Herman Miller Leads Echo Boom

December 22, 2006
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The stellar quarterly results of the region's two publicly traded office furniture manufacturers make it clear that the industry, domestically and abroad, is no longer in a recovery but a boom.

Steelcase, Herman Miller and the three out-of-area publicly traded furniture firms are all showing consistent growth in sales and profitability. The industry is all but assured of reaching its projections of a $10.9 billion year. The U.S. market is on track for a $14.3 billion 2007, nearly matching the bubble years of the late 1990s.

But as this massive industry correction moves forward, it appears that its epicenter will shift away from Grand Rapids and closer to the lakeshore, as manufacturers such as Herman Miller, Haworth and Trendway erode the U.S. market share of Grand Rapids-based Steelcase Inc.

The world's largest maker of office furniture saw only a 0.4 percent year-over-year increase in sales for its North American segment in its third fiscal quarter. Coupled with other business segments with domestic sales, Steelcase now holds at best a 17.6 percent market share in North America, a fifth less than its 2001 market share.

Herman Miller, meanwhile, reported North American sales growth of 20 percent in its second quarter last week.

Steelcase President and CEO Jim Hackett deflected analyst questions concerning market share in a conference call last week, saying, "At times, there may be a dip and then it comes back."

Industry analyst Michael Dunlap of Michael A. Dunlap & Associates in SpringLake said there is little doubt Steelcase has lost market share. "But from a regional perspective, I don't really think that's a big issue. When you look at gains of the other local companies, it is clear that the region is fairly healthy."

Steelcase did show solid gains in its international segment, posting a 19.2 percent increase in the quarter. This was the largest factor in a 6.8 percent revenue gain across all segments, to $802 million. Herman Miller saw a 13.1 percent gain, to $499.1 million, but reported a 22.1 percent spike in orders and a 21.3 percent increase in backlog, including significant gains in Mexico (31 percent), Asia (51 percent) and Europe (51 percent).

Neither company is a significant player in those markets, Dunlap said, seeing most of their growth through U.S. companies with operations abroad. Herman Miller did grow that segment from 10 percent of its business to 14 percent.

Both companies showed increased profitability and bested analyst expectations of earnings per share. Herman Miller reported its highest earnings per share ever recorded, 56 cents per share on earnings of $36.6 million. Steelcase came in three cents ahead of Wall Street predictions, at 22 cents per share on earnings of $32.8 million.

Herman Miller president and CEO Brian Walker attributed the earnings growth to the company's surprising sales growth. "We ran up the margin curve a lot faster than we expected because we ran up the volume curve a lot faster than expected," he said.

Steelcase had losses in its wood business and subsidiary Polyvision, which it expects to reverse in the coming year.

In the 2006 calendar year, Steelcase has achieved overall sales growth of 8.4 percent, and Herman Miller of 9.5 percent. Both are ahead of estimates from the Business and Institutional Furniture Makers Association of 7.8 percent industry-wide, but Steelcase trails expected growth of 8.9 percent in the North American market.

Tom Reardon, BIFMA executive director, said the group does not expect the industry to finish much ahead of its latest projection, as it did with a surprising 12.7 percent growth a year ago.

"I think high single digits is very good growth," he said. "And even that is not sustainable."

Reardon said the industry should taper down to 4 percent to 6 percent in the coming years, although it should have an even stronger 2007.

"A large part of the growth is due to the deep hole we were in," he said, speaking of the three-year, 35 percent recession of 2001-2003. "All of the factors we track are steady, but in all honesty, we didn't predict the last bubble."

Less Steelcase Stateside

After its worst decline in history, the contract furniture industry is now booming, but its largest manufacturer has lagged behind.

Year              Steelcase Market Share           U.S. Market (in billions)
2001 21.2 percent $12.3
2003 18 percent $10
2006 17.6 percent $13 (projection)

Source: BIFMA, Steelcase Inc.

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