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Published in Manufacturing
A Steelcase home office concept from last year. A Steelcase home office concept from last year. COURTESY OF STEELCASE

Return-to-office uncertainty softening orders for furniture giants

BY Friday, September 30, 2022 02:07pm

The office furniture industry’s two largest players expect slower sales but also growth in the near term as employers face an uncertain economy and they reshape their offices to accommodate hybrid work models.

Both MillerKnoll Inc. and Steelcase Inc. recently reported reductions in incoming order rates that occurred despite solid quarterly sales gains.

The Zeeland-based MillerKnoll (Nasdaq: MKLN) reported that orders for the recently completed first quarter of fiscal year 2023 declined 17 percent organically from a year earlier in the key Americas business unit and 11 percent globally.

MillerKnoll, after reporting strong gains for the three-month period that ended Aug. 28, now forecasts $1.02 billion to $1.06 billion in sales for the second quarter of FY 2023, a flat or 4-percent growth rate, with 39 cents to 45 cents earnings per share.

Like their counterparts at Steelcase, MillerKnoll executives are seeing clients ease into adapting their offices to the new work environment and taking longer than expected to transition to hybrid work models. The softer order rates occurred despite what MillerKnoll Americas Contract Division President John Michael called “robust activity.”

“If you talk to the dealer network, they’re all incredibly busy. I think some of the things that we’re seeing is a lot of hesitation on the part of customers in terms of pulling the trigger on a new and more hybrid-focused work environment, and probably some hesitation in terms of the size of projects going forward,” Michael said in a Sept. 28 conference call to discuss quarterly results. “That said, most companies that we talk to realize they have to do something, and they’re in the process. It’s an iterative process and it takes a little bit longer to get the order to close than in a pre-pandemic kind of environment.”

As a result of the softer order rate, MillerKnoll is “proactively taking actions, including continued pricing increases and careful management of discretionary spending” and voluntary retirements, President and CEO Andi Owen said. The pending actions should generate annualized cost savings of $30 million to $35 million.

Furniture makers have performed well for several quarters after the initial shock to the economy when the pandemic hit in early 2020. They since “have been seeing some pretty solid numbers,” said Elisa Berger, a vice president at Grand Rapids investment bank Charter Capital Partners who follows the industry.

Given the slowing economy and the cyclical nature of the office furniture industry, the softening order rates are not surprising, Berger said.

“The softening is not going to be shocking to anyone,” she said. “We’ve been on an upswing for about the appropriate amount of time for it to cycle down again.”

Steelcase cuts

At Grand Rapids-based Steelcase (NYSE: SCS), executives recently said they are pursuing cost-cutting moves after incoming orders declined 20 percent in the first few weeks of the present quarter and 8 percent in the prior quarter. The moves will include eliminating up to 180 salaried positions in Steelcase’s corporate and Americas division.

The actions target about $20 million of annualized spending at Steelcase, which reported global sales of $863.3 million for the second quarter of its 2023 fiscal year. That compares to $724.8 million for the same period a year earlier. Quarterly sales for the Americas division that accounts for three quarters of total revenue grew 25 percent to $651.6 million.

Despite the strong sales gains for the quarter, volumes are “not tracking as we originally planned” back in March when Steelcase forecasted “continuing improvements in our overall order patterns,” said Senior Vice President and Chief Financial Officer Dave Sylvester. A slowing U.S. economy and lower CEO sentiment that affects corporate capital spending also contributed to the decision to implement job cuts.

“It’s possible the slow return-to-office trend in the U.S. could be having an impact. It’s also possible that reduced CEO confidence is impacting capital spending in our sector. Decision-makers have a lot to deal with at the moment and they’re also facing a lot of near-term uncertainty,” Sylvester said in a conference call to discuss quarterly results.

Citing the lower order volumes of late, Steelcase still expects sales in its current quarter to range from $825 million to $850 million, a 12-percent to 15-percent increase from a year ago. That’s a growth rate lower than what the company has recently experienced, and will include the benefits of prior price increases. Steelcase forecasts quarterly net income in the range of 8 cents to 12 cents per share.

As well, MillerKnoll is “feeling the impact that the economic uncertainty is having on our customers, particularly in the U.S.,” where there is “concerns about inflation, piloting smaller orders and requiring more revisions to projects as they learn to operate in a mostly hybrid environment,” Owen said. That’s causing hesitation among some clients, even as the company’s project pipeline remains “super healthy,” she said.

“When you look at it … in North America, the United States in particular, we have a lot more indecision. We have a lot of CEOs that are still kind of iterating and iterating on what they want their return to office to look like. In other parts of the world, we have a lot more decisiveness, so we haven’t seen this questioning,” Owen said. “So, I look at this order decline and (I’m) not incredibly worried. I think we’re certainly facing uncertainty and I think we will see some decline. But I also think there’s a matter of people being indecisive and understanding how to work in a hybrid environment. I would say activity is strong, projects are taking longer, and there’s a regional variant in how we’re approaching the return to office post COVID.”

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