Flexsteel Industries, Inc. - Nasdaq GM --FLXS

April 13, 2012

The Opportunity

Flexsteel Industries, Inc. has a strong and diversified participation in the seating business.  The Company’s actions to improve profitability during the recent recession puts it in a position to achieve rapid earnings gains as its markets recover in coming quarters.  Although the Company was founded over 80 years ago, it only has a float of 5.45 million shares and is not widely followed by Wall Street analysts.    Although the stock, at 18.98, is trading near the 52-week high of 19.00 that it hit on April 10, it is trading at only 11.7 times trailing 12 month earnings and about 4% below book value. From a technical standpoint, on February 2 the stock moved above its 200-day moving average and its 50-day moving average has been trending steadily higher since mid-January.

The Situation

The June 2011 fiscal year was marked by high unemployment, declining consumer confidence, lack of recovery in the housing sector and diminishing consumer discretionary spending. All of these factors argued for negative results in for a seating manufacturer serving the home, hospitality, vehicle and office markets. In addition, Flexsteel had to deal with increases in raw materials and finished product costs. Yet the Company increased sales by 4% and maintained its gross margins.  While reported earnings per share dropped 7% from $1.61 to $1.50, the comparison would have been favorable had it not been for charges consisting of employee separation costs and inventory write down related to closing a manufacturing facility at a cost of $1.0 million (after tax) or $0.15 per share.  Importantly, during the year the Company increased working capital from $90.8 million to $100.7 million and reduced debt from $40.1 million to $36.1 million.

In the first half of fiscal 2012, operations continued to be hampered by the weak housing sector and lackluster consumer spending.  Revenues fell 2.1% but gross margins continued to improve.  Pre-tax earnings, even before subtracting facility closing charges discussed above, rose 4.3%.  Reported EPS was $0.76 versus $0.65 in the first half of fiscal 2011.

The Company, in its February 2 release of the December quarter results, indicated that it believes that top line growth will be modest through the second half of fiscal year 2012. The report further noted that business continued to be adversely impacted by macroeconomic conditions such as high unemployment, limited job growth and a depressed housing market resulting in low consumer confidence levels. While it expected orders for residential seating products to continue to perform slightly above prior year levels and noted that its commercial office business had picked up modestly, it expected flat order trends for its vehicle and hospitality seating products for the remainder of the fiscal year. 

However, we would point out that in the past two months employment figures have improved and housing activity has begun to pick up.  We believe that, with costs under control, Flexsteel is positioned to report solid earnings improvement as revenues recover along with improving economic conditions.

The Company

Flexsteel Industries, Inc., incorporated in 1929, is one of the oldest and largest manufacturers, importers and marketers of residential and commercial upholstered and wooden furniture products in the United States. Product offerings include a wide variety of upholstered and wood furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. The Company’s products are intended for use in home, office, hotel and other commercial applications. Featured as a basic component in most of the upholstered furniture is a unique steel drop-in seat spring from which its name “Flexsteel” is derived.  The Company distributes its products throughout the United States through the Company’s sales force and various independent representatives to furniture dealers, department stores, recreational vehicle manufacturers, catalogs, hospitality and healthcare facilities. The Company’s products are also sold to several national and regional chains, some of which sell on a private label basis.

Flexsteel has one active wholly-owned subsidiary: DMI Furniture, Inc. (“DMI”), which is a Louisville, Kentucky-based, importer and marketer of residential and commercial office furniture with warehouses in Indiana and manufacturing sources in Asia; DMI’s divisions are Wynwood, Homestyles and DMI Commercial Office Furniture.

Its furniture products business involves the distribution of manufactured and imported products consisting of a broad line of upholstered and wooden furniture for residential (about 75% of revenues) and commercial (about 25% of revenues) markets.

Flexsteel integrates its manufactured products with finished products acquired from offshore suppliers who can meet its quality specification and scheduling requirements. The Company plans to continue to pursue and refine this blended strategy, offering customers manufactured goods, products manufactured utilizing imported component parts, and ready-to-deliver imported products. Flexsteel believes that it best serves customers by offering products from each of these categories to assist customers in reaching specific consumers with varied price points, styles and product categories. This blended focus on products allows the Company to provide a wide range of options to satisfy customer requirements.

Flexsteel operates manufacturing facilities that are located in Arkansas, California, Georgia, Iowa, Mississippi and Juarez, Mexico. These manufacturing operations are integral to its product offerings and distribution strategy by offering smaller and more frequent product runs of a wider product selection. Flexsteel identifies and eliminates manufacturing inefficiencies and adjusts manufacturing schedules on a daily basis to meet customer requirements. The Company has established relationships with key suppliers to ensure prompt delivery of quality component parts. Flexsteel’s production includes the use of selected offshore component parts to enhance its product quality and value in the marketplace. 

Earnings Outlook and Valuation

The Company is scheduled to report its third (March) fiscal quarter results on April 17.  While it may be too early to see the benefit of recent economic improvement in Flexsteel’s numbers, there remains the possibility that management may be able to report an improved tone in its markets.   Given the attractive valuation of the stock, positive guidance could well send the shares to new highs.  A market multiple of 14.5 times trailing 12-month earnings (assuming a flat March quarter), would generate a market price of $23.35, a figure of 20% above the current level.



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Analyst Certification

I, Paul Resnik, the research analyst of this snapshot report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation, was, is, or will be directly, or indirectly, related to the specific recommendations or views contained in this report.