sufficient in our eyes and the technical chart might certainly be pricing this in. Let’s have a look at what the fourth quarter brings for Flexsteel. We stay up for continued protection.