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Perspectives From Herman Miller's Management

By Asit Sharma - Updated Dec 28, 2018 at 1:51PM

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Executives share key factors behind the company's improving numbers.

Herman Miller's (MLKN -1.71%) fiscal second-quarter 2019 earnings, reported on Dec. 19, revealed steadily improving financial performance. Year to date, sales growth of 7.8% has been supported by order growth of nearly 9%. During the office furniture and collaboration technology icon's earnings conference call, executives discussed the components behind the stronger numbers and its outlook for at least 7% organic growth in the fiscal third quarter. Below, we'll look at three comments that illuminate management's current optimism.

Admirable order flow in North America

Within our North America segment, sales were $353 million in the second quarter, representing an increase of 7% from last year. New orders were $371 million and were up 9% on a reported basis and increased 7% organically over last year.
-- CFO Jeff Stutz

For the last several quarters, orders in Herman Miller's North America segment have been overshadowed by order growth in ELA (Europe, Latin America, and Asia). The prior sequential quarter (the fiscal first quarter of 2019) provides a decent illustration: North American orders rose 3% year over year, while ELA orders expanded by 15%. 

Herman Miller office furniture arranged in a large contemporary workspace.

Canvas Vista workstations. Image source: Herman Miller, Inc. 

The second quarter's resurgence in North American orders is encouraging on a few fronts. First, North America is still Herman Miller's biggest market: Revenue in the second quarter reached $353 million -- making it nearly three times the size of ELA, which recorded revenue of $119 million during the last three months. An uptick in orders and the related effect of a firming backlog in this market augurs healthy total revenue for Herman Miller in the months ahead.

This may prove useful, as ELA revenue growth slowed unexpectedly in the second quarter, from a double-digit year-over-year growth rate during the last several quarters to just 5% year-over-year expansion in the fiscal second quarter, stemming from uncertainty over Brexit in Europe. 

Finally, management noted that North American order flow was characterized by strength among all categories of project sizes versus being propelled by a few extremely large projects (which has happened in a handful of quarters over the last two years).

The consumer business is gaining traction

[I]f you look at the performance in DWR, it is pretty amazing. I mean, we've had 11 straight quarters of solid comp performance as well as revenue growth...if I look at kind of all the factors; understanding our customer, understanding how we're marketing to our customer, location, on how we're spending our money and where we are, those things are all contributing to a really, really nice run for this business.
-- CEO Andi Owen

In the fiscal second quarter, Herman Miller's consumer business outpaced North America, ELA, and the specialty segment, achieving a 14.5% year-over-year growth rate to book nearly $100 million in revenue over the last three months.

Above, Owen mentions an important driver of the consumer business that also demonstrates the evolution of Herman Miller's sales channels. The company acquired retailer Design Within Reach (DWR) in 2014. The subsidiary now has 32 retail showrooms within the U.S. and Canada that encompass 360,000 square feet of selling space.

DWR comprises about 53% of the consumer segment's sales, and management believes that the retail studios also drive its e-commerce sales, as customers try out furniture at DWR locations and later order directly from the company online. While the majority of Herman Miller's business derives from the global corporate office market, the consumer business represents a vital channel extension, and its fast growth makes it an increasingly integral part of the company's bottom line with each passing quarter.  

A specific trend underlying optimism on forward guidance

[I]n the last few months we've had several very successful product launches. Last two weeks we launched Canvas Vista and Overlay. Both have had incredibly successful launches. And on Cosm which we launched in North America in August and have launched globally now has been an incredible performer.
-- Owen

The comments above were in response to an analyst's question on the factors behind Herman Miller's robust forward guidance for the fiscal third quarter of 2019. Owen refers here to two types of product innovation that have resulted in higher order flow and boosted management's confidence regarding near-term results.

The first type of innovation is core product advancement as embodied by the Cosm chair, an advanced ergonomic chair that launched in June of this year. The second type of innovation focuses on contemporary workspaces and collaboration. Canvas Vista workstations (pictured above) are designed to increase employees' total work area through "trim" design while avoiding cramping in shared spaces. The company designed Overlay for open floor plans and describes it in its product press release as "a system of sub-architectural, movable walls that can create freestanding rooms, give shape to open spaces, or simply divide areas."

If the Cosm chair represents the company's attention to its traditional revenue streams, Canvas Vista and Overlay demonstrate responsiveness to revenue opportunities created by the rise of flexible workspaces. Timely product introductions are boosting order flow and helping the company keep pace with close competitor Steelcase, which recently reported its own vigorous quarterly results. As long as the U.S. economy remains in a steady state, these balanced product introductions may assist Herman Miller in netting further revenue expansion in calendar year 2019. 

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