After missing its own top-line estimates in the first quarter of the fiscal year, office furnishings designer and manufacturer Steelcase (NYSE:SCS) turned in an improved performance in Q2, and in the third quarter, it surprised shareholders by handily exceeding management's previous guidance. Steelcase released fiscal third-quarter 2020 results on Tuesday after the markets closed, and on Wednesday, the company suddenly seems less of a value play, as investors have bid up shares by 18% at midday. As we review Steelcase's impressive results below, note that all comparative numbers are presented against the prior-year quarter.

Steelcase results: The headline numbers

Metric Q3 2020 Q3 2019 Change 
Revenue $955.2 million $901.0 million 6%
Net income $54.9 million $37.3 million 47.2%
Diluted earnings per share $0.46 $0.31 48.4%

Data source: Steelcase.   

What happened at Steelcase this quarter?

  • Revenue of $955 million sailed past the top of management's guidance range of $920 million-$945 million.
  • The Americas segment increased revenue by 8.2% to $690.9 million, while the Europe, Middle East, and Africa (EMEA) segment's top line fell 1.5% to $168.4 million. 
  • Steelcase's "Other" category, which includes Asia-Pacific sales and specialty materials sales, improved revenue by 4.8% to $95.9 million.
  • Orders increased by 4% against a tough prior-year comparison (they rose 10% in fiscal Q3 2019).
  • Gross margin advanced by a healthy 220 basis points to 33.1%. Factors behind the higher profitability included favorable pricing, lower manufacturing input costs, and better absorption of fixed costs due to the increased sales level.
  • Operating margin rose nearly 300 basis points to 7.9%. The gain can be traced to higher operating income in the Americas segment, due partially to increases in list prices taking effect. In addition, the EMEA segment, despite its slight dip in revenue, achieved operating income of $6.3 million against a loss of $0.7 million in the prior-year quarter, which management attributed to cost-cutting and specific initiatives to boost gross margin.
  • Steelcase's diluted earnings per share (EPS) of $0.46 landed well ahead of its forecast of $0.33-$0.37.
A city loft furnished in relaxed style for a start-up company.

Image source: Steelcase.

What management had to say

In Steelcase's earnings release, CEO Jim Keane observed that even after making some adjustments for comparability between the current and prior-year quarters, the company still generated excellent results:

We're proud to deliver another quarter of outstanding results, including a 28% improvement in adjusted earnings and terrific year-over-year increases in operating margins in the Americas and EMEA. Our teams continue to execute against our strategies for growth and profit improvement. We continue to capitalize on the investments we've made in new product development and drive initiatives for improving our cost structure.

Also in the release, CFO Dave Sylvester discussed the progress in the EMEA segment, which is a critical component of Steelcase's business, as it represents a potential growth area and currently accounts for one-fifth of total company revenue:

Our $7 million year-over-year profit improvement in EMEA this quarter is reflective of our teams executing against our strategies as we sustained a high level of revenue while driving improvements in gross margin and operating expenses. Our year-to-date profitability demonstrates our ability to drive continued improvement in our business, despite an overall economic environment that continues to be challenging, and puts us in a great position to achieve our near-term target of being profitable in EMEA for fiscal 2020.

Boosting the full-year outlook

For the final quarter of the year, management advised investors to expect revenue of $905 million-$930 million and diluted EPS of $0.30-$0.34, both of which reflect an additional week in fiscal 2020, unfavorable foreign currency translation impacts, and a difficult comparison against Q4 2019, in which revenue jumped 18%.

For the full year, Steelcase expects revenue of approximately $3.7 billion, representing a 7.5% increase over the $3.44 billion booked in fiscal 2019. The company also revised its full-year diluted EPS range to $1.41-$1.45, up from the target set at the beginning of the year of $1.20-$1.35. Investors endorsed this revision on Wednesday, but they've also recognized all year long that a moderately growing economy is beneficial to this professional environments outfitter: As of this writing, shares have appreciated a cool 50% year to date.

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