Steelcase Raises A Red Flag For The Furniture Industry
Steelcase (NYSE: SCS) is only the latest in a string of earnings reports that indicate systemic challenges within the global supply chain are severely impacting results. The headwinds involve inflation, freight, input costs, and wages and none of them appear to be subsiding. What this means for Steelcase is a minimum impact of 550 basis points in the second quarter and they forecast headwinds will persist into the fiscal 3rd quarter as well. While the company appears to be navigating these challenges well, and demand doesn't seem to be affected by the delays, it's only a matter of time before it is.
"The extraordinary inflation in steel, logistics, and many other commodities impacted our gross margins more significantly than we expected in the second quarter, and we now project inflation will have a more significant impact on our results over the remainder of this fiscal year than we had previously expected," said Dave Sylvester, senior vice president, and CFO. "The industry forecasts for steel costs have been revised upward and projected to last longer as they have been updated each month over the last year ... in response to these unprecedented levels of inflation, we announced our third price increase of this year. We expect it will take until the second quarter of fiscal 2023 for the benefits from these three price increases to offset the current level of inflation."
Steelcase Whiffs As Supply Chain Challenges Impair Business
Steelcase, with its exposure to industrial uses of furniture, was expected to see a sequential and two-year decline in revenue. The problem is that the $724.80 in reported revenue is down 11.5% from last year and missed the Pricetargets.com consensus by 480 basis points. The two-year comparison is even worse but includes restructuring and divestitures spurred by the company's realization times are changing. On an organic basis, revenue was down 14% with notable weakness in the Americas. Sales in the Americas are down 17% due to tough comparisons in last year's second quarter coupled with supply chain headwinds while sales in the EMEA region advanced 10% and the Other segment grew by 1%.
The company says significant supply chain disruptions impaired their results and are expected to persist into the third quarter of the year. Sales in the Americas segment alone are off 550 basis points due to these problems. Worst, supply chain problems are having an effect on the margins as well. The gross margin contracted by 440 basis points on the combined impact of revenue deleverages and inflationary pressures. The real tickler here is that revenue deleverage is a direct result of the supply chain issues which are having an impact on the inflationary outlook. In many cases, fixing the supply chain means hiring more people (truckers/drivers in particular) and with wages on the rise, hiring more people can only result in higher inflation near-term.
The good news is that margin contraction was less than expected and helped deliver solid results on the bottom line. The GAAP EPS of $0.21 beat the consensus by $0.07 while the adjusted $0.21 beat the consensus by $0.02. As for guidance, the company says new orders advanced 12% sequentially and 24% over last year indicative of strong demand and the opportunity for revenue growth. Turning to the actual guidance, the company is expecting Q3 revenue in the range of 22% to 27% and we see downside risk in the numbers.
The Technical Outlook: Support For Steelcase Falters
Shares of Steelcase are down more than 5% in the premarket action and trading below key support levels. With price action below the $13 level, we see shares of the stock falling down to the $12 level and possibly to the $11 level before hitting a firm bottom. The outlook for Steelcase is bright if clouded by supply chain issues, assuming the supply chain issues are overcome within the next couple of quarters, we see shares of Steelcase regaining their pre-COVID levels sometime in calendar 2022.
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