Over the past six months, LSI Industries' (LYTS) stock price has increased by 12.37%, better than the S&P 500's 6.87% growth. The company saw a good revenue boost from Q1 FY2022 to Q2 FY2023 due to higher demand and increased pricing actions. However, in Q4 FY2023 and Q1 FY2024, growth declined due to stabilization in market demand and tough year-over-year comparisons. In Q1 FY2024, the Lighting segment's revenue growth stayed flat due to stable demand and tough comparisons. The Display Solutions segment had negative growth in the last three quarters, with -6.3% in Q1 FY2024, mainly because of delays in the QSR digital signage program.

LSI Industries’ Segmentwise Revenue Chart

Even though revenue growth took a hit in the last two quarters, LSI Industries managed to improve its adjusted EBITDA margins by keeping prices steady, tweaking its product mix, and running operations more efficiently. In Q1 FY2024, the company's adjusted EBITDA margin increased by 170 basis points compared to the previous year, reaching 12.2%. From Q1 FY2022 to Q1 FY2024, the adjusted EBITDA margin grew by 510 basis points, climbing from 7.1% to 12.2%.

What should we expect in Q2 FY2024 and beyond?

LSI Industries will report its Q2 2024 financial results on January 25, 2024. In the Lighting segment, I believe the year-over-year revenue growth should be modest in Q2 FY2024. This tempered projection is attributed to prolonged project conversion times caused by prevailing supply chain challenges, stabilized pricing, and tough year-over-year comparisons. In the medium to long term, the segment should benefit from several large projects. The Lighting segment secured a substantial multi-million dollar order in April 2023 for a state-of-the-art EV battery manufacturing plant. The initial phase of this venture is slated for completion in the second quarter of FY2024, with shipment activities expected to commence later in the fiscal second quarter and persist into Q3 FY2024. In October 2023, LSI Industries received another order for a two-plant complex in Kentucky that is similar in size and lighting specification requirements. Similar to the previous project, shipment activities are set to kick off in Q2 FY2024, extending through Q3 FY2024.

In the Display Solutions segment, challenges loom in the Automotive, Grocery, and warehousing verticals in the coming quarters. Delays in site permitting and customer installation schedules, compounded by the industry upheaval stemming from the impending merger of major grocery chains Kroger and Albertsons, and robust shipments in the preceding year, should exert downward pressure on Display Solutions’ sales growth in the fiscal second quarter of FY2024. Therefore, I believe the segment’s revenue growth in Q2 FY2024 should be in the negative low single digits.

Despite these short-term fluctuations, the intrinsic demand outlook for this segment remains robust. Noteworthy among them is a significant project aimed at refreshing the brand of a major oil company across a staggering 7,000 locations. This extensive undertaking should be completed over the next four and a half years. Internationally, the company has also won projects in Central American countries that involve rebranding 1400 sites, which should be completed over the next three years. These projects underline the medium-term growth of the Display Solutions segment.

In terms of margins, the second and third quarters of FY2024 should be influenced by seasonal factors, and the company's margins should also be affected by lower utilization during this period. Additionally, the ongoing investment in new personnel at the corporate level by LSI Industries should contribute to an increase in SG&A expenses in the upcoming quarters. The Display Solutions segment's margin should continue to be influenced by project timing. Overall, I believe the company’s margins in Q2 FY2024 should be lower compared to Q1 FY2024.

In the long term, LSI Industries has introduced its five-year plan to increase its adjusted EBITDA and expand margins. The company plans to grow its adjusted EBITDA by 100% and increase its margins by 250 bps by 2028. This ambitious goal should materialize through a calculated approach involving annual cost reductions of 2-3%, optimizing assets, and enhancing overall productivity.

Conclusion

In summary, I believe LSI Industries’ year-over-year revenue growth in Q2 FY2024 should be flat given the delayed project conversion and steady price. The company’s margins should be impacted by lower utilization rates, investments in corporate, and flat revenue growth. Despite these short-term challenges, the horizon appears promising for LSI Industries in the medium to long term given the large lighting-related projects at EV battery manufacturing plants and the brand improvement of a major oil company.

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