Furniture Firms Split On Downward Lean

October 1, 2007
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In back-to-back conferences with analysts, the management teams of the region’s two publicly traded furniture companies presented two curiously different perceptions of the industry.

Herman Miller Inc. announced a restructuring effort that would allow it to get ahead of what it perceived as a pending downturn. Yet Steelcase had no storm clouds in its forecast.

“We believe the recent lowering of the industry forecast and the general state of the U.S. economy could be signs of an emerging softness in the North American market,” said Herman Miller President and CEO Brian Walker in a prepared statement. “We recognize that we’re in a cyclical industry. … We are already taking steps … to immediately align our cost structure to the current volume levels we are seeing in North America.”

Approximately 90 minutes later, Steelcase President and CEO Jim Hackett dismissed concerns of a downturn in his remarks: “I am frequently asked about the likelihood of some kind of recession. Analysts have been struck by the volatility of the BIFMA forecasts, and they are volatile, but we are reporting that our business is vibrant and on course.”

The Business and Institutional Furniture Manufacturers Association recently downgraded its projections for the coming year to 2.3 percent growth in U.S. production, the lowest since the three-year contraction of 2001-2003. The trade group is projecting growth of 5.5 percent for 2007.

“I think there is a recognition that the industry has begun to flatten a bit,” said Michael Dunlap, an office furniture industry consultant based in Spring Lake. “I don’t want to call it a ceiling necessarily, but I think there is a market saturation point, and we seem to be approaching it.”

Elaborating on the projections, BIFMA Manager of Statistical Information Michael Reagan said that the data definitely suggested a downward slope going into 2008. “But what that doesn’t say is, it looks like that slope will go in the other direction in 2009.”

Also missing from the projections, and perhaps a large contributor to the different outlooks, is the office furniture makers’ increased penetration in new markets. According to Reagan, new offerings specific to the health care, higher education and other nontraditional markets are not represented in historical data, so these markets are not included in the overall projections.

Hackett trumpeted the success of the company’s health care brand, Nurture by Steelcase, and announced a similar research-based launch was underway for the higher education segment.

“We haven’t announced the full details of our strategy,” Hackett said.

 “The nature of classroom design hasn’t changed a lot in 50 years … technology ended up shaping a lot of what now happens in colleges and the spaces haven’t caught up. … This is a natural space for Steelcase to expand.”

Dunlap pointed to the new JW Marriott hotel that opened last week in Grand Rapids as an example of Steelcase’s new business model.

“There are (Steelcase) Leap chairs in many of the rooms — they’re equipped as offices,” he explained. “Ten, 15 years ago, would Steelcase be looking at the hotel industry to sell chairs? I doubt it. But people have different needs today; the relevance of the office isn’t the same as it was in the past.”

Brian Bascom, principal of market research firm Velocity Partners, agrees with Dunlap’s assessment. “It’s no longer the office furniture industry. It’s the industry of furniture you use in the office, health care, education and a wide variety of other environments.”

Herman Miller appears to be moving in the same direction. The company has worked hard to create out-of-the-box offerings for its traditional customers, and recently began ramping up its health care division under veteran executive Elizabeth Nickels.

Steelcase last month acquired Chinese manufacturer Ultra Office Furniture as part of an effort to expand its manufacturing and sales footprint in Asia. Herman Miller hinted at a similar move; Walker explained to investors that the company was considering acquisitions that could position it for future growth in the international segment, health care or other new platforms.

By the numbers, the two companies performed remarkably similar in their respective periods ending Sept. 1. Earnings at Steelcase rose 42 percent to $37.7 million, beating Wall Street estimates. Sales grew 5 percent to $825 million, significantly ahead of analyst predictions. Net earnings at Herman Miller were $33.5 million, an increase of 17.5 percent, also ahead of consensus estimates, while sales increased 9.3 percent to $491.7 million.

In the coming quarter, Steelcase expects a profit of 27 cents to 32 cents per share, above current Wall Street estimates of 27 cents per share. In contrast, Herman Miller is estimating 51 cents to 57 cents per share, below analyst estimates of 59 cents per share.

Chris Agnew, an analyst with Goldman Sachs, pointed out the discrepancy between industry projections during the conference call with Herman Miller. “(Steelcase is) quite a bit more upbeat,” he said. “I am wondering what’s making you so concerned and why you are looking to take cost actions.”

Walker pointed to declines in orders (3.9 percent) and North American orders (5 percent) as reason for pause, but confessed the company’s sales force was confident that overall growth would continue in the short term.

“On the other hand, if you look at what happened across overall economic activity as well as the kind of continued step-down in the industry forecast, what we are trying to do, quite frankly, is be ahead of that curve,” he said. Walker explained that in the past, the company had failed to prepare for market contractions and been forced to react after the fact.

“When the industry took a nose dive in 2001 to 2004, the strategy was to survive,” Dunlap said. “Since then, companies have decided they want to make sure that they are never put in that position again.”

Elsewhere in the industry, local manufacturers Trendway and Nucraft both recently announced double-digit sales growth for the year-to-date. Dunlap believes this is reflective of a growth curve in the middle market slightly behind that of the larger firms.

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