FLXS: A Furniture Net-Net

There are few industries worse than the furniture business right now. Retailers are closed. There is massive unemployment. Who is thinking, “Let’s make a large, highly discretionary, easily postponable expense!”

Hence the opportunity in Flexsteel, a 126 year-old furniture manufacturer based in Iowa. Sales are probably down 80-90% right now, and they will be burning cash until demand returns.

The company had already been burning cash through 2019 due to a series of restructurings. They rationalized SKUs and shut down facilities with low utilization. Inventory was written down. Flexsteel has also been fixing a disastrous SAP implementation which burned close to $100 million (yes, the market cap is currently $70 million).

The old management team rode a few product winners to new heights in the 2012-2016 period but left the pipeline dry. They compounded this with the flubbed the ERP implementation. The result of these miscues is the stock is down about 85% from the peak and is trading at 2009 levels.

On the bright side, the company hired a new management team. The new CEO’s primary experience is from a rival furniture manufacturer called HNI. He wrote an annual letter which outlined some ambitious goals. And insiders are even buying some stock.

The only fear: Are they moving too fast? I’m all for moving fast but it came at a large cash cost. Was it necessary to hire Alix Partners? Perhaps I’m just too cheap and short-sighted (I am a net-net investor after all). Regardless, after all the restructuring and cash costs, the core business was on the cusp of profitability.

And then the pandemic struck. Now the question is how much cash will they burn this year before demand comes back? The company is hunkering down. My estimate is that they could burn $30 million this year if demand comes back slowly. So by the end of the year, it goes from a 60% net-net to a 100% net-net. Still cheap, but then we’ll have to worry about 2021.

However, it seems like a company that will last. It’s been around forever. People talk about Flexsteel on BIFL forums on Reddit. It’s not the highest end, but they are known for making decent furniture.

When the dust settles, they should have a leaner operation. They will have flexible sourcing, manufacturing, and distribution. They will have an omni-channel presence. At their goal of 7% margins, this company is trading at about 3x earnings.

With that said, this one is not without risk. It could be down a decent amount in 1-2 years. But it’s a net-net. The odds are good it will be worth more, perhaps much more.