Office Furniture Improves Changes

September 23, 2005
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As a whole, the public segment of the office furniture industry appears to be back on track and picking up steam.

Last Monday, Steelcase Inc. reported an 8 percent annual increase in sales to $702.9 million for its second quarter of fiscal 2006. Within company estimates, the growth fell below Wall Street expectations, primarily because of a surprising percentage of incoming orders scheduled for shipment in the third quarter.

During a conference call with investors that morning, Steelcase CFO Jim Keane estimated that the late ship dates transferred $10 million in revenue from the second to the third quarter.

Had that $10 million stayed in the second quarter, Steelcase would have experienced a 9.5 percent increase, which was in line with analysts’ predictions.

At first glance, even that percentile pales against the 20.6 percent increase Herman Miller Inc. reported for its first quarter of fiscal 2006 on Wednesday. However, when adjusted for the extra week in Herman Miller’s accounting calendar, it drops to 12 percent.

By cash value, that reflects a $73.9 million gain at 20.6 percent and a $42.9 million gain at 12 percent — roughly parallel to the much larger Steelcase’s $51.9 million increase.

When including Iowa-based HNI Corp.’s 16.8 percent, $85.6 million gain reported in its second quarter fiscal 2005 in July, the office furniture industry appears to be robust, already outpacing estimates of 12.4 percent growth in the 2005 calendar year from the Business and Institutional Furniture Manufacturers Association (BIFMA).

BIFMA projects a $1.1 billion gain in U.S. shipments, roughly $278 million per quarter, excluding seasonal sales trends. The three public companies reported a combined $211.4 million in the last quarter. Assuming the BIFMA projections hold, the balance of the industry, including large private companies like Haworth and Trendway, split sales growth of only $70 million this quarter.

At that rate, for the three public companies to continue their rate of growth, it will be either through new markets or at the expense of their competition.

This could be alarming to Herman Miller, which has trumpeted a goal of doubling its business by 2010, with a revenue goal of $2.6 billion.

“We know that we have to outpace the industry to do that,” said CEO Brian Walker during a conference call with analysts. “Last quarter we were 13 percent; this quarter we’re 20. I think we’re well on track … what we don’t get from the domestic market, we’re counting on from the international segment and parallel markets.”

Those parallel markets include products like the Babble sound management system, released under the Sonare brand.

Herman Miller does have its highest order backlog since 2000, but Walker deflected questions about market share.

He also avoided details about other offerings from the Creative Office, namely Motus, which will be released under the Viaro brand. Motus has been described as a new approach to commercial space that will help building owners, architects, designers and organizations manage interior spaces. It is currently installed in a 17,000-square-foot retail space in New York, and Walker said the company has made an early investment in tooling.

Likewise, Steelcase is looking to new markets. A full $11 million of revenue came from its service offerings, and another $3.8 million from acquisitions. It reported growth in specialized categories such as health care and education. CEO Jim Hackett remarked that he was surprised by the 10 percent growth in the North American segment, driven by growth in the corporate market and the aforementioned special clients.

Also impressive, the low-cost Turnstone brand showed double-digit growth, outpacing the rest of the North American segment.

“The good news is that we didn’t trade lower margins for this growth,” Hackett said.

When Steelcase finishes its company-wide restructuring plan, it will likely reap even better gains in margin than the 1.3 percentage points of the last quarter, to 30.4 percent.

Steelcase incurred $6.1 million in restructuring charges in the quarter, at the high end of its $3 million to $7 million estimate.

Herman Miller is on the tail end of its own restructuring, with margins now up to 32.9 percent from 31.4 percent a year ago.

“We continue to see strengths in margin,” said CFO Beth Nickels. “Additional volume drove leverage, and the (August) price increase helped, but price competition drove some additional discounting. That we worked hard at restructuring is evident, but it’s been diluted by higher raw material costs.”

Whereas Steelcase recently quantified its productivity gains in square footage, Nickels cut to the chase with investors. In 2002, Herman Miller had 9,000 employees, she said, today it has 6,000 — that’s a 30 percent “productivity improvement.”

Neither Steelcase nor Herman Miller reported any measurable impact from Hurricane Katrina, although both cited concerns of rising raw material and fuel costs. Walker mentioned additional concern for Hurricane Rita.    

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