Shares of office-furniture maker Steelcase (NYSE: SCS) got hammered last week, after the company reported fiscal Q1 2009 earnings. Although the Motley Fool Income Investor pick's shares are beginning to claw back from their 14% plunge on Friday, the decline poses us a question: Do we buy into this sale, or leave these shares in the remainders room?
Where the growth is
Steelcase reported less than 1% sales growth last quarter. Literally all of that growth occurred in overseas markets, where sales were up 29.1%. In contrast, North American sales tumbled 9%. Meanwhile, per-share profits dropped 30% to end at $0.16 for the quarter. Good news for Steelcase, right? The flagging U.S. market has dragged down furniture retailers like La-Z-Boy (NYSE: LZB), Ethan Allen (NYSE: ETH), and Stanley Furniture (Nasdaq: STLY), but at least the international business will pick up the slack for Steelcase ... won't it?
... Or not
Steelcase's international business has its own problems. Generally speaking, CFO David Sylvester blamed "global inflationary pressures ... particularly in the areas of steel and fuel related commodities" for the company's struggles. Yet Steelcase noted that "cost of sales was 66.8% of revenue, a 30 basis point decrease compared to the prior year." Gross margins, while still inferior to those of rivals like Herman Miller (Nasdaq: MLHR) and HNI (NYSE: HNI), at least held steady at 32.6%. So where's the problem?
Over there
The problem seems to be "over there." Here in the U.S., sales may be down, but margins are holding up nicely. Gross margin actually ticked up 160 basis points, and this business scored a tidy 8% operating profit margin for the quarter. Margins abroad are a completely different story. Over there, gross margin dropped 160 basis points, and the operating margin clocked in at just 4.9%.
That suggests two things to me. First and most importantly, Sylvester has not gone completely bonkers with his "global inflationary pressures" talk. Those pressures do exist -- but they're being felt primarily abroad, not in the U.S. business.
Second, I have to wonder what exactly Steelcase is up to with its international business. Sure, sales there are going great guns. But the company doesn't seem to be making a lot of profit off those sales. As a matter of fact, with sales up 29% internationally, operating profit contributed by this division declined by $0.7 million (only about half of which owed to higher restructuring costs). That sort of takes the bloom off the rose of Steelcase's international growth story.
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