Fast Order Growth and Productivity Are Shoring Up Herman Miller's Earnings Power
Office furnishings and design giant Herman Miller (NASDAQ: MLHR) impressed investors with its final quarterly report of fiscal 2019 last week. Results released on June 26 reveal that despite headwinds arising from Brexit-inspired uncertainty in Europe and trade disputes between the U.S. and China, the manufacturer is still enjoying sustained demand from corporate furnishings buyers and retail customers. Herman Miller's success was fueled during both the quarter and fiscal year by brisk new order growth that was undergirded by a tight hold on overhead expenses.
As we break down the details of the last three months, note that all comparative numbers are presented against the prior-year quarter.
Herman Miller: The raw numbers
Metric | Q4 2019 | Q4 2018 | Growth (YOY) |
|---|---|---|---|
Revenue | $671.0 million | $618.0 million | 8.6% |
Net income | $46.2 million | $31.8 million | 45.3% |
Diluted earnings per share | $0.78 | $0.53 | 47.2% |
Data source: Herman Miller. YOY = year over year.
What happened at Herman Miller this quarter?
Image source: Herman Miller.
Record quarterly reported revenue of $671 million handily exceeded management's forecasted top-line range of $645 million to $650 million.
Sales increased by 7.6% on an organic basis (i.e., adjusting reported sales for foreign currency effects and the adoption of new accounting standard ASC 606).
New orders rose 6.4% on an organic basis to $670 million, following a 7.6% growth rate in the last sequential quarter (the third quarter of fiscal 2019). A continued healthy pace of order growth throughout fiscal 2019 has helped to solidify investors' confidence in the professional environments specialist -- shares have jumped 45% year to date.
Herman Miller's order backlog increased by 12% to $394.2 million.
The company made changes to its operating and reporting structure. Effective from the beginning of the fourth quarter, the specialty segment has been folded into the North American segment. These divisions were combined to better align sales teams. In addition, Europe, Latin America, and Asia (ELA) has been renamed "International," while the consumer segment has been renamed "Retail."
Gross margin inched up by 10 basis points to 37%. Adjusting for the adoption of ASC 606, gross margin improved by 70 basis points -- an admirable result given that the company is still grappling with rising commodity prices and the inflationary impact of import tariffs.
Operating margin jumped by 180 basis points to 8.4% as Herman Miller held operating costs nearly flat against the prior-year quarter even as sales climbed. Management pointed to the organization's ongoing profit improvement initiative as a key driver behind the effective cost control.
Herman Miller raised its quarterly dividend by 6% to $0.21. The dividend now yields 1.8% on an annualized basis at its current share price.
What management had to say
In the company's earnings press release, CFO Jeff Stutz provided some detail on Herman Miller's recent operating leverage, which has manifested in its expanding top line, cost discipline, and productivity enhancement:
We were encouraged by broad-based sales and order growth for the quarter, supported by favorable macro-economic conditions and continued traction from our strategic priorities. We also further positioned our Retail business for profitable growth with the opening of three new Design Within Reach studios in the fourth quarter, a lease termination related to an underperforming studio and beginning the transition to a new, state of the art distribution center in Batavia, Ohio. These actions reflected expenses of $4.5 million during the quarter and, while they pressured profitability in the quarter, are important enablers for future growth and operating margin expansion of our Retail business. Even after factoring in these initiatives, consolidated sales growth, gross margin expansion and well-managed operating expenses combined to drive 33% growth in adjusted earnings per share compared to the same quarter last year.
Looking forward
For the first quarter of fiscal 2020, Herman Miller's management expects revenue to fall between $650 million and $670 million. This implies 6% annual organic revenue growth at the midpoint of the range. Diluted EPS are penciled in at $0.77 to $0.81, a range which, while close to current-quarter EPS, implies roughly 32% growth over the $0.60 in diluted EPS the company achieved in the first quarter of fiscal 2018.
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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
