The Monday Morning Quarterback

Wall Street Sours on Contract Furniture

By the numbers, the office furnishings industry seems to be in a pretty good place: MillerKnoll Inc. and Steelcase Inc. recently reported reductions in incoming order rates that occurred despite solid quarterly sales gains. But there are no shortages of what Wall Street calls "headwinds."

The Street sees plenty of reason to be bearish on the contract furnishings industry and almost every other industry. The industry has done a pretty good job managing inflation - primarily by raising prices - something MillerKnoll is continuing to do this month. But raising prices only goes so far. While Steelcase was straightforward about letting go of 180 members (aka employees), Millerknoll was subtler by offering voluntary retirements instead.

Listening to the discussion on MillerKnoll's earnings call last week, it is easy to see why the Street is spooked. Not only have inventories increased, retail business at DWR has slowed. Incoming organic orders are also off a bit. There is a whole host of reasons for shareholders to worry when you listen to the explanations. Needless to say, the shareholders haven't wasted any time punishing the company (along with every other manufacturer in the sector). It's just that MillerKnoll has been punished the most - all things being equal.

Shares of the company fell Thursday and fell 8 percent again on Friday, closing at 15.60, down nearly 59% over the past year. That drop has only been beaten by DIRTT, which has seen its shares fall to $0.44 (yes, 44 cents), down 86 percent over the past year. DIRTT is a bargain for anyone looking to enter the demountable wall market as its market cap is a measly $37 million. Pretty much pocket change at this point. VC's are funding startups with "A" rounds for more than that, and for many, that's pre-revenue! Yikes!

Like Steelcase, MillerKnoll executives see clients taking their time adapting their offices to the new work environment (if they can even agree on what that exactly is) and taking longer than expected to transition to hybrid work models. The softer order rates occurred despite what MillerKnoll Americas Contract Division President John Michael called "robust activity."

"If you talk to the dealer network, they're all incredibly busy. I think some of the things that we're seeing is a lot of hesitation on the part of customers in terms of pulling the trigger on a new and more hybrid-focused work environment, and probably some hesitation in terms of the size of projects going forward," Michael said in the conference call to discuss quarterly results. "That said, most companies that we talk to realize they have to do something, and they're in the process. It's an iterative process, and it takes a little bit longer to get the order to close than in a pre-pandemic kind of environment."

Contract furniture makers have performed well for several quarters after the initial shock to the economy when the pandemic hit in early 2020. They since “have been seeing some pretty solid numbers,” said Elisa Berger, a vice president at Grand Rapids investment bank Charter Capital Partners who follows the industry.

“The softening is not going to be shocking to anyone,” she said. “We’ve been on an upswing for about the appropriate amount of time for it to cycle down again.”

Well, it's obviously shocking to shareholders, many of whom are dumping shares at a pretty good clip.

“It’s possible the slow return-to-office trend in the U.S. could be having an impact. It’s also possible that reduced CEO confidence is impacting capital spending in our sector. Decision-makers have a lot to deal with at the moment, and they’re also facing a lot of near-term uncertainty,” Senior Steelcase's Vice President and Chief Financial Officer Dave Sylvester said in a conference call to discuss quarterly results two weeks ago.

Lots and lots of possible explanations, but the best is (again), “we’ve been on an upswing for about the appropriate amount of time for it to cycle down again.”

 MW