The problem with success is that investors always expect the story to just keep getting better. For the second quarter in a row, interior-furnishing maker Herman Miller
By all accounts, Herman Miller has reason to crow about its first-quarter results. Sales of $492 million grew 9.3%. Gross margins expanded by 20 basis points. Expenses were well-contained, growing only 6.8%. Operating earnings rose 17.5%, and EPS shot up more than 25%. All these results beat analyst expectations.
While its inventory growth has been a concern in recent quarters, as fellow Fool Rich Smith detailed on Monday, the company reported only a 7.1% increase in Q1 inventory year over year.
Soft guidance
Unfortunately, orders received during the quarter and future backlog numbers weren't so robust, down 3.9% and 4.8%, respectively. While orders for business outside the U.S. continued to grow, North American orders declined 5%, resulting in second-quarter sales and earnings guidance well below analyst expectations. This guidance caused the stock to drop by more than 4% in trading today.
CEO Brian Walker addressed the slowing pace of orders head-on in the company's earnings release, explaining that the North American market may be heading into a "cyclical softening." But he countered that the company's business model is designed to handle "less robust market conditions," and that it can continue to deliver solid numbers because of a variable cost structure.
Fetch the comfy chair
While I'll be listening to management comments on the earnings conference call Thursday, deep down, I'm hoping that the Street gets a little more pessimistic about Herman Miller. The stock is already down nearly 30% since mid-February. Aside from Steelcase
Herman Miller has the highest operating margin (more than 10%) and lowest P/E ratio (less than 15 times trailing-12-month earnings) of the group. Its expansion into Asia and the United Kingdom appears quite successful to date. Add to that a solid history of sales and earnings growth, and Herman Miller looks like a very well-run company. If it can weather a cyclical downturn in the U.S. market, as management suggests it can, this stock could be a solid candidate for further appreciation.
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