Courtesy Herman Miller
C.T. Fitzpatrick recently expanded his office space in a wooded corporate park in Birmingham, Ala., preparing for the end of the pandemic.
Dozens of offices and conference rooms were added. And his company, Vulcan Value Partners, a $19 billion investment firm, bought 30 Eames Executive chairs from furniture maker
“We like the midcentury modern look of the chairs, and they’re a good combination of comfort and style,” Fitzpatrick, the CEO, says.
It’s not just the chairs. He is also a fan of Herman Miller (ticker: MLHR) stock, owning 2% of the shares outstanding for Vulcan’s funds and managed accounts. Vulcan started buying the stock in the $20s. It’s now around $48, and he still thinks it is cheap.
“Even if people go to flexible work options, companies will need more space and different configurations,” he says. “The stock is still meaningfully discounted.”
E=Estimate. *Earnings before interest, taxes, depreciation, and amortization
Fiscal year ends in May. Estimates do not include pending Knoll acquisition.
Source: FactSet
With half of U.S. adults fully vaccinated, many companies are making plans to get people back in the office. Wall Street wants employees back by the fall, while Silicon Valley is looking at hybrid workforces. That should fuel demand for Herman Miller, known for its highly adjustable and ergonomic Aeron chair, starting at about $1,000.
The company also sells sofas, desks, and other seating. And it’s expanding into retail. Its Design Within Reach stores, acquired in 2014, are thriving. In April, Miller announced a big acquisition, $1.8 billion in cash and stock for
(KNL), a furniture designer known for its Saarinen tables and Scandinavian brand Muuto.
People are returning to offices that are being redesigned for postpandemic work. Layouts are adapting to flexible workforces with more unassigned seating, privacy pods, and spaces for small-group collaboration.
“There will be changes in office layouts, but it won’t necessarily mean less total space,” says Jeff Stutz, the chief financial officer of Miller. “It may take time to get back to prepandemic levels, but we’re seeing momentum.”
Demand for home offices is rising fast. Miller’s home-office furniture sales surged 326% in its last quarter, compared with prepandemic levels.
“The home office has gone from a convenience to a necessity,” says Karl Mistry, regional president at the home builder
(TOL).
The retail business isn’t only thriving (orders up 59% in the first quarter), but highly profitable. Its operating margins reached 20% in the first quarter, compared with 4.4% for North American commercial sales.
E-commerce is also going strong, and the company is opening stores in wealthy locations like Southampton, N.Y.; Greenwich, Conn.; and Tokyo. The retail segment should reach $595 million this year, or 24% of Miller’s $2.5 billion estimated revenue total. The target, Stutz says, is $1 billion in annual revenue from retail.
That looks doable, partly because Knoll is expanding Miller’s product line. Knoll booked $1.2 billion in sales in the past 12 months, about half of Miller’s $2.3 billion total. Knoll also brought in $127 million of Ebitda, or earnings before interest, taxes, depreciation, and amortization. Miller paid a 45% premium for Knoll’s equity and took on $1.8 billion in debt and credit lines to fund the deal. But Miller sees its Ebitda margin hitting 16%, up from 14% before the merger, thanks partly to cost savings and a shift in its sales mix to retail.
Granted, Miller’s margins could face pressure in the near term: Prices for steel, one of its biggest manufacturing costs, have soared. Global shortages of container ships and supplies from China have caused some shipping and manufacturing delays. Miller can pass on some higher costs to consumers, CFO Stutz says, but corporate contracts are tougher to reprice, since they typically last a year before they are renegotiated.
And its core market is still in a rut: North American commercial sales were down 35% in the first quarter from prepandemic levels.
Nonetheless, investors aren’t paying much to bet on the Miller-Knoll combo. At 16 times earnings, Miller’s stock trades above its five-year average of 13, based on next-12-month estimates.
Rudy Yang at Berenberg Capital Markets likes the stock for Miller’s expanding retail presence. The higher margins in consumer sales should help offset some margin pressure on the commercial side, he says. He also sees a rebound in office furniture lifting two of Miller’s rivals,
(KBAL) and
(SCS), rating all three a Buy.
Alex Fuhrman, an analyst with Craig-Hallum Capital Group, thinks Miller could get to $100 with Knoll in the mix. By 2023, he estimates the combined company will hit $3 billion in revenue and $600 million in Ebitda. That could get the stock to $100 at a multiple of 15 times enterprise value to Ebitda, he estimates, though his 12-month target is $60.
One hot new market: videogaming. Miller recently introduced a $1,600 gaming chair, co-branded with Logitech G and designed to “eliminate pressure buildup and keep you cool.” Pro gamers Electra and Timthetatman have endorsed it. Stutz says the product line could be a $100 million opportunity.
Not bad for an office chair for gamers to blast zombies all day.
Write to Daren Fonda at daren.fonda@barrons.com
