Professional furnishings manufacturer and design house Herman Miller (MLKN 3.07%) released fiscal second-quarter 2020 earnings after the markets closed on Wednesday, and results that missed management's guidance and investor expectations presaged a soft opening in Thursday's trading session.

Let's dive into highlights of the last three months, as well as management's outlook for next quarter, bearing in mind that all comparative numbers refer to those of the prior-year quarter.

Herman Miller: The big picture

Metric Q2 2020 Q2 2019 Change
Revenue $674.2 million $652.6 million 3.3%
Net income $78.6 million $39.3 million 100%
Diluted earnings per share $1.32 $0.66 100%

Data source: Herman Miller.

Essential highlights from the quarter

A woman works in a spacious, contemporary office lounge.

Image source: Herman Miller.

  • The company's 3% revenue advance fell well below the 7% growth trend of recent quarters, and its $674 million top-line result also missed management's guidance range of $685 million to $705 million. Organic revenue increased by 3.1%.
  • Orders decreased by 4.2% to $674.9 million, as Herman Miller's two largest segments, North America and "International," saw orders dip by 5.4% and 7.2%, respectively. Organic orders retreated by 4.4% to $673.6 million.
  • During the quarter, the organization boosted its interest in Danish ancillary furniture distributor Hay A/S by 34%, bringing its total equity stake to 67%. The additional equity purchase came at a price of $78 million. Herman Miller also paid $46.1 million to acquire the remaining 50% of equity in British collaborative furniture house naughtone that it didn't already own.
  • The company's order backlog shrank marginally by 1.5%, to $400.6 million.
  • Gross margin jumped 180 basis points, to 36.7%. Management attributed the gain in profitability to pricing power, lower steel costs, and ongoing productivity initiatives.
  • Helped by the higher gross margin and a manageable 4% increase in operating expenses, operating margin rose 120 basis points to 9.3%.
  • Both net income and earnings per share doubled against the prior-year period due to a $30.5 million gain recorded via a purchase accounting adjustment related to the company's original stake in naughtone. Acccounting for this and several smaller items, adjusted earnings per share (EPS) of $0.88 hit the top of management's projected range of $0.85-$0.89.

What management had to say

In my earnings preview, I noted that Herman Miller's order flow tends to exhibit periodic volatility as it's tied to global commercial project activity each quarter. Long-time shareholders shouldn't be too surprised at this period's deceleration in order growth, although several consecutive quarters of mid-to-high single digit expansion in this metric make for a jarring effect. In the company's earnings release, CEO Andi Owen provided much context around current-period orders, and her thoughts are worth reading in their entirety:

In the face of an uncertain global economic and geopolitical environment, we delivered adjusted earnings per share at the upper end of the guidance range that we established at the start of the quarter. Second quarter sales were impacted by lower than anticipated order levels, which reflected the uneven demand patterns we're seeing across the broader industry and the natural variability in a project-driven business. Order rate declines during the quarter were amplified by a particularly challenging growth comparison in our prior year second quarter, which reflected consolidated organic order growth of 10%. While these factors also impact our organic sales growth guidance for the upcoming quarter, we are seeing positive signs as we look further ahead, both in our own project activity levels and in broader demand indicators such as job growth, unemployment levels, and consumer spending. Going forward, we are also excited about our additional investments in HAY and naughtone that give us majority ownership of these fast-growing design brands. With our collection of leading brands, a global multi-channel distribution capability and a clear set of strategic priorities, we remain well-positioned to drive sustainable long-term growth.

Looking forward

Herman Miller typically issues a simple quarter-to-quarter earnings outlook. For the fiscal third quarter of 2020, management forecasts revenue of $672 million-$692 million, which, at the midpoint of the range, will equal year-over-year organic revenue growth of 3%. Management expects diluted EPS of between $0.68 and $0.72 next quarter.

While the company is likely to see selling pressure on shares during Thursday's trading session, veteran shareholders should stay the course on this iconic design dynamo. The small-cap standout has exceeded investor expectations consistently over the past several quarters, and before Wednesday's report, the stock had appreciated by a stellar 55% year to date.