Steelcase: A Quality Furniture Company Facing Headwinds
Steelcase Inc. (NYSE:SCS) provides a portfolio of furniture and architectural products globally, primarily for the office environment but also for health care and educational facilities.
The Grand Rapids, Michigan-based companys furniture portfolio includes a variety of options for seating, storage, desks, benches and tables, as well as complementary products such as work accessories, lighting and mobile power and screens. It also provides textiles, wall coverings and surface imaging solutions. Its popular brands include Steelcase, Designtex, Coalesse, AMQ, Smith System, Orangebox and Viccarbe.
The Covid-19 pandemic was obviously a difficult time for the company as most office environments were closed for an extended period. Although the in-office business has recovered somewhat, the company plans to be a leader in the hybrid work environment. This involves innovating products to support hybrid work as well as producing home office solutions.
Founded in 1912, Steelcase currently has a market capitalization of $937 million.
Financial review
On Sept. 21, the company reported second-quarter 2023 results. For the three-month period ended Aug. 26, organic revenue increased 20% due to a strong beginning backlog and price increases. The gross margin was 29.1%, an increase of 60 basis points compared to the prior-year quarter and led by a 120 basis point improvement in the Americas. Year-over-year price increases of approximately $80 million exceeded year-over-year inflation by approximately $30 million.
In a statement, Steelcase Senior Vice President and Chief Financial Officer Dave Sylvester said, "Inflation continues to be significant and has aggregated to approximately $270 million over the last six quarters, but for the first time since fiscal 2021, our year-over-year pricing benefits exceeded inflation this quarter. Over the coming quarters, although inflationary pressure is expected to remain, we anticipate the benefits from our pricing actions will continue to accumulate and more fully offset the cumulative inflationary costs weve incurred."
Total liquidity at quarter end, which is comprised of cash and cash equivalents as well as cash surrender value of company-owned life insurance, totaled $213.9 million, while total debt was $563.5 million. Adjusted Ebitda for the trailing four quarters was $154.1 million and the companys net leverage ratio was 2.3.
Valuation
Consensus earnings per share estimates for the fiscal year ending February 2023 are 50 cents and $1.00 for the following year, which is expected to be a more normal year. That creates a low forward price-earnings ratio of only 7. Based on forward estimates of Ebitda, the stock is trading at an enterprise value/Ebitda ratio of 9.
The GuruFocus discounted cash flow calculator creates a value of approximately $12 using $1 in earnings per share as the starting point and a 5% long-term growth rate.
The company recently cut its dividend from an annualized rate of 58 cents to 40 cents, which is still an above-average dividend yield of 4.81%.
"Based on the recent order and return-to-office trends, we adjusted our dividend this quarter to strengthen our liquidity profile and support a higher allocation of capital to reinvestment in the business and pursuit of our longer-term strategy," Sylvester said.
Guru trades
Gurus have established or increased their positions in Steelcase recently include First Eagle Investment (Trades, Portfolio) and Charles Brandes (Trades, Portfolio), while those who have reduced or sold out of their holdings include Chuck Royce (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies.
Conclusion
Steelcase has a solid history of operating excellence and should be able manage current cost and supply chain issues. The workplace environment will be viable for a very long time and may even return to previous norms as some businesses are discovering workers are often much less productive at home. Even if a hybrid work-home environment remains popular, Steelcase has solutions for the home office as well.
This article first appeared on GuruFocus.
