LSI Industries Inc. Q2 FY2023 Analysis:  LSI Continues Double-digit Sales Growth, Improved Earnings, with Operational Execution and “Boundary-less Selling”

LSI Industries (NASDAQ: LYTS) released Q2 FY2023 results last week, delivering its seventh consecutive quarter of double-digit sales growth.  Net sales grew 16% over Q2 last fiscal year, coming in at $129M.  LSI showed continued improved profitability with Q2 FY2023 Adjusted EBITDA up +54% over the same quarter last year, coming in at 10.1% (+250 bps year over year).  Working capital declined as a more stable supply chain allowed for targeted inventory reductions.  The company’s free cash flow was $8.9M in Q2FY2023 compared to a negative position in Q2 FY2022.  Reduction in net debt outstanding has brought net leverage down from 3.1x Adjusted EBITDA in Q2 FY2022, to 1.3x in Q2 FY2023. 

LSI has two reportable business segments:  Lighting Solutions and Display Solutions, with each segment delivering roughly half of the company’s revenue since the acquisition in mid-2021 of JSI Store Fixtures, which significantly grew the Display Solutions segment.  In Q2 2023, both segments attained double-digit growth, with the Lighting Segment increasing sales by 17% and Display Solutions increasing by 15%. 

CEO Jim Clark credited the entire team at LSI along with their agents and partners for achieving the seventh consecutive quarter of double-digit organic growth – especially given the economic headwinds, supply chain issues and construction market disruptions.  He noted that “while no market is recession-proof, we do believe that a good swath of our various vertical markets has provided us with some hedge against current headwinds and proven to be recession-resistant, creating growth opportunities that outpaced the performance of the general economy.”

LSI’s Annual National Sales meeting is being held this week in Cincinnati, bringing all sales, marketing, product development and engineering resources together.  CEO Clark noted LSI’s excitement over making this big investment, with a plan to follow the national sales meeting with the third annual partner and agent virtual sales and tech meeting (sharing lessons, new product intros and best practices from the national sales meeting and the past year).  The Q2 FY2023 financials released last week show consulting expense for “Commercial Growth Initiatives” of $789,000 for the first 6 months of FY2023.

CFO Jim Galeese provided background on the continued profitability improvements:  stable selling prices and moderating commodity costs combined with growth in volume to improve earnings and expand margin in Q2 FY2023.  He also noted that LSI’s strong cash generation  reduced net debt by $17M in the first 6 months of FY2023 and over $25M from the prior year period, reinforcing that debt reduction remains a capital allocation priority and “provides flexibility to pursue investment in both organic and inorganic initiatives.”

In response to analyst questions on potential future areas of contribution from cross-selling or other initiatives, CEO Clark talked about LSI’s concept of “boundary-less selling”:  “any time one of our sales folk is in talking to a customer… we are making sure that regardless of what the entry point is, once we are in and established with that customer that we are talking about the full product portfolio, and that’s whether you are at JSI or LSI or lighting or graphics or whether you are with our services group…it’s a constant occurrence and it’s a discipline and a process that we are underlining with our folks all the time.”

Now halfway through fiscal 2023, LSI appears to be comfortably on track for early achievement of the growth plan set out in 2019 to reach $500M in annual sales and improve to double-digit EBITDA in FY2025 (in 2019, LSI had annual sales of just $300M and EBITDA of around 3%).  Pressed during the Q&A on updating these targets, CEO Clark indicated they are looking to revisit that guidance in the current quarter and provide an update on LSI’s goals and targets by the end of the year.  More than once in the earnings call CEO Clark referred to LSI’s belief that they have “a lot of runway left”, seeing “both top line and bottom line” growth opportunity.

Looking ahead to Q3 FY2023, the company expects quote/order activity to remain healthy, with the proviso that the winter months bring a seasonality to the outdoor lighting business.  LSI believes they are executing well in vertical markets that are generally healthy, a key part of their above-market growth.

Go Deeper

LSI Industries Q2 FY2023 Results Press Release

LSI Industries Q2 FY2023 Earnings Presentation