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BIFMA: August Orders -33%; Shipments -32%
10.2.09 | Grand Rapids, MI | On Wednesday evening, the Business and Institutional Furniture Manufacturers Association (BIFMA) released its market statistics for August 2009. The month's order and shipment statistics were derived from a sampling of 35 companies in the contract office furniture industry whose combined shipments make up about 75% of total industry volume.
* BIFMA estimates August orders fell 33% (our tables show -34% due to rounding differences), the fourth consecutive month with a 33% year-over-year percentage decline. August 2008 orders had decreased 1%, a modestly easier prior year comp compared with +1% in July 2008. Year-to-date orders are down 33% and have been remarkably consistent- ranging from -32% to -38% for the past 7 months.
* August shipments decreased 32% against a 4% decline in August 2008. The percentage decline worsened compared with -29% in July, which also had a tougher prior year hurdle of +1% in July 2008. Year-to-date shipments have declined by 30%. Shipment percentage declines have ranged from down mid-twenties to mid-thirties in 2009. As we noted last month, industry demand appears to be stabilizing- though an actual recovery remains elusive. Looking ahead, comps will not get substantially easier until 4Q09 when we begin to lap double-digit percentage declines.
* While the general economy has begun to show signs of improvement, the late-cycle nature of office furniture demand suggests a recovery for the industry is likely to lag the broader economy by at least three to four quarters. As shown in the graphs below, the industry's relevant economic drivers remain decidedly mixed. The service sector continues to shed jobs, though at a moderating pace. The Architect's Billing Index (which tends to lead non-residential construction by 9 to 12 months) for August was 41.7, down from 43.1 last month and 46.5 last August. This marks the nineteenth consecutive month that the ABI has been below 50- the line of demarcation between expansion and contraction. Given tight credit conditions and long lead times between planning and completion of new office buildings, project-related office furniture demand is likely to remain challenged for the foreseeable future. That said; Herman Miller management has commented recently that it is seeing fewer cancellations and deferrals of large projects - perhaps an early sign that the worst of the declines may be behind us. CEO confidence has rebounded from the all-time lows achieved earlier this year but remains well-below historic norms.
* Reflecting these factors, BIFMA projects 2009 orders and shipments will decline 32.1% and 31%, respectively, down from its previous (issued in May) forecast of -29.3 and -28.6%. BIFMA expects 2010 orders to decline 1.9% compared with its previous estimate of 2.6% growth. 2010 shipments are also expected to decline modestly - down 1.4% compared with the prior forecast for 2.8% growth. On a quarterly basis, BIFMA continues to anticipate a return to year-over-year industry growth in 3Q10.
* Each of our Office furniture companies under coverage have traded higher since the beginning of the year and remain sharply above their March lows. While valuations on price-to-sales and EV/Sales multiples remain attractive relative to history, office furniture equities appear expensive based on this or even next year's expected depressed earnings - suggesting to us that investors are increasingly "looking past the valley" and valuing these equities on projected earnings power under a recovery scenario. Ultimately, the attractiveness of these equities will hinge on the timing and shape of the economic recovery, which remains clouded. For now, we are cautiously optimistic, with positive investment ratings on Knoll and Herman Miller, and neutral ratings on HNI and Steelcase.
* According to BIFMA, August orders were $645 million, down 33% versus $970 million last year, and but up modestly from $630 million in July. Estimated trailing 12-month orders were $8.505 billion, down 25.5% year-over-year. This is the largest percentage drop we have ever recorded in our database, which dates back to 1980.
* BIFMA estimates that August shipments decreased 32% year-over-year to $680 million, though increased from $660 million last month. Trailing 12-month shipments fell 21.4% year-over-year to an estimated $8.935 billion, the worst drop in trailing 12-month shipments since October 2002.
* August unfilled order backlog fell 29.9% year-over-year to $1.08 billion, down from $1.12 billion in July.
* With regard to our office furniture equities under coverage, we reaffirm our Outperform rating on Herman Miller. Despite the challenging economy, our positive investment rating on Herman Miller reflects our view of its excellent management and the shares' reasonable valuation. Herman Miller is a well-run, economic value added (EVA)-focused company that combines innovative design, high-quality products, and lean manufacturing. In recent years, management has lessened its reliance on the North American office furniture market, diversifying internationally, expanding its healthcare business, and developing emerging technologies like CONVIA. Herman Miller generates substantial positive cash flow, and we are heartened by management's track record of managing the company through difficult times. Finally, while the shares trade at 20.8x the forward consensus EPS (above historic norms), they trade at 0.7x sales versus the 10-year median of 1.1x.
* On September 16th, Herman Miller reported F1Q10 GAAP EPS of $0.14. Excluding $2.6 million of pretax restructuring and $4.5 million of charges related to its recent debt tender offer, adjusted EPS were $0.22, compared with our $0.19 estimate (also consensus). Total sales declined 32.4% year-over-year to $324 million, modestly better than our $320.6 million estimate, but slightly below the $326 million published consensus. On a normalized basis, operating income was $21.2 million (6.5% of sales), modestly above our $20.8 million (6.5% of sales) estimate.
* Drilling down, North American sales fell 31.9% to $269.7 million. International revenue declined 40.4% to $41.8 million. F1Q10 incoming orders fell 39.8% to $322.1 million. That said, Herman Miller estimates F1Q09 orders benefitted by $35 million due to pull forward ahead of an August 2008 price increase. Adjusting for this impact, F1Q10 orders would have declined approximately 36%.
* Despite the headline beat, shares gapped lower in the wake of the release due to: 1) investor concerns about the quality of the beat (a one-time tax benefit contributed $0.05); 2) cautious commentary from management regarding F2Q sales and margins; and 3) MLHR shares' strength prior to the report, which left the stock vulnerable to profit-taking.
* We also reaffirm our Outperform rating on Knoll. Knoll is a well-managed enterprise in our view that generates significant free cash flow, which management has used to de-leverage the balance sheet and return capital to shareholders through dividends and stock buybacks. We believe that Knoll's focus on higher-end products with high design content lends itself to attractive profit margins and better maintenance of pricing power. In FY09, benefits from cost-saving actions, lower commodity costs, and strength in the U.S. dollar versus the Canadian dollar (due to the company's Canadian manufacturing operations) should benefit margins, partially offsetting de-leverage from lower volumes. Despite consistent execution and industry-leading profitability, Knoll trades at 0.5x sales and 18.0x forward consensus earnings - the lowest forward P/E multiple in the peer group.
* Our Market Perform rating on Steelcase stems from our concern that the company's industry-leading market share and significant international exposure may make it more vulnerable than its peers to industry weakness both domestically and abroad. While Steelcase sports the lowest price-to-sales multiple among our covered companies at 0.3x, shares trade at a lofty 74x the forward consensus.
* On September 24th, Steelcase reported GAAP EPS of breakeven. This result includes $17.4 million of pretax restructuring charges, though because of the 100% effective tax rate in the quarter, there was no after tax impact from the charges. Results were in-line with company guidance and our breakeven estimate; the First Call mean was $0.01 per share.
* Total sales declined 35.9% to $578.1 million, $22.7 million below our $600.8 million guess and below the $597 million consensus. Excluding $23 million of unfavorable currency translation and a $5 million negative impact from divestitures, the "organic" revenue decline was approximately 34%. According to the press release, weakness was broad-based, affecting most geographies, vertical markets, and product categories.
* Excluding restructuring charges, normalized operating income was $16.4 million, or 2.8% of sales. Excluding a ~$10 million excess benefit from increases in the cash surrender value of company-owned life insurance policies (COLI) and a $2 million favorable tax settlement, normalized operating income would have been about $4 million, modestly better than our $3.4 million estimate.
* North America sales were $323 million, $25.3 million below our estimate and down 35.4% year-over-year (-34% organic). International sales declined 41.9% year-over-year (-36% organic) to $147.1 million, roughly in-line with our estimate.
* Citing "stabilizing demand levels," management expects F3Q10 sales to approximate $600 million, up sequentially, but below the current consensus forecast of $614 million. The company expects to report "modestly positive operating income" (ex-restructuring) and approximately breakeven net income, based on a ~100% effective tax rate.
* We also reaffirm our Market Perform rating on HNI Corp. While we continue to admire HNI management for its financial discipline and cost-cutting acumen, we remain reluctant to recommend the shares as the company faces headwinds in its three primary end markets, including: 1) slowing contract office furniture demand; 2) weakness in the supplies-driven channel (which caters to small businesses through big-box retailers and catalog dealers); and 3) declining hearth sales, which typically lag new home construction by 9 to 12 months. That said, we would remind investors that due to its exposure to small business through the supplies-driven channel, HNI will likely be the first among its peers to benefit when the economy begins to recover. HNI currently trades at 0.5x sales and 32.2x the forward consensus EPS estimate.
* BIFMA estimates August orders fell 33% (our tables show -34% due to rounding differences), the fourth consecutive month with a 33% year-over-year percentage decline. August 2008 orders had decreased 1%, a modestly easier prior year comp compared with +1% in July 2008. Year-to-date orders are down 33% and have been remarkably consistent- ranging from -32% to -38% for the past 7 months.
* August shipments decreased 32% against a 4% decline in August 2008. The percentage decline worsened compared with -29% in July, which also had a tougher prior year hurdle of +1% in July 2008. Year-to-date shipments have declined by 30%. Shipment percentage declines have ranged from down mid-twenties to mid-thirties in 2009. As we noted last month, industry demand appears to be stabilizing- though an actual recovery remains elusive. Looking ahead, comps will not get substantially easier until 4Q09 when we begin to lap double-digit percentage declines.
* While the general economy has begun to show signs of improvement, the late-cycle nature of office furniture demand suggests a recovery for the industry is likely to lag the broader economy by at least three to four quarters. As shown in the graphs below, the industry's relevant economic drivers remain decidedly mixed. The service sector continues to shed jobs, though at a moderating pace. The Architect's Billing Index (which tends to lead non-residential construction by 9 to 12 months) for August was 41.7, down from 43.1 last month and 46.5 last August. This marks the nineteenth consecutive month that the ABI has been below 50- the line of demarcation between expansion and contraction. Given tight credit conditions and long lead times between planning and completion of new office buildings, project-related office furniture demand is likely to remain challenged for the foreseeable future. That said; Herman Miller management has commented recently that it is seeing fewer cancellations and deferrals of large projects - perhaps an early sign that the worst of the declines may be behind us. CEO confidence has rebounded from the all-time lows achieved earlier this year but remains well-below historic norms.
* Reflecting these factors, BIFMA projects 2009 orders and shipments will decline 32.1% and 31%, respectively, down from its previous (issued in May) forecast of -29.3 and -28.6%. BIFMA expects 2010 orders to decline 1.9% compared with its previous estimate of 2.6% growth. 2010 shipments are also expected to decline modestly - down 1.4% compared with the prior forecast for 2.8% growth. On a quarterly basis, BIFMA continues to anticipate a return to year-over-year industry growth in 3Q10.
* Each of our Office furniture companies under coverage have traded higher since the beginning of the year and remain sharply above their March lows. While valuations on price-to-sales and EV/Sales multiples remain attractive relative to history, office furniture equities appear expensive based on this or even next year's expected depressed earnings - suggesting to us that investors are increasingly "looking past the valley" and valuing these equities on projected earnings power under a recovery scenario. Ultimately, the attractiveness of these equities will hinge on the timing and shape of the economic recovery, which remains clouded. For now, we are cautiously optimistic, with positive investment ratings on Knoll and Herman Miller, and neutral ratings on HNI and Steelcase.
* According to BIFMA, August orders were $645 million, down 33% versus $970 million last year, and but up modestly from $630 million in July. Estimated trailing 12-month orders were $8.505 billion, down 25.5% year-over-year. This is the largest percentage drop we have ever recorded in our database, which dates back to 1980.
* BIFMA estimates that August shipments decreased 32% year-over-year to $680 million, though increased from $660 million last month. Trailing 12-month shipments fell 21.4% year-over-year to an estimated $8.935 billion, the worst drop in trailing 12-month shipments since October 2002.
* August unfilled order backlog fell 29.9% year-over-year to $1.08 billion, down from $1.12 billion in July.
* With regard to our office furniture equities under coverage, we reaffirm our Outperform rating on Herman Miller. Despite the challenging economy, our positive investment rating on Herman Miller reflects our view of its excellent management and the shares' reasonable valuation. Herman Miller is a well-run, economic value added (EVA)-focused company that combines innovative design, high-quality products, and lean manufacturing. In recent years, management has lessened its reliance on the North American office furniture market, diversifying internationally, expanding its healthcare business, and developing emerging technologies like CONVIA. Herman Miller generates substantial positive cash flow, and we are heartened by management's track record of managing the company through difficult times. Finally, while the shares trade at 20.8x the forward consensus EPS (above historic norms), they trade at 0.7x sales versus the 10-year median of 1.1x.
* On September 16th, Herman Miller reported F1Q10 GAAP EPS of $0.14. Excluding $2.6 million of pretax restructuring and $4.5 million of charges related to its recent debt tender offer, adjusted EPS were $0.22, compared with our $0.19 estimate (also consensus). Total sales declined 32.4% year-over-year to $324 million, modestly better than our $320.6 million estimate, but slightly below the $326 million published consensus. On a normalized basis, operating income was $21.2 million (6.5% of sales), modestly above our $20.8 million (6.5% of sales) estimate.
* Drilling down, North American sales fell 31.9% to $269.7 million. International revenue declined 40.4% to $41.8 million. F1Q10 incoming orders fell 39.8% to $322.1 million. That said, Herman Miller estimates F1Q09 orders benefitted by $35 million due to pull forward ahead of an August 2008 price increase. Adjusting for this impact, F1Q10 orders would have declined approximately 36%.
* Despite the headline beat, shares gapped lower in the wake of the release due to: 1) investor concerns about the quality of the beat (a one-time tax benefit contributed $0.05); 2) cautious commentary from management regarding F2Q sales and margins; and 3) MLHR shares' strength prior to the report, which left the stock vulnerable to profit-taking.
* We also reaffirm our Outperform rating on Knoll. Knoll is a well-managed enterprise in our view that generates significant free cash flow, which management has used to de-leverage the balance sheet and return capital to shareholders through dividends and stock buybacks. We believe that Knoll's focus on higher-end products with high design content lends itself to attractive profit margins and better maintenance of pricing power. In FY09, benefits from cost-saving actions, lower commodity costs, and strength in the U.S. dollar versus the Canadian dollar (due to the company's Canadian manufacturing operations) should benefit margins, partially offsetting de-leverage from lower volumes. Despite consistent execution and industry-leading profitability, Knoll trades at 0.5x sales and 18.0x forward consensus earnings - the lowest forward P/E multiple in the peer group.
* Our Market Perform rating on Steelcase stems from our concern that the company's industry-leading market share and significant international exposure may make it more vulnerable than its peers to industry weakness both domestically and abroad. While Steelcase sports the lowest price-to-sales multiple among our covered companies at 0.3x, shares trade at a lofty 74x the forward consensus.
* On September 24th, Steelcase reported GAAP EPS of breakeven. This result includes $17.4 million of pretax restructuring charges, though because of the 100% effective tax rate in the quarter, there was no after tax impact from the charges. Results were in-line with company guidance and our breakeven estimate; the First Call mean was $0.01 per share.
* Total sales declined 35.9% to $578.1 million, $22.7 million below our $600.8 million guess and below the $597 million consensus. Excluding $23 million of unfavorable currency translation and a $5 million negative impact from divestitures, the "organic" revenue decline was approximately 34%. According to the press release, weakness was broad-based, affecting most geographies, vertical markets, and product categories.
* Excluding restructuring charges, normalized operating income was $16.4 million, or 2.8% of sales. Excluding a ~$10 million excess benefit from increases in the cash surrender value of company-owned life insurance policies (COLI) and a $2 million favorable tax settlement, normalized operating income would have been about $4 million, modestly better than our $3.4 million estimate.
* North America sales were $323 million, $25.3 million below our estimate and down 35.4% year-over-year (-34% organic). International sales declined 41.9% year-over-year (-36% organic) to $147.1 million, roughly in-line with our estimate.
* Citing "stabilizing demand levels," management expects F3Q10 sales to approximate $600 million, up sequentially, but below the current consensus forecast of $614 million. The company expects to report "modestly positive operating income" (ex-restructuring) and approximately breakeven net income, based on a ~100% effective tax rate.
* We also reaffirm our Market Perform rating on HNI Corp. While we continue to admire HNI management for its financial discipline and cost-cutting acumen, we remain reluctant to recommend the shares as the company faces headwinds in its three primary end markets, including: 1) slowing contract office furniture demand; 2) weakness in the supplies-driven channel (which caters to small businesses through big-box retailers and catalog dealers); and 3) declining hearth sales, which typically lag new home construction by 9 to 12 months. That said, we would remind investors that due to its exposure to small business through the supplies-driven channel, HNI will likely be the first among its peers to benefit when the economy begins to recover. HNI currently trades at 0.5x sales and 32.2x the forward consensus EPS estimate.
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