As my Foolish colleague Timothy Otte observed last week, office furniture maker Herman Miller (Nasdaq: MLHR) reported "solid sales and earnings growth" for its fiscal first quarter 2008. But next quarter may not look so hot. Order backlog declined during the quarter, leading CEO Brian Walker to speak ominously of a "cyclical softening" in the works.
All the more reason, then, for us to pull up an Aero chair and peruse the subsequent earnings report out of fellow office furniture maker Steelcase (NYSE: SCS). Did Steelcase back up Walker's downbeat assessment of the commercial office industry or refute it? That's what we aim to find out.
In one respect, at least, Steelcase's report mimicked Herman Miller's. Both revenues and earnings came in stronger than expected, with the former rising more than 4.5% year over year, and the latter, up 44%. But when it comes to outlook, the two firms' opinions differed widely.
Herman Miller's boss was predicting his cyclical softening on Wednesday afternoon; by Thursday morning, things had apparently improved enough to cause Steelcase CEO James Hackett to express a "positive outlook for the third quarter." With no evidence of "significant change in our customers' plans to purchase our products and services," Hackett predicted decent mid-single-digit sales growth in the current quarter, giving rise to earnings growth somewhere between 4% ($0.27 per share) and 23% ($0.32).
Can't see the forest for the furniture
Occam's Razor tells us that when trying to understand a phenomenon, we should strive for simple explanations. Applying the razor to our two office furniture makers, the simple explanation for their diverging views on the future would be: Steelcase is outperforming Herman Miller.
Many are questioning how Steelcase managed to produce such a surge in earnings. The company's other major rival, HNI (NYSE: HNI), also cited that the unfavorable housing market hindered recent results and that conditions aren't expected to improve during the rest of 2007.
It looks like Steelcase is leading the competition through the downturn of this housing cycle, but the company did benefit from noncontinuing operational activities such as foreign translation benefits and restructuring credits. The company is selling at an attractive PEG ratio of .58 and is expected to grow 30% in the next five years.
To truly understand where this quarter's earnings growth came from, and whether the company has reason to maintain a positive outlook for the near future, deeper digging needs to be done on this company.
What did we expect out of Steelcase last quarter, and what did we get? Find out in:
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