Furniture Profits Soar

December 23, 2005
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The contract furniture industry is boasting incredible profit increases despite unstable material prices and restructuring costs.

For its third quarter of fiscal 2006, Steelcase Inc. reported profits of $19.1 million, an astonishing 90 percent over the year-ago $10.1 million. Year to date, profits were up $27.9 million to $39.6 million, a 238 percent increase over the same period last year.

Herman Miller Inc. announced that its second quarter profits had increased 81 percent to $27.9 million.

Both of these were on the high end of company estimates, but exceeded Wall Street projections. According to a report last week by Purchasing magazine, the two companies have been trumpeting gains in North America and overseas.

Morningstar analyst Anthony Chukumba said there is “plenty of evidence that the global office furniture market is continuing to rebound strongly.” However, higher energy and materials costs remain a hot topic, and he expects a price increase of 12 percent to 15 percent for desks, chairs and other office pieces in the coming year.

Neither Steeclase nor Herman Miller indicated another price increase was forthcoming, but both Herman Miller CEO Brian Walker and Steelcase CEO Jim Hackett cautioned analysts that material costs remain unstable.

Entering the quarter, Walker recounted the concerns over a possible impact from the hurricane season and subsequent rebuilding efforts. As it turned out, he admitted, there was little effect whatsoever.

Herman Miller, on the outward end of its restructuring, reported a gross margin of 32.8 percent. During a conference call last Thursday, a number of analysts were concerned that the company had not leveraged its significant increase of volume — sales increased 18.9 percent to $438.2 million — into margin points.

Steelcase entered the quarter facing significant restructuring costs related to facility consolidation in North America and abroad, including Grand Rapids, as well as the aforementioned material cost concerns. On top of that, the company hit a hitch with the consolidation of one of its product lines.

Nonetheless, Steelcase boasted a sales increase of 11.4 percent to $750.7 million, driven by 17.4 percent growth in its North America segment, largely from the low-cost Turnstone brand. Gross margin improved 1.9 points over the year-ago quarter, to 29.8 percent.

This bodes well for the industry as a whole. Both companies are in line with or above the Business and Institutional Furniture Makers Association’s projections of 11.8 percent growth in 2005.

“Having gone through a recession two years ago, it has made us acutely aware of signs to look for in economic conditions,” Hackett said. “I can strongly confirm that we’re making progress on all fronts.”

The bigger story remains the margin and productivity gains, according to analyst Michael Dunlap of Michael A. Dunlap & Associates.

“The story here is the incredible productivity increases,” he said. “These economies of scale should be reflected directly in the Tier 1 supply base. They should expect to be putting out more with less every day.”

Herman Miller is preparing for what CFO Beth Nickels calls the company’s “biggest launch ever,” with two new office systems from Sonare and Herman Miller for the Home, and the rollout of the Brandrud and Bretford partnerships.    

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