The Herman Miller Group (NYSE:MLHR) is a designer and manufacturer of office furniture and equipment as well as home furnishings.
Despite the negative impact from the Covid-19 pandemic, Herman Miller is working with their clients to solve their office furnishing needs arising from the “new normal”.
MLHR has set the course to expand the business on a global scale and will emerge stronger from this crisis. I feel that it is an opportunity to invest in a high end furniture maker as they recover from the disruptions caused by the pandemic.
Business Overview
Together with their portfolio of companies, Herman Miller provides furnishing solutions to suit their customer needs.
Herman Miller’s signature products include the Noguchi Table, Eames Lounge Chair, Aeron Chair and the Marshmallow sofa.
Financial Performance
MLHR’s FY20 performance was marred by the pandemic due to the city lockdowns and shelter-in-place. This has resulted in delayed and/or cancelled orders for their furnishings.
Sales across the board fell with Q4 net sales and orders decreasing 29% and 19% respectively as compared to the previous year. Margins fell over the prior year primarily due to lower production leverage. MLHR registered a loss per share of $2.85 in Q4 2020. Most of it is due to restructuring and impairment costs.
Looking at the macro economic drivers, it seems like we will be seeing similar under-performance for 1Q21 where the pandemic is in full force and businesses were shut for most of the quarter. The management has stated in their recent conference call that orders were down 28% in May. This is consistent with the trend from 4Q20.
Riding Out the Storm
It is clear that luxury goods tends to underperform during recessions (Read: https://www.ft.com/content/4bee8020-5781-4658-839a-c8d56fc102e7) and MLHR belongs in this space with their award winning high end office chairs.
Despite the fall in sales, MLHR is still FCF positive for the year. They have also drawn down their revolving credit facility of $265 mil to boost their cash balance (repaid in June 2020).
Besides looking at the strength of their balance sheet, we should also focus on their track record and strong branding position.
- Knowledge and skill set to support customer needs
- Wide product offering
- Global multi-channel distribution capability
MLHR remains confident that the office will not be going away. Although there might be certain changes such as re-configuring of office spaces, expanded use of hub-and-spoke office location models, remote working and increased work-from-home activities. MLHR has the assortment of brands and capability to help fulfil their customers’ needs for where they work, live and play. In the words of their management.
With great change comes great opportunity for us to explore how we sell, what we sell, and where we sell it.
Andi Owen, CEO, Herman Miller
Investing in New Opportunities
Play Advanced
In July 2020 this month, Herman Miller and Logitech Gaming announced their foray into the gaming industry with the Embody Gaming Chair. I wouldn’t go into the technical details of what the chair offers but basically, they claimed that their chair is ergonomic and allows the gamer to sit in one spot for an extended period of time.
Herman Miller started their retail price at US$1500. This is a little high in my opinion. However, it goes to show that they are targeting the working adults and professional gamers who have their source of income instead of high school students.
From their website (link above), I can see that they are not stopping here. MLHR has collaborations with other designers to produce their own gaming desk and monitor arm.
MLHR planned to establish themselves as a major player in this space by entering into partnerships with esports brand like TSM and Complexity Gaming. (Link https://esportsinsider.com/2020/07/tsm-herman-miller/ & https://esportsinsider.com/2019/11/complexity-gaming-herman-miller/)
This is an exciting new business venture for MLHR. As a well known furniture brand, I believe that they will give their competitors like Secret Lab a run for their money. With Secret Lab valued at around $300mil, MLHR’s venture, if successful, could have a similar valuation.
Work From Home
Since the pandemic started earlier this year, people are spending more time at home working, living and playing. This itself has created an opportunity for the furnishing sector to provide comfort and convenience to people working from home.
In the 4Q conference call, management has noted that they experienced an increased in about 126% sales for home offices and orders through their e-commerce platform were up 123%. That is encouraging news that MLHR is still able to leverage on their products to capture this market segment.
The management also stated that their customers are looking at a more meaningful shift towards working from home through the end of the year. That means that this segment will continue to grow. Corporate offices will be beginning to offer reimbursements and stipends for their employees working from home.
Risks
The outlook for the retail furniture looks bleak short term as we see a slowdown in economic activity and lower property sales. However, MLHR is focusing on expanding its global reach by increasing the number of dealer distributions and product categories.
There is also the question of how the “new normal” working world will look like. MLHR is the market leader in North America Contract business where they supply office furnishings to companies like Google and the US government. If companies are leaning towards having smaller office space and more work-from-home, this would mean that their contract business will be smaller and less profitable (due to economies of scale).
Good Value for Money
Herman Miller’s plans to improve profitability and growth relies on their strength in investing in new opportunities, like the gaming industry. Their investment in expanding internationally may also act as growth catalysts in an competitive retail environment.
Although FY20 has seen a decrease in revenue and profit and we may also see similar results for FY21. Their valuation still looks attractive with PE at 13x and EV-EBIT at 7.68.
They also has a strong track record of revenue and cash flow generation. This shows that they will be able to survive this pandemic and recession and possibly emerge stronger.
Closing
Herman Miller is well-positioned to serve their customers unique needs. They have a strong track record, skill set, wide range of product offerings and a good eye for investing in new opportunities like the gaming industry,
The tough macro environment with the pandemic is expected to have a negative impact on Herman Miller’s business. This has also resulted in their share price to decline about 50% since the beginning of the year.
This share price decline is overdone in my opinion. MLHR’s business did not reflect a drastic drop in sales and profit. This provides an opportunity to invest in a high end furniture maker that is expected to emerge stronger once the pandemic is over. They also has a strong balance sheet to weather the storm.
I would expect MLHR’s share price to appreciate back to the $40 range as soon as the economy picks up.
Cheers
Note: The Moss Piglet is vested in MLHR at an average price of $21.50.