[Management View]
Flexsteel Industries reported strong topline and margin gains for fiscal Q1 2026. Key metrics included net sales of $110.4 million, up 6.2%, and an operating margin of 8.1%, marking ten consecutive quarters of year-over-year adjusted operating margin improvement. Strategic priorities focused on new product momentum, with over 50% of sales from products introduced within the past three years, and the launch of innovative sub-brands like “Pulse” and “Zen.”

[Outlook]
Management emphasized significant new risks from Section 232 tariffs and an absence of forward guidance due to uncertainty. Future plans include a multi-pronged mitigation strategy involving short-term surcharges, restraint on discretionary expenses, and exploration of new supply chain options. Despite near-term challenges, Flexsteel remains committed to growth investments and new product introductions.

[Financial Performance]
Net sales for fiscal Q1 2026 were $110.4 million, up 6.2% YoY, driven primarily by Source Sauce Seating products. Operating margin increased to 8.1%, up 230 basis points from the prior year quarter. Approximately $2.4 million of sales reflected pricing from tariff surcharges. Operating income was $9 million, exceeding the top end of the prior guidance range.

[Q&A Highlights]
Question 1: Can you provide more details on the trends you saw from early July through September, especially around Labor Day?
Answer: Weekly store traffic and sales were very volatile, with weak weeks leading up to Labor Day, strong sales during and immediately after Labor Day, followed by a drop in demand and store traffic. This volatility is attributed to uncertainty around tariffs and the overall macro environment, impacting consumer confidence.

Question 2: Can you comment on the level of tariff surcharges and their impact on sales and gross margins?
Answer: For in-stock source products, the surcharge increased from 8.5% to 15% to cover the eventual 30% tariff. Similarly, made-to-order products from Juarez facilities now have a 15% surcharge. There will be some demand decline due to these price increases, but competitors are taking similar or larger price increases.

Question 3: Do you have a goal for the percentage of sales from new products, and how should we think about pricing on those new products?
Answer: The long-term goal is 30%-40% of sales from new products launched within the last three years. In Q1, over 50% of sales came from new products. Pricing aims to bring better value to the market at similar or lower prices than current products.

Question 4: What are your goals for the case goods business, and how do you see it growing?
Answer: While internal goals exist, they are not publicly shared for competitive reasons. The case goods category has been challenged but remains a large part of U.S. furniture consumption. Flexsteel is well-positioned to gain market share and sees it as a critical growth driver.

Question 5: What affected the lower tax rate in the quarter, and how should we think about the tax rate for the rest of the year?
Answer: The lower tax rate was due to discrete items like changes in reserve for uncertain tax positions, higher R&D tax credit, and lower foreign taxes. The forward tax rate is expected to be a couple of hundred basis points higher for the remainder of fiscal 2026.

Question 6: Can you quantify the magnitude of price increases by competitors relative to your 8.5% to 15% surcharges?
Answer: Competitors are passing along price increases as high as 21% to 25%, relative to Flexsteel’s 15% surcharge. This competitive information gives confidence that Flexsteel is maintaining its competitive position.

Question 7: Have you heard from retail customers about potentially gaining more business due to your lower price increases compared to competitors?
Answer: It is too early to speculate, but conversations with retailers at the upcoming High Point market will provide better insights into their views on pricing changes and consumer demand.

[Sentiment Analysis]
Analysts expressed concern over demand volatility and tariff impacts but were impressed by Flexsteel’s strategic product innovations and pricing discipline. Management maintained a cautious yet optimistic tone, emphasizing agility and readiness to navigate market shifts.

[Quarterly Comparison]
| Metric | Q1 2026 | Q1 2025 | Change |
|-------------------------|---------------|---------------|---------------|
| Net Sales | $110.4 million| $104 million | +6.2% |
| Operating Margin | 8.1% | 5.8% | +230 bps |
| Operating Income | $9 million | N/A | N/A |
| Sales Order Backlog | $66.7 million | N/A | Relatively flat|
| Cash Balance | $38.6 million | N/A | N/A |
| Working Capital | $116.9 million| N/A | N/A |

[Risks and Concerns]
The new Section 232 tariffs are expected to be highly disruptive to the U.S. furniture industry, impacting over 90% of Flexsteel’s product mix. The absence of USMCA exemptions and the step-up in tariffs to 30% by year-end pose significant risks to near-term demand and profitability. Consumer confidence remains fragile due to inflation and slowing employment growth.

[Final Takeaway]
Flexsteel Industries delivered strong financial performance in Q1 2026 despite facing significant headwinds from new tariffs and demand volatility. Management’s strategic focus on product innovation and pricing discipline has positioned the company to navigate near-term challenges while continuing to invest in growth. The upcoming High Point Furniture Market will be crucial in assessing retailer sentiment and consumer response to pricing changes. Flexsteel remains committed to its long-term trajectory of profitable growth and shareholder value creation.