Herman Miller (NASDAQ: MLHR) reported fourth-quarter results after the market close on June 29th that showed the significant impact of the coronavirus pandemic on its business operations. Revenue at the Michigan-based maker of office furniture and home furnishings fell 29% to $475.7 million and new orders declined 19% to $535.3 million from the same quarter last fiscal year.
The company reported adjusted earnings per share (EPS) of $0.11 after posting adjusted EPS of $0.78 a year ago. The gross margin slipped 210 basis points to 34.9% due to lower production volumes as facilities shut down during the period. It incurred special charges of $5.5 million related to COVID-19 and recognized pre-tax restructuring expenses of $16.9 million associated with workforce reduction measures like severance pay and outplacement benefits.
Citing the uncertainty of the current economic environment management withheld guidance for the first quarter of fiscal 2021.
A Focus on Cost Reduction and Capital Conservation
The results underscore how disruptive the pandemic has been to Herman Miller. It has struggled to generate revenue over the last few months with closed business leaving little need for chairs, desks, storage units, and other office equipment.
To management's credit, however, it has been quick to reduce discretionary spending and workforce levels to help weather the storm. It reduced salaries, lowered retirement plan contributions, and suspended bonuses to mitigate the effects of lower product demand.
It also improved the liquidity position of the company exiting the quarter with a $454 million cash balance. This was the result of a $265 million drawdown on its revolving credit facility and a $50 million issuance of private placement notes. To conserve capital, management previously announced the suspension of its dividend payment and stock buyback program.
But while a strengthened balance sheet has Herman Miller well-positioned to survive the current recession, can it adapt to the new post-pandemic economy?
A Need for Reinvention as Workforces Stay Home
Its no secret that workforces in all sectors of the global economy are increasingly being transitioned to remote work setups. With this trend likely to become a permanent structural shift in the way we work, Herman Miller will need to prove to investors that its business model is as adjustable as its ergonomic office chairs.
Corporate offices looking to adopt social distancing measures will be looking to create more space, i.e. wanting fewer chairs and desks. The likelihood of corporate office space downsizing and consolidation of also bodes unfavorably for Herman Miller.
The company has more than 700 contract dealers across 110 countries along with 38 retail studios and a growing e-commerce presence. With its traditional North American contract market maturing, the future growth potential lies in direct to consumer marketing. Herman Miller's digital channels with need to become its main showrooms.
The work-from-home phenomenon is expected to drive increased demand for home office furnishings and supplies. Some businesses will pay for these expenses, but amid a recessionary backdrop many will not. While budget-constrained workers left to their own devices may not necessarily opt for IKEA, purchasing higher-end products such as those offered by Herman Miller also seems less likely.
Additional pressure will come from existing competitors and new market entrants clamoring to get a piece of the growing global home office equipment market. Having been in business since 1905, Herman Miller's expertise and well-established relationships should give it some sort of edge.
At the time same though, it will need to spend more to pivot its strategy towards this market. Given its focus on innovation and the pride it takes in its research capabilities, the company will need to devote significant resources to learn about the habits and preferences of the modern residential worker. This will likely mean that recent cost reduction measures will soon revert to spending increases.
Is Herman Miller a Good Buy Here?
Of course, there will still be plenty of need for traditional office furniture as the global economy normalizes so Herman Miller cannot afford to lose sight of its core business. And it serves other markets too providing nurses stations to hospitals, educational equipment to schools, and furnishings to federal, state, and local government entities.
Yet Herman Miller's ability to capitalize on the remote work revolution will undoubtedly go a long way in determining its financial performance over the next few years.
From a valuation perspective, based on the $1.64 analyst consensus estimate of fiscal 2021 EPS, Herman Miller's stock is trading around 16x forward earnings which is above its five-year historical average forward PE multiple of 14x. The current lack of dividend, previously one of the modest growth company's more appealing features, also suggests investors should consider other stock market opportunities.
Amid an already uncertain economic environment marked by careful business and personal discretionary spending, the uncertainty around Herman Miller's new market opportunity suggests it is best to sit back and swivel on the sidelines for now.
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