Why Herman Miller Is Enjoying Another Post-Earnings Bounce

As we begin to contemplate year-end 2019, professional-environments manufacturer and design-house Herman Miller (MLHR 24.23%) is one of my candidates for small-cap sleeper stock of the year. The Zeeland, Michigan-based enterprise has quietly strung together several quarters of appealing growth, and shares have ascended accordingly, rising 50% year to date.

Of course, that number doesn’t include today’s 5% leap in early trading, following the company’s release of first-quarter fiscal 2020 results after markets concluded business Wednesday evening. Below, we’ll review headline numbers and isolate the drivers of this latest quarter of outperformance.

Note that all comparative numbers that follow are presented against the prior-year quarter.

Herman Miller: The raw numbers

Data source: Herman Miller.

What happened at Herman Miller this quarter?

Image source: Herman Miller.

• Revenue of roughly $671 million exceeded management’s prior guidance range of $650 million-$670 million, while diluted earnings per share (EPS) hit the high end of a projected band of $0.77-$0.81.
• Organic revenue growth of 7.7% slightly outpaced the reported top-line advance of 7.4%. North America, the company’s largest segment (comprising 68% of total revenue during the quarter), chalked up organic sales growth of nearly 9%, to $459 million. Similarly, Herman Miller’s retail segment expanded organic sales by 11%, to $99 million. International sales on an organic basis were flat at $116 million.
• Order flow continued in a strong trend. North American organic orders rose 10%, to $469 million, and retail organic orders grew 11%, to $92 million. Organic orders in the international segment dipped by 5%, to $119 million.
• The company’s order backlog jumped 13%, to $400 million.
• Despite ongoing cost pressures from trade tariffs, Herman Miller managed to improve gross margin by 70 basis points, to 36.7%. CFO Jeff Stutz noted that the company is “[navigating] the global tariff picture effectively,” and implementing price increases while finding efficiencies in its supply chain. Stutz also observed that Herman Miller boosted gross margin even as it incurred costs to open a new 620,000 square-foot distribution facility during the quarter.
• Operating margin rose 160 basis points, to 9%, due to profit-improvement initiatives and disciplined overhead control.
• Operating cash flow spiked by 60% to roughly $53 million – a result of higher sales, working capital management, and wider gross and operating margins.

What management had to say

CEO Andi Owen completed her first year at the helm of the 114 year-old manufacturer in late August. In the company’s earnings press release, Owen commented on the quarter, and also alluded to her focus on extending the Herman Miller brand globally and increasing its retail presence, among other priorities:

Strong sales and order growth for the quarter were led by our North America and Retail businesses. Consolidated sales growth, higher gross margins and well-managed operating expenses combined to drive operating margin expansion over the same quarter last year. While there are clear opportunities for additional improvement, the enterprise at large is executing at a very high level, and we are beginning to realize meaningful benefit from our efforts to align the direction of the global business around a common set of strategic priorities.

Looking forward

Looking ahead to next quarter, Herman Miller advised shareholders to expect revenue of between $685 million and $705 million, which should approximate organic sales growth of 7% at the midpoint of the range. As for earnings, the manufacturer projects that it will ink between $0.85 and $0.89 in diluted EPS in the next reporting period. At the midpoint of this range, the earnings target will represent robust growth of 32% against the $0.66 per share reported in the second quarter of fiscal 2019.