Office Furniture Is a Must-Avoid Business in this Market

If the economy is weak, why would businesses buy more furniture? Well, they wouldn't. With unemployment near three decade highs and economic growth expected to be modest over the interim, one of the stocks that should continue to suffer is Knoll (NYSE: KNL  ) , one of the nation's leading designers and manufacturers of branded office furniture products. Steelcase  (NYSE: SCS  )  and Herman Miller  (NASDAQ: MLHR  )  are two of the other major office furniture stocks on the market. As businesses keep their purse strings tight, these stocks should see downward pressure. 

Knoll is down 25% from its 2007 highs, a time when the company was generating some $1 billion in revenue. Analysts project that sales will remain below the $1 billion mark for both 2013 and 2014, so it's easy to see why Knoll's stock might remain below $20 for the interim. 

Top line pressures and margin compression
Knoll has significant exposure to the weak European market and local governments, where budgets are strained, which limits its top line growth. For the third quarter, Knoll saw revenue from government sales decline 24% quarter over quarter. Now government sales make up 12% of the company's total revenue, versus the 22% it made up just a couple years ago.

The weakness in government sales should continue as local and state governments see budget cuts. Knoll's entire office furniture segment saw a near 6% decline in year over year sales last quarter, driven by the fact that the company can't seem to find enough commercial business to offset the weakness in government.

We're also seeing higher raw material costs, which should put some pressure on operating margins. Most notably, there is the ever-rising price of lumber. As a result, operating margin at Knoll has gone from 10.5% in 2011 to 8.4% over the trailing twelve months. Currently, the random length lumber price is around $350 per thousand board feet, but this is expected to change in the near future. The International Wood Markets Group believes that the price of lumber will set record highs in 2014. 

Assuming the economy remains weak, it's common sense that office furniture sales will remain weak. Hence all three of the major furniture stocks listed above will ultimately underperform the market.

Steelcase gets about 3% of revenues from the U.S. federal government, so it should see some continued weakness there. The company looks to be in somewhat of a transition period as well--it just announced a new CEO who will take over in March of next year. Steelcase is also closing a production facility in Germany to open a new plant in the Czech Republic, which is all part of its multi-year restructuring plan in Europe. 

Meanwhile, Herman Miller appears to be having some success overseas. Sales for the third quarter came in 17% higher year-over-year thanks to the success of its high margin products that are selling well in Asia. Longer-term, Herman Miller appears to be in the worst shape. Analysts expect the company to grow earnings per share at a mere 2% per annum over the next five years. 

Foolish bottom line
Knoll trades at less than 20 times earnings, less than both Steelcase and Herman Miller, which trade above 25 times earnings. Although Knoll's cheaper than its major peers, the entire industry should remain under pressure thanks to continued weakness in the economic recovery and high unemployment, not to mention rising raw material input costs. Knoll should also face other headwinds related to weakness in Europe. It's a safe bet to avoid the office furniture industry entirely for now.

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  • Report this Comment On December 02, 2013, at 8:56 PM, pacemakernj wrote:

    I have been in the industry for 25 years it is more difficult than ever. There is no pricing power. Margins have been declining for nearly two decades.

    The entire industry has been transformed by the internet. How? Companies need less space to operate. IPads and IPhones are the new mobile office. Workstations have shrunk to a point where people are just sharing spaces. One large company I know has consolidated their office space from 1.2 million square feet to just over 600K.

    For years Government business was used as a complement to add sales. But the margins in government were paltry 10% in most cases for the furniture. Now people and companies depend on that business. Now too those sales are waning.

    So many companies have closed their doors, Architects, Dealers, Manufacturers Factory Sales Reps you name it. The industry has been crushed.

    There is no vitality in the economy, no momentum. People are not taking risks.

    Then there are the costs. Health insurance for one. When I started in my business in the early 1990's my health insurance was $343 per month for a family policy of four. Now that policy is $1,564! Business insurance, gas, tolls, my goodness look at what it costs now to go over the George Washington Bridge!. The politicians are crazy and stupid. And it does not matter Republican or Democrat. You know what you get when you mix crazy and stupid? The US Government. They have killed the golden goose.

    I used to have at least One Thousand accounts. They are all gone. Look at Staples numbers. they were terrible. Small business has been decimated in this country. Staples sales reflect that.

    I get the creative destruction thing. I have been through two recessions and a depression. I realize the four most dangerous words are "this time is different". But this time really is. The economy has not come back for a lot of people. And it never will. It is tragic. Blame it on globalization, The Fed, US Government but there is something seriously wrong out there and no one is talking about it. This is merely a symptom of a larger problem. The next bust when it comes will be a doozy. I have no faith in the government, the Fed, the banksters anyone. The policy is get all you can while you can. YOu watch this will all come back to bite us in the end. When the day of reckoning comes, and it will come, it will be ugly. It will all end in tears.

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