By David Randall
NEW YORK (Reuters) - U.S. corporate offices are getting spruced up now that the recession is over, and a total makeover is what Steelcase Inc (NYS:SCS) is pitching as office furniture suppliers seek a slice of the growing pie.
Steelcase, the industry leader, invested in research during the downturn, focusing on how mobile devices and tablet computers have changed the way office workers sit and interact with colleagues.
Its solution - open floor plans - may be radical for many corporations, but is one that has been gaining ground in recent decades. Steelcase suggests replacing individual cubicles with shared desks, and private offices with shared meeting spaces.
It has been pitching this idea to Fortune 1000 companies as a cost effective way to increase productivity.
"They're out there saying, 'Look, sales people don't need an office anymore, and you don't need storage space," said Ann Miletti, a portfolio manager of the $1.3 billion (835.0 million pounds) Wells Fargo Advantage Common Stock fund.
"You need more meeting rooms, and we can show you how to design this building to fit another 500 people in so you can close another location."
To fill these open spaces, Steelcase has designed innovative furniture such as its new Gesture chair which provides support whether someone is sitting in front of a laptop or leaning back with a tablet screen. The chair won an industry award in June.
"The work they've done into redesigning desk chairs puts them farther ahead of everyone else, and now it has to be proven on the battlefield of commerce," said Budd Bugatch, an analyst at Raymond James who covers the company.
Many analysts said this approach gives Steelcase an edge over rivals such as Knoll Inc (NYS:KNL) and Herman Miller Inc (NSQ:MLHR), which focus more on aesthetics.
SPENDING TO INCREASE
U.S. companies are expected to spend $11.7 billion on office furniture in 2013, and $12.6 billion in 2014, according to research firm IHS Global Insight.
While that would mark a 11.5 percent increase from 2012, it is still well below the $13.4 billion in 2007 at the peak of the last bull market, suggesting more gains lie ahead.
Companies may speed up refurbishing outdated offices to retain and recruit talented employees, said Josh Borstein, an analyst at Longbow Research who covers the company.
Grand Rapids, Michigan-based Steelcase has been gaining market share by already selling high-end chairs, tables and office setups designed for workers who are no longer tethered to a desktop computer.
"You have this trend of firms moving away from cubicles to open work spaces that took hold on the coasts and cities like Chicago, and is now creeping its way into Cleveland, where I work," Borstein said.
The emphasis on design has helped Steelcase gain an estimated 1 to 2 percentage points of the so-called contract furniture market over the past year, to about 25 percent overall, analysts said.
Yet the resurgence in office spending comes at a time when Steelcase, with a $1.8 billion market cap, faces a range of hurdles.
Steelcase shares fell as much as 11 percent in June after it missed quarterly revenue expectations that management blamed in part on weak demand from Europe. The stock price has only recently retouched its prior highs.
While up 15 percent for the year, the stock is trading at a discount to its competitors because Steelcase depends on Europe for a larger percentage of its sales, Borstein said.
To complicate matters, long-time Chief Executive Jim Hackett announced in July that he would retire in February, and a successor has not yet been named.
Steelcase shares have fallen about 6 percent to around $14.60 since Hackett's announcement.
While the question of succession may be holding back Steelcase's stock, Chief Financial Officer David Sylvester downplayed the transition issue.
"We have been team that has been working together for 15 to 20 years," Sylvester said. "We're the team that has helped the organization navigate through tremendous change ... and the team that is gaining market share in the industry," he added.
POISED FOR REBOUND
Despite its choppy performance for the year, analysts and fund managers see solid potential for Steelcase to capitalize on the expected rise in corporate spending.
The four analysts who cover the company expect the stock to rise 21 percent to $17.75 over the next year, and each has a "buy" or "overweight" rating on it, according to Thomson Reuters data.
Analysts have mostly stood pat with their ratings on Steelcase since the leadership change was announced.
"The game plan is pretty well articulated, at least in the short run, so I don't see that to be an issue," Bugatch of Raymond James said.
Miletti, the Wells Fargo portfolio manager, began buying Steelcase at around $6.25 in mid-2010, enough for a roughly 130 percent gain. She likes that government spending accounts for a lower percentage of the company's total revenue than its rivals, especially at a time when more budget cutbacks could be coming.
Sales to the U.S. federal government account for roughly 3 percent of its consolidated revenues, and the company does not break out sales to local and state governments.
Knoll, by comparison, received 10 to 12 percent of its second-quarter revenue from government purchases, according to the company.
Knoll's stock is little changed year to date, trading at a forward price-to-earnings ratio of 16.8. Herman Miller has the same P/E multiple, though the stock has gained 19.2 percent so far this year.
Steelcase lags with P/E ratio of 14.5.
One pressing issue for Steelcase is to stabilize the company's European business line, which has been weighing on the stock price, said Bugatch, who has a price target of $17.50 for the company.
Whether the company is successful in the turnaround will become more apparent when it reports earnings on September 18.
(Editing by Frank McGurty and Richard Chang)