Although Steelcase (NYSE:SCS) blew earnings estimates out of the water, I'd describe its overall results as decent, but not great.
The world's largest office furniture manufacturer, Steelcase competes with Herman Miller (NASDAQ:MLHR) and Knoll (NYSE:KNL). In its most recent quarter, it grew sales 6.8%, net income 72%, and boosted operating margin 60 basis points year over year.
However, excluding currency fluctuations, acquisitions, and restructuring charges, sales increased a less impressive 4%, and operating margin increased 30 basis points. In addition, much of the net income boost was related to non-core items, such as an increase in interest income from cash balances, a lower tax rate, and one-time gains. On a more "normalized" basis, operating income improved 15.5%.
With North American sales roughly flat, the international segment was the clear star of the quarter, providing substantially all of the improvement in operating income. International sales grew 19.2% (14% when excluding currency fluctuations). Steelcase cited Western Europe as the best performer in the international segment; thanks primarily to volume leverage, operating income and margin more than doubled here for the quarter.
Most importantly, the company reiterated its three-year goal of achieving a 10% operating margin, driven by 35% gross margins and 25% operating expenses as a percentage of sales. In the latest quarter, Steelcase reported a 30.8% gross margin and a 5% operating margin, which means that the company believes it can double operating margins in the next three years.
To achieve this, the company intends to employ lean manufacturing techniques and improve supply chain sourcing. In North America, Steelcase plans to attack its cost-of-goods-sold expenses, whereas in Europe, it hopes to keep improving operating leverage. This seems reasonable, given that the international segment's operating expenses as a percentage of sales in the latest quarter were 300 basis points greater than in North America. The North American segment has double the sales of the international segment, which lets it better leverage its expenses; this difference should rescind as international sales grow more quickly.
Management certainly has its work cut out if it wants to meet its ambitious goal of a 10% operating margin. Until I'm certain it can meet that goal, I'll stick to watching from the sidelines.
Steel yourself for further Foolishness:
- Steelcase Slogs Forward
- Steelcase's Solid Progress: Fool by Numbers
- Foolish Forecast: Signs of Steelcase
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. The Motley Fool has a disclosure policy. Emil appreciates comments, concerns, and complaints.
