Herman Miller Report Strong Results, But…
Global Furniture manufacturer Herman Miller (NASDAQ: MLHR) reported a strong fiscal first-quarter but there is a big but that investors need to be aware of. While the integration of Knoll is moving forward smoothly and demand remains high, the company's top and bottom lines are being heavily impacted by global supply chain issues. Not only did those issues curb revenue growth by 500 basis points but they also cut deeply into the bottom line and we don't expect these issues to end soon.
“While order demand was strong, our ability to produce and ship orders in the near-term was impacted by global supply chain and labor supply disruptions. We estimate this adversely impacted net sales by approximately $30 million during the first quarter.”
Mixed Results For Herman Miller
Herman Miller reported $789.70 in net consolidated revenue which is good for a gain of 26% over last year and beat the consensus by 17.9%. The caveat here is that much of the gains are due to the integration of the Knoll acquisition which was completed during the quarter. On an organic basis, Herman Miller sales are up a mere 0.4% and include pricing hikes initiated earlier in the year. Segment results were strong but once again are impacted by the acquisition of Knoll which resulted in a complete reshuffling of reporting segments.
Moving down the report is where the news gets really bad. The company reported a 410 basis point contraction in the gross margin and a 410 basis point contraction in the adjusted gross margin that were compounded by a significant contraction in the operating margin as well. On the bottom line, the company's GAAP earnings of -$0.93 missed the consensus by $1.47 but do not take into account costs related to the Knoll acquisition. On an adjusted basis, the $0.49 was only as expected despite significantly higher than expected revenue. This is not good, especially in light of the company’s efforts to offset the impacts of inflation and supply chain disruption.
“Gross margin for the quarter was 35.1% compared to 39.9% during the prior year period, reflecting higher commodity costs and other inflationary pressures… We implemented a price increase in the first quarter to help offset inflationary pressures in the contract business and are planning additional price increases in the second quarter to further mitigate these pressures.”
Herman Miller's Dividend Looks Safe Enough
Among the attractions of the furniture industry including Herman Miller is the dividend. Shares of Herman Miller yield about 1.9% trading at $40 and there is an outlook for growth. The company suspended its payout during the pandemic to preserve its fortress balance sheet and it appears like the recovery is on. Earnings could be stronger but are strong enough that we anticipate a dividend increase over the next quarter or two that should bring the payout back to the pre-pandemic level. An increase to the pre-pandemic level would be worth about 10% of the current payout.
The Technical Outlook: Herman Miller Could Be At A Bottom
Price action in Herman Miller opened with a loss in the session following the earnings release. Price action did however find support at a key technical level and have moved higher in early trading. If support can be maintained at the $39 level we see this stock entering a reversal and moving higher into the end of the year. There are near-term headwinds impacting revenue and earnings but those headwinds will hopefully dissipate. Even so, current conditions support robust business for the company so it's only a matter of time before price action is retesting the recent highs above $50 and then the Pricetarget.com consensus target of $59.
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