Herman Miller's Backlog Hurts

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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 (Nasdaq: MLHR) reported solid sales and earnings growth, only to disappoint with soft guidance for the upcoming quarter. That mix left investors wondering whether the company's streak is coming to an end.

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 (NYSE: SCS) and HNI (NYSE: HNI), this business has few strong players.

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.

For more news on companies that make office furniture, check out:

• 3 Stocks That Blew the Market Away
• Steelcase Scores
• Have a Seat, Herman Miller