Office furnishings giant Steelcase (NYSE: SCS) announced its fiscal first-quarter 2020 results on Wednesday after the markets closed. The manufacturer presented a generally positive report to investors, although customer-initiated order delays prevented it from realizing its expected revenue potential over the last three months. Note that in the discussion that follows, all comparative numbers are presented against the prior-year quarter.
Steelcase results: The raw numbers
|Metric||Q1 2020||Q1 2019||Change (YOY)|
|Revenue||$824.3 million||$754.0 million||9.3%|
|Net income||$17.8 million||$17.0 million||4.7%|
|Diluted earnings per share||$0.15||$0.14||7.1%|
Data source: Steelcase. YOY = year over year.
What happened at Steelcase this quarter?
- While Steelcase reported a healthy revenue increase and organic revenue growth of 6%, the top line fell short of the company's own projected range of between $830 million and $855 million.
- Management explained that order growth was weighted toward the second half of the quarter. In addition, some customers requested delayed deliveries of products due to construction labor shortages that impacted office furnishing projects.
- The Americas, EMEA (Europe, Middle East, and Africa), and "other category" segments increased organic revenue by 5%, 9%, and 10%, respectively.
- Orders grew at a 15% clip on both a reported and an organic basis. The company ended the quarter with what it described as "a high backlog" of unfilled orders.
- Steelcase's gross margin decreased slightly by 30 basis points to 31.3%. The company attributed that contraction to higher cost of sales in the Americas segment, an effect partially offset by pricing increases instituted over the last few quarters.
- Operating expenses fell 50 basis points to 28% of sales, helping operating margin to improve modestly to 3.3%, compared to 3.1% in the first quarter of fiscal 2019.
Image source: Steelcase.
What management had to say
In the company's earnings press release, CFO Dave Sylvester highlighted the recent success of the EMEA segment, which is its fastest-growing division. Sylvester addressed one of investors' concerns -- namely, the time frame in which segment earnings are expected to catch up to brisk top-line growth: "We delivered strong year-over-year improvement in EMEA this quarter, with 9 percent organic revenue growth, improvements in gross margin and lower operating expenses as a percentage of revenue. Our teams remain solidly focused on achieving profitability in EMEA for fiscal 2020 and reaching a low- to mid-single-digit operating margin for that segment within the next three years."
That Steelcase fumbled on its own revenue outlook in the second quarter is a bit problematic as we look ahead. The delay in order completion requested by customers represents an external factor over which the company has little control. Management remains confident regarding its deep order backlog and "strong customer opportunities." Yet investors may proceed with caution in the next few months, at least until the company recognizes its delayed revenue in its second-quarter report.
As for the next quarter, management is projecting revenue of $970 million-$995 million, which equates to organic growth of 6%-9%. Diluted EPS is expected to land between $0.41-$0.45, compared to $0.41 in the second quarter of fiscal 2019. The prior-year period included a $7.5 million gain on the sale of property, which positively impacted EPS by $0.06. Thus, the fiscal second-quarter 2020 projection (at the midpoint) will represent adjusted earnings growth of roughly 19% if achieved.
In a signal that quarterly revenue recognition is indeed simply a matter of timing, Steelcase reiterated its full-year projection of 2%-6% year-over-year organic growth, and diluted earnings per share (EPS) of $1.20-$1.35. Nailing its second-quarter targets will help Steelcase persuade shareholders that this is indeed the case.
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