Herman Miller Is Adaptable

Office-furniture maker Herman Miller (Nasdaq: MLHR  ) continues to show surprising resilience in the face of a slowdown in its core office business. The key lies in management's ability to adapt its business model to changing market conditions.

With the economy in a funk, you would expect that remodeling the office would be low on the corporate priority list, making for slow growth in this sector. Truth be told, the company saw third-quarter sales inch forward just 2.2%.

But profitability on that sales growth was solid, with operating earnings up more than 25.7% and earnings per share advancing 30% -- quite a trick. Gross margins improved 130 basis points, thanks to manufacturing cost controls and favorable raw material input costs.

Wait a minute ... aren't commodity costs going up? Last time I checked, oil was up more than a tad, and steel doesn't seem to be getting much cheaper. But Herman Miller has long-term contracts that made for lower year-over-year costs on steel and plastics. Management is also adapting to sluggish demand by trimming expenses -- down 2% for the quarter on strategic pruning of costs that began last fall.

The final contributor to earnings growth was a $200 million share repurchase program that reduced the outstanding share base by 10%. First glance might lead you to believe management went a little overboard here, but the company issued Senior Unsecured Private Placement Notes to fund the program. Plus, in the last year, the company has generated over $128 million in free cash flow, so liquidity doesn't look to be an issue. The stock is 22% off its high from a year ago, so perhaps the timing is better than with Home Depot (NYSE: HD  ) and Sears Holdings (Nasdaq: SHLD  ) , both of which severely overpaid on major share repurchases last year.

Adaptability is working at Herman Miller, but can it keep the streak going with soft sales growth? HNI (NYSE: HNI  ) is also seeing a sluggish top line, although Steelcase (NYSE: SCS  ) managed to deliver 10.5% revenue growth last quarter.

Management offered up a flattish revenue growth outlook for next quarter, and hinted that next year is not looking any more encouraging. Pricing and cost controls are expected to deliver operating income growth of 11%-12%. The company has a history of underpromising and overdelivering, so I would expect we'll see results a little stronger than that. I look forward to Steelcase reporting earnings this week for comparison purposes. Then we'll see whether revenue in the sector is picking up, or whether more adaptability is needed to keep earnings on pace.

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