Flexsteel Industries, Inc. (FLXS) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Flexsteel Industries Fourth Quarter Fiscal Year 2020 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note that today's event is being recorded. I would like to turn the conference over to Derek Schmidt, Chief Financial Officer and Chief Operating Officer for Flexsteel Industries. Please go ahead.

Thank you, and welcome to today's call to discuss Flexsteel Industries' Fourth Quarter and Fiscal Year 2020 financial results. Our earnings release, which we issued after market closed yesterday, Monday, August 24th, is available on the Investor Relations section of our Web site, www.flexsteel.com, under News & Events. I am here today with Jerry Dittmer, President and Chief Executive Officer. On today's call, management will provide prepared remarks, and then we'll open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified by the use of the words, such as estimate, anticipate, expect and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause the actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include, but are not limited, to those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we refer to non-GAAP measures, which are intended to supplement but not substitute, for the most directly comparable GAAP measures. The press release available on the Web site contains the financial and other quantitative information to be discussed today, as well as the reconciliation of GAAP to non-GAAP measures. And with that, I'll turn the call over to Jerry Dittmer. Jerry?

Good morning, and thank you for joining us today. When we last spoke in April, I think we all had high hope that this pandemic will be behind us by now. Unfortunately, our nation is still in the grief of COVID and its widespread damage to our wellbeing and economy, and there is no clear end insight. Times of crisis test the resolve of each of us and I am especially grateful to all our Flexsteel co-workers and their commitment and perseverance as we navigate the challenges ahead. Now, I will take a few minutes to cover the impact of COVID-19 on our industry and business. On a macro level, consumer confidence and unemployment levels, which are important economic determinants of future home furnishings demand have plummeted. Although, the unemployment rate has declined over the past few months, it currently stands around 10%, which is notably higher than the pre-COVID level which were below 4%. Consumer confidence as measured by the Conference Board has dropped sharply from 130 in January and February to 92.6 in July. These economic measures present both short-term and long-term risks to the industry. Due to state and local regulations, virtually all the brick and mortar stores of our retail partners were closed for varying periods of time during our fourth quarter, which greatly depressed sales demand. As we speak today, the uncertainty around whether a store will remain open, restrictions around reduced hours and social distancing, all contribute to the growing uncertainty of our customers and industry. This uncertainly has led to canceling or postponing marketing events and other customer facing activities that have been the traditional levers to generate sales. At the same time, country border shutdowns have posed challenges to our global suppliers and disrupted their available capacity. This is further complicated by ocean vessel capacity reductions from COVID, which in turn have recently created supply demand imbalances for containers and a resulting surge in ocean freight costs. As the pandemic continues to spread beyond major metro areas, we have had several confirmed cases of COVID-19 over the past few months, that have required us to temporarily shutdown some of our plants and distribution centers to execute CDC recommended cleaning procedures. Such COVID related shutdowns are costly, constrain our capacity and present risk to our ability to serve as our customers. On a positive note, despite all consumer demand for furniture rebounded in June and July but we still had good visibility on whether or not these demand trends are sustainable. Our belief is that the recent pickup in sales was partially related to pent up demand from shutdown across late March through early June. We also feel the recent unprecedented government stimulus has buoyed demand near term. Once pent up demand and government stimulus dissipate, we expect that demand will likely moderate but to what degree is a major unknown. As I addressed on our last call, we took quick and decisive actions to fortify our business and financial position. First and foremost was to ensure the safety and welfare of our employees to the best of our ability. Next, we took some necessary yet painful measures to protect cash, including permanent facility closures, reductions in force and compensation cuts. Moving on to our fiscal 2020 summary. I can say it was the most challenging year of my career to date. Both sales and financial results were severely and negatively affected largely by unanticipated external forces, namely COVID and the deterioration of U.S. China trade relations that ultimately resulted in new 25% tariffs on furniture. In response, we moved quickly to adjust our cost structure and cash management to successfully navigate the ongoing economic uncertainty brought on by COVID-19 and to realign our global sourcing partnerships to minimize exposure to China tariffs wherever possible. Regardless of these factors beyond our control, we made strong strategic progress in our business transformation efforts and are now well-positioned to accelerate long-term profitable growth. Our notable accomplishments in fiscal year '20 include, first, executing with improved strategic clarity and organizational focus. The recent exit of our non-core RV seating and remaining hospitality businesses has accelerated our strategic focus on core businesses where we are advantaged and best-positioned to drive profitable growth. Second, reducing operational complexity. Our aggressive approach to SKU rationalization and streamline our network structure has reduced complexity. These actions are improving the physical flow and cost in our plants in D.C., which in turn will provide Flexsteel customers with a better overall experience. Next, we made significant and broad-based talent upgrades in fiscal year '20, including the senior management and our sales leadership. All key functional areas have been stabilized and improved organizational structure and business processes. And we have instilled and deployed a deeper customer understanding across the business, which is driving market-backed decision making throughout the company. The actions we took to substantially reduce structural costs now provide the company with a multi-year path to improve profitability on a lower sale base. Two significant areas of structural cost takeout include, closing our Dubuque, Iowa and Starkville, Mississippi manufacturing sites and exiting our Lancaster, Pennsylvania distribution center, which have greatly reduced fixed costs and simplified our network. Second, we have reduced SG&A expenses by rightsizing our workforce, while improving the organization's agility to quickly respond to changing market condition. Finally, we've made good progress in expanding our digital capabilities and ecommerce penetration with both e-tailers and brick-and-click retailers. These improvements will continue to provide new sources of growth and risk mitigation to future economic shocks to our retail brick-and-mortar distribution. While we are early in our journey to become a true omnichannel company, we are highly committed to this strategy to position ourselves where and how consumers want to buy furniture now and in the future. Now, I'll turn the call over to Derek to discuss our financial and operational results, and I'll be back with some closing comments on what we see ahead. Derek?

Thank you, Jerry. As Jerry just discussed, like many companies, we felt an enormous impact of COVID-19 in the most recent quarter. Demand started dropping rapidly at the end of March and came to a screeching halt in April when virtually all of our brick-and-mortar retail partners closed their stores to varying degrees due to COVID-19. At the same time, we saw a healthy increase in our e-commerce sales. Yet this gain was greatly overshadowed by the loss of brick-and-mortar sales. Fourth quarter net sales were $64.8 million, down $35.4 million or 35% compared to $100.2 million in the prior year period. Residential sales, which represent approximately 90% of our business in fiscal 2020, were down $24.4 million or 29% during the fourth quarter due primarily to the adverse impact of the COVID pandemic impact on our business. Within residential, home furnishings products sold through retail stores were down $34 million or 46%, while ecommerce sales were up $9.5 million or 86%. On the contract front, total sales were $4.1 million, reflecting our decision to exit the non-core RV seating and remaining hospitality businesses. For fiscal year 2020, net sales declined 17% to $366.9 million versus sales of $443.6 million in fiscal 2019. The lower sales in fiscal 2020 were a function of higher China tariff, the COVID-19 pandemic and the exit of the RV seating and remaining hospitality businesses. The decline was partially offset by an increase in our ready to assemble furniture sold through ecommerce, which grew 35.7% year-over-year primarily driven by increased demand. As retail stores began opening up around Memorial Day, we experienced a surge of sales related to pent up consumer demand, which was sustained for several weeks in June. To give you some contextual perspective on the monthly sales momentum in the fourth quarter; April sales were 43% of prior sales; May sales were 61% of prior sales; June sales were 90% prior year sales; and in July, we were even with 100% of prior sales. While July sales were encouraging, near term sales demand remains highly variable and vulnerable to the uncertainty surrounding COVID-19. The variables include the potential return of full or partial store shutdowns, the continuation of enhanced employment benefits and other government stimulus programs, intending to mitigate the impact of high unemployment, the potential worsening of U.S. China relations and the unknowns related to the upcoming presidential election. Our fourth quarter financial results were impacted by a multitude of factors making it difficult to accurately parse what normalized earnings would have looked like given the number and magnitude of individual factors, including dramatic fixed costs volume deleverage due to the precipitous drop in sales from COVID-19 related store shutdowns. Second, sizeable cost inefficiencies from quickly closing our plants and distribution centers during COVID-19 shutdown and then subsequently, ramping operations back up. Third, onetime costs associated with the exit of the RV and remaining hospitality businesses and the closure of a DC. And fourth, onetime costs associated with our SKU rationalization efforts and the deep discounting required to sell those discontinued items. We reported a fiscal fourth quarter net loss of $25.7 million or $3.23 per share that compared to a net loss of $19.9 million or $2.52 per diluted share in the prior year quarter. The reported net loss included $20.8 million pretax restructuring expense, a $3 million inventory impairment charge related to the company's exit of certain product lines and $2.9 million right of use asset impairment expense related to leases. Excluding these expenses, the non-GAAP adjusted net loss was $3.7 million or $0.47 per share in this fiscal fourth quarter as compared to a non-GAAP adjusted net loss of $4.3 million or $0.54 per diluted share in the fourth quarter last year. Please see the non-GAAP disclosure included in the earnings release for a detailed reconciliation of GAAP to non-GAAP adjusted net loss. Turning now to profitability results for the quarter. Gross margin, as a percent of net sales in the fourth quarter, was 9.2% versus a reported 5.3% in the prior year quarter. There was quite a bit of noise that had an impact on both this year and last year's quarterly results. The approximate 390 basis point improvement in adjusted gross margin is composed of three large drivers. First, a 720 basis point benefit or $4.7 million from lower year-over-year inventory impairment related to the company's restructuring program. Second, a 440 basis point benefit, or $2.9 million from a reduced valuation loan on foreign value added tax. And third, a 770 basis point detriment related to fixed costs the leverage from lower volume and operational inefficiencies related to closing and ramping-up operations during COVID related shutdown. Selling general administrative or SG&A expenses were 25.9% of sales compared with 18.8% of net sales in the prior year quarter. Approximately 440 basis points of this increase were due to to lease impairments, 200 basis points for COVID-19 related costs and 110 basis points due to higher bad debt expense. Regarding taxes, during the quarter, we reported a tax benefit of $5.6 million or an effective tax rate of 17.8% during the fourth quarter compared to a tax benefit of $6.5 million in the prior year quarter or an effective tax rate of 24.7%. Now turning to the balance sheet. As Jerry noted, we took aggressive and decisive actions during the quarter to reduce costs and preserve cash. And as a result, we ended the fourth quarter with a strong cash position of $48 million and no debt. During fiscal year 2020, we generated $18.3 million in cash from operations compared with $6.7 million at year end fiscal 2019. As previously released, we secured a commitment for a new $45 million line of credit prior to the end of fiscal year 2020. Given our strong cash position and confidence in future cash flows, we have initiated a renegotiation of the new line to a lower amount of $25 million and with more favorable terms to the company, which better fits the business's current needs and reduces unnecessary costs. We anticipate finalizing the modified credit agreement within the next week or two. Working capital, defined as current assets minus current liabilities at June 30, 2020, was $128.4 million compared to $118.2 million at June 30, 2019. The $10.2 million increase in working capital was due to an increase in cash of $26 million, primarily attributable to proceeds from the sale of Riverside California facility of $20.5 million and increase in assets held for sale of $12.3 million, and increase in other current assets of $6.6 million and a decrease in restructuring liability of $4.2 million, partially offset by $23.1 million reduction in inventory as a result of inventory management and SKU rationalization activities, a decrease in trade receivables of $5.9 million due to lower sales and an increase in accounts payable of $9.3 million. Capital expenditures for the 12 months ended June 30, 2020 were at $3.7 million. During fiscal 2021, we anticipate spending between $3 million and $4 million for capital expenditures, and we believe we have adequate working capital to meet these requirements. And finally, a quick update on restructured expenses. During the fiscal year ended June 30, 2020, the company incurred $34.2 million of restructuring expense, primarily for the write down of assets due to impairment, facility closures, professional fees, pension withdrawal liability and employee termination costs, as part of Flexsteel's previously announced comprehensive transformation program. The company expects to incur approximately $2 million of ongoing facility and transition restructuring expense in fiscal 2021, while the company will remain steadfast in pursuing continuous improvement and business optimization opportunities. Activities related to the previously announced transformation program are expected to be fully-completed by the end of the first half of fiscal year 2021. Now, I'll turn the call back to Jerry. Jerry?

As noted earlier, the demand outlook remains very cloudy but we are positioning the company to successfully operate under multiple sales scenarios. While demand in June and July was encouraging, we are conservatively planning for sales growth to recede somewhat later in the quarter and for the remainder of the calendar year 2020. This outlook could change dramatically in either direction, depending on the unfolding situation with COVID-19, U.S. unemployment, consumer confidence and future government stimulus programs. Right now, we are not in a position to provide any profit guidance in this environment, not only due to sales uncertainty but also several costs headwinds we are currently encountering, specifically ocean container surcharges. There was a significant amount of shipping container capacity taking out of the market at the onset of COVID-19, which has not been brought back online. This supply demand imbalance is driving 30% to 60% cost premium on our ocean container spot rates from Asia with no line of sight on when additional container capacity will be added. Wage rate increases, despite record unemployment, we are finding it increasingly difficult to recruit new applicants for jobs at our various facilities. In response, we increased wage rates at several of our locations in order to attract the talent needed to ramp up our operations back up and support existing sales demand. Vietnam supplier constraints. After the new China tariffs were put in effect, we aggressively reset our global supply chain to reduce our exposure with a large part of that capacity ship moving to Vietnam. The ability of our Vietnam suppliers to quickly increase production capacity was highly dependent on bringing in workers from China and other countries outside of Vietnam. With strict country border restrictions now in place due to COVID-19, our Vietnam suppliers can no longer leverage workers from outside of Vietnam, and are facing production constraints as a result. It is unclear when these border restrictions may be lifted. The hard work we did to limit our exposure to China is being somewhat reversed by circumstances beyond our control. Now we have to revert back to China for production capacity to avoid potential out of the stock inventory situations. The additional cost of tariffs on increased China production will be a drag on gross margins at least through the calendar year 2020. Despite the near term sales uncertainty and profit headwinds, we remain confident in our ability to continue to preserve cash and effectively navigate in multitude of various economic scenarios. We also remain confident that the move we've made to refocus the organization on core businesses, reduce complexity, upgrade talent, reset our cost structure and position ourselves as an omnichannel leader in the furniture industry, will accelerate our return to profitability and generate sustainable shareholder value over the long-term. With that, we'll open the call to your questions, operator?

Speakers, your line is now open. We will now begin the question and answer session [Operator Instructions]. First question will come from [David Bold with Portland]. Please go ahead.

Would you be able to talk about August trends so far in the same kind of manner you discussed the July, June, and April commentary…

So we've seen kind of the same trends in August and the trends have been encouraging. The real questions are the same things we put out there until we know that everything has stabilized, we're not sure what's sustainable out there. Just because of there was a lot of pent up demand and those trends have continued. So like I said, we're just going to have to wait and see what happens as we go forward here, because a lot of movement here with the elections coming up and a lot of other things. So we've been encouraged but we’re going to have to just wait and see if how much that was pent up demand and how much of that was stimulus related versus true demand that will continue on.

So August was flat versus last year or is August up?

August, it's up from last year.

Our next question will come from Mike Hughes with SGF Capital. Please go ahead.

Just one follow up on the previous question, given the supply chain issues and labor issues. Is it fair to say the revenue is constrained by those factors, meaning July was even but if those issues weren't in place, you could had a more robust number? Maybe ask a different way. I'm assuming that order growth is exceeding revenue growth significantly at this point. Is that correct?

That is correct.

Second question for you on the RV line in Dubuque. Is that completely shutdown at this point or is that ramping up right now?

No, that's completely shutdown.

And I know there was an inventory provision in the quarter. Was that related just to Dubuque?

Yes, it was.

Just kind of on a plant level basis the Dubuque, putting the inventory charges aside, did Dubuque to lose money in the quarter?

No, it actually -- even though sales were relatively low, it was breakeven. And so if you think about that when we wrapped up shipments in kind of June, we were shipping a lot of finished goods that were already produced and even the finished goods that we had to produce a lot of the raw materials were already fabricated. So we didn't really expend them much later kind of relative to the outgoing shipments and further for that though I would have expected, yes, that business to be in the right…

And then the SG&A number as reported was $16.8 million. I saw $2.9 million lease impairment. Is that included in the $16.8 million number?

It is. And the other thing that are noteworthy. I mean, if you wanted to normalize SG&A, we also have $1.3 million of COVID related charges in that SG&A number, as well as an additional $900,000 for provision of bad debt. So, those three items I would consider as kind of non-recurring or extraordinary.

So if I normalize for what you just went over, that would be quarterly SG&A of $12 million. Is that right, roughly?

Yes. And we had a couple of kind of onetime gains to that were amounted to a little less than a million dollars, so add those back as well.

So $13 million. So as we see sales pick back up, how do we think about the SG&A coming back from the $13 million level?

So we've been very aggressive in terms of taking the structural costs out not knowing what the economic prospects look like in this type of environment. As I think sales stabilize and become more sustainable, I think we'll have to reinvest back some money in SG&A. But I think an appropriate kind of run rate would be in the kind of $15 million range, maybe plus or minus a million.

And what are your thoughts on what's the revenue breakeven point now?

At about 60% to 70% of our sales, historical sales.

I'm not sure I follow. So, I'm just asking what would kind of be a revenue number that would result in breakeven for the company? So, are you saying if historically you're doing $100 million in the quarter, and now it's $70 million is breakeven, I apologize…

I would say on an annualized basis around $350 million.

$350 million would be breakeven?

Yes.

And then just two more questions for you. What's contained in the $12.3 million assets held for sale? And how quickly can you monetize that number?

Yes, we have we have four properties right now for sale. Lancaster, Pennsylvania, a plant in Harrison, Arkansas, our Dubuque facility and then the Starkville, Mississippi facility. Lancaster right now is under contract. The other three, all have potential interested parties. We're going to be patient with those sales and make sure that we get fair market value. What I would tell you that, what would be reasonable when it's all set and done, we'd expect somewhere between $18 million and $23 million of cash in aggregate from those four locations.

So they’re assets held-for-sale at $12 million and you're saying they're potentially worth $18 million. Is that just an accounting issue?

Correct. Again, it depends on market dynamics but given where we've got them price right now, I'm hopeful that we can sell them for more than what's on the books.

Last one for you. The other asset line was $18.5 million versus $11.9 million a year ago. Is there a tax receivable number in there related to the tax changes that can be [Multiple Speakers] COVID?

Yes, given the CARES Act, we were able to apply the loss back to previous years when we paid a 35% tax rate.

What is the tax receivable amount, roughly?

$9 million.

So $48 million in cash, assets held-for-sale at $12 million, gets to the 60 plus 9 is 70. Okay. So just, what are the working capital needs for the next couple of quarters?

Yes, right now, frankly, if our supplier capacity was in a healthier position, I'd want to invest about $20 million in more inventory. So again, I think once the global supply chain gets healthier, we're going to take a deeper position in inventory. So that will be a use of working capital. And then, again, when we feel that the top line sustainable, we have other investments to drive longer-term kind of profitable growth as well.

Our next question will come from John Deysher with Pinnacle. Please go ahead.

It looks like you've made solid progress this past fiscal year, and I'm just curious if you suggest that the restructuring is going to be complete by the end of this year, calendar year, December, the transformation. What needs to be done between now and then? Where are the priorities between now and the end of the year?

As it relates to the restructuring?

Yes and in general. Yes, that's a good point.

So as it relates to the restructuring, so we spent about $55 million over the last year and a half on the restructuring, and we've been able to take out close to $20 million in fixed structural costs and generated about $40 million in kind of restructuring from field of assets. Right now, that restructuring for the most part is complete. There's about $2 million we think we'll need to spend over the next year for just ongoing facilities and clean up and things like that. But the restructuring that we put in place, our belief is pretty well behind us. And we put our cost structure now where we want it to be. Now, we'll be just really working through the various parts of different initiatives that we can go after to grow our sales and our top-line again.

So the heavy lifting has been done up to this point.

Correct.

Back to the sales front. What percentage of your retail customer base is open at this point? In other words, is everyone -- are all the stores open, but maybe have limited hours? Or are there still stores that are closed at this point? I'm just looking for a rough percentage.

So in essence, everybody for the most part back open. The limited hours we think maybe could become the new norm. But for the most part, almost all of our customers are back open now.

And I guess kind of just a quick follow up, the Lancaster plant is under contract. When do you anticipate having that sold and what do you anticipate as the proceeds?

Right now, we're targeting close by the end of September. Until we close that, I don't want to give you a specific sales price but we had it listed for -- if I remember $2.4 million. So that gives you a directional indication.

[Operator Instructions] Our next question today will come from Jess Geygan with Global Value Investment Corp. Please go ahead.

Very interesting quarter, you had lots of information here. Regarding the tax receivable from the CARES Act of roughly $9 million, I believe is going to be cited. When do you anticipate collecting that?

Well, given the shutdown, it's been difficult for us to get all the IRS. I think wishful thinking would be the end of this quarter or more likely than not maybe early Q2.

You mentioned your ecommerce as a growing segment and increase, but can you tell us what the absolute dollar of ecommerce sales are?

Yes, give me a second here. I'm looking at number. Do you have another question, while we're looking that up?

On your cash flow statement, you showed for the year $1.5 million of stock purchases. My recollection is all that occurred in your fiscal Q4. You cite a buyback approval by the board of $8 million. Is that in addition or inclusive of the $1.5 million?

That would be in addition to the previous authorization of $6 million. The $6 million authorization is still active. So we're still working through that. But the $8 million really was intended to give us an additional option to return excess cash to shareholders if and when appropriate. So we just wanted -- we really wanted that option in our back pocket.

And Jeff, the math, so it's really six plus eight, it's really $14 million in total.

And how much of that existing six have been drawn down, are you saying it was six net of the prior plan?

No the $6 million, again, it's still active but we've used up a majority of it.

So really we're looking at $8 million of new plus some de minimis amount from the prior plan?

Correct…

And then to go back to your question on ecommerce. So in the quarter absolute sales were $20.5 million and for the full year about $61 million.

You gave us a number for SG&A of roughly $15 million, which I think is a very encouraging number. What's the ratio of revenue for that number?

Yes, what I'll tell you, I'll give you a contextual perspective on our long-term target, which is an EBIT in the 7% maybe 8% range. And the components of that would be a gross margin 23% or higher and SG&A of 16% or lower.

Do you think that 23% for your gross margin is the right number even after your transformation plan?

I think that's the next place we want to go. Historically, that's where the corporation ran is in that 23% range. We're kind of stair step in this. So as Derek said, the SG&A fees is time that 14%, 15%, 16% and the margins, the next big step to get to that 23%, 24%, there's no way or means that we're going to stop there. We believe it can be higher. But we just kind of sit there and looking out where we think we need to be, because remember we put out there that we thought we'd be in that 7% EBITDA on a run rate basis in 2021. And that’s we really feel we're still on trend and on track to do that. Once we’re they are, but we obviously try to do better than that. Absolutely.

And last question regarding your transformation plan that included divestiture of certain assets, which you've highlighted. Balancing today $12 million, you're suggesting fair market could be $18 million maybe a little bit higher. Just at a high level plan versus expectation, how has the transformation plan unfolded versus I think it was mid-year 2019 that you rolled that out?

So basically interesting. We originally were behind some on it, Jess, during COVID we’ve really been able to kind of catch back up. So all in. And I think I've mentioned earlier to one the other earlier questions. We will have spend about $55 million in last year and a half on the restructurings, we've been able to take our structural fixed costs down over $20 million, we’ll have generated $40 million probably even closer to $50 million plus in cash. So the net-net of it, we're feeling really good about. And of course, as you know, there's a lot of hard decisions in there. But we've really reset the business from a strategic standpoint really, we've got a couple core businesses now that our belief is will generate, both the sales we’re at now and higher than we were in the combined corporation. So, we're actually feeling really good about it. We've taken a lot of complexity out and really simplified a lot of the back end of our business.

All right, I appreciate it, guys. Congratulations. Good luck. And I would just comment and say, I think you've done an exceptional job under the circumstances. You've been excellent stewards of our capital. So thank you.

Thank Jess.

[Operator Instructions] Our next question will come from [David Bold with Portland]. Please go ahead.

Just following up on the August demand commentary. Is your expectation that demand will recede? Is that based on linearity of the August quarter so far, or is that just an abundance of caution on your part?

It is abundance of caution.

And last one, the bad debt expense and SG&A. Is that -- should we expect that to be the last of it, how is the financial health of your counterparties?

Right now, knock on wood we haven't had any major bankruptcies beyond kind of Art Van. So I think we're kind of reserved for any issues that will -- that could arise now. That said, if the economy starts to unravel then that's kind of a new ball game. But as it stands right now, we feel pretty good about the accounts receivable.

[Operator Instructions] Our next question will come from Mike Hughes with SGF Capital. Please go ahead.

First on the July and August revenue trends, basically flat with a year ago, at least July. You're not pro forming out the contract business. Are you?

No. That is largely gone. What we have left right now is minuscule.

So if I did perform that out, you're showing in the month of July, for example, roughly 10% plus growth, because I'm removing at least $10 million in revenue presumably from last, on a quarterly basis from last September's quarter. Is that right?

You're correct. Our organic growth, excluding those discontinued businesses was 11% in July.

And then just follow-up you indicated around $350 million would be breakeven. So even if you're at a 20% gross margin at $350 million, that's $70 million in gross profit, SG&A of $15 million annualized be $60 million, that's $10 million in operating income. Even if you bring back some SG&A, it seems like at $350 million, you should be more profitable. Where's my math off there?

It's not. The $350 million was really directional.

And then [Multiple Speakers] I just wanted to, follow-up, the 7% to 8%. When did you say you could achieve the goal by at this point?

We put out, last year we said that we would do that in a run rate in fiscal year 2021.

So you still think by the third or fourth quarter of the current fiscal year, meaning March or June '21, you could be at 7% to 8% even margins?

At this point in time, not seeing all the things that could happen. Yes, that’s still the plan and try to do that.

You talked about the higher shipping costs, higher labor costs. I think that's kind of a industry-wide issue. One, do you agree with that? Meaning you're not at a competitive disadvantage because of that? And two, given everyone's faces those costs, have you pushed on pricing?

So in terms of whether we're at advantage, the answer is no. The container issue is universal across multiple industries, not just furniture. And with regard to pushing through the pricing, we have started to do that. Obviously, there's been some resistance and pushback from the channel. But we're trying to pass through as much of that as we effectively can.

And we're doing it as a surcharge knowing that, hopefully, it's going to go up and down. And as it eliminates we'll bring it back out. We’ve not done it as a true price increase we’ve done it as a surcharge.

Our next question comes from Jess Geygan with Global Value Investment Corp. Please go ahead.

One quick follow up as long as we're talking about the shipping that’s on. There was a move out of China to Vietnam and other Southeast Asian countries, I'm not sure of what beyond Vietnam. But what ratio that -- of your business today is coming from offshore, albeit Asia or otherwise and how much of that is actually coming out of China?

Yes, I would say in terms of our total sales, roughly about 60% is sourced. And what I’d tell you before last month our China exposure was down below 15%. So as Jerry kind of alluded to, we're going to have to revert back to China production at least for the remainder of the calendar year. But then we expect our suppliers in Vietnam to be in a better position to ramp up their capacity so that we can quickly shift that back to Vietnam. And we are looking at other -- we're looking -- we do have a plan to more broadly diversify our global supply chain, whether that would be with Eastern Europe or Mexico. So that we can reduce our overall exposure to Asia as well.

And these products you're bringing in from China continues to have a 25% import tariff?

Correct. So it will be -- that move back to China will be a short term drag on margins.

This will conclude our question and answer session. I would like to turn it back to Jerry Dittmer for any closing remarks.

Thank you for participating in today's call. Throughout the duration of this pandemic, we will continue to work hard to transform our company and achieve its full potential. We have a clear vision of where we want to go, and I’m confident in our team's ability to carry out our plans even in the face of these daunting and unprecedented times. I appreciate your questions today. And please reach out if you have any additional ones. We are grateful for your continued support. And until next quarter, please stay safe, healthy and sane. Again, thanks for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.