Herman Miller's Magic Trick

Blowing away earnings estimates last night, management at Herman Miller (Nasdaq: MLHR) managed to turn a 1.4% sales increase into a 20% boost in profits.

Nice trick
Wasn't it, though? Here's how it did it. First, management expanded the gross margin by 1.5% from improved pricing and material cost improvements, and slashed operating expenses 1.4% due to greater cost control. This alone would have boosted Herman Miller's profits by 12%, extending the furniture maker's profitability lead over rivals HNI (NYSE: HNI) and Steelcase (NYSE: SCS).

But the real kicker here is what happened once those net profits got divvied up among shareholders. Herman Miller has been reducing its shares outstanding, and at last count, it had 6.5% fewer shares outstanding year over year. In the end, the company pulled off nearly a 20% improvement in earnings per share-- and the makings of a 8.2% price spike today.

Show me that again
Of course, the real question now is whether Herman Miller can repeat this performance going forward. Based on what management told us in its earnings release, I think there's reason for optimism there. For example, while sales grew just more than 1% last quarter, Herman Miller confided that new orders booked during the quarter were up 8.2% versus last year's fiscal second quarter. Assuming management can hold the line on costs, and translate those orders into sales, it's got continued earnings growth in the bag.

But Herman Miller isn't kicking back and resting on those numbers. Management also announced a "$200 million Accelerated Share Repurchase program to begin in January 2008." If implemented in full (as the "accelerated" part of the program's title suggests it will be), we could see shares outstanding decline by another 11% or so come this time, next year.

Hey! What's that up your sleeve?!
Order growth. Better margins. Fewer shares -- check, check, and check. Just to be safe, though, Herman Miller intends to play one more card to ensure it keeps growing: It's buying some market share in medical furniture. In a separate press release, management announced that it will pay an unspecified sum to acquire its partner in the health-care market, Brandrud Furniture, and its $20 million in annual sales. Office-furniture rival Steelcase made a similar move last year.

Foolish takeaway
Judging from the respectable growth at medical-products makers like Stryker and Zimmer, for example, Americans' consumption of health-care services doesn't seem likely to diminish any time soon -- making this a growth market for Herman Miller. So a few years from now, when we're still writing about this company's continuing growth story, just remember: It didn't happen by magic.

How did Herman Miller do last quarter? Find out in:

• Herman Miller's Getting Soft: Fool by Numbers
• Herman Miller's Backlog Hurts

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