CT Fitzpatrick recently expanded its office space in a wooded corporate park in Birmingham, Alabama, preparing for the end of the pandemic.
Dozens of offices and conference rooms have been added. And his company, Vulcan Value Partners, a $ 19 billion investment firm, bought 30 Eames executive chairs from a furniture maker.
“We love the mid-century modern look of the chairs, and they combine comfort and style well,” says Fitzpatrick, CEO.
It’s not just the chairs. He is also a fan of the Herman Miller stock (ticker: MLHR), holding 2% of the outstanding shares for Vulcan funds and managed accounts. Vulcan started buying the stock in the 1920s. It’s now around $ 48, and he still thinks it’s cheap.
“Even if people go for flexible working options, businesses will need more space and different configurations,” he says. “The stock is always significantly updated.”
E = Estimate. * Earnings before interest, taxes, depreciation and amortization The financial year ends in May. Estimates do not include the pending acquisition of Knoll.
With half of American adults fully vaccinated, many companies are considering bringing people back to the office. Wall Street wants its employees to return by fall, while Silicon Valley is looking at hybrid workforces. This should fuel demand for Herman Miller, known for his highly adjustable and ergonomic Aeron chair, starting at around $ 1,000.
The company also sells sofas, desks and other seating. And it is expanding into the retail business. Its Design Within Reach stores, acquired in 2014, are booming. In April, Miller announced a large acquisition, $ 1.8 billion in cash and stock for
(KNL), a furniture designer known for his Saarinen tables and the Scandinavian brand Muuto.
People are returning to offices that are being redeveloped for post-pandemic work. Layouts accommodate flexible workforce with more unassigned seating, privacy pods, and spaces for small group collaboration.
“There will be changes to the layout of the offices, but that won’t necessarily mean less total space,” says Jeff Stutz, Miller’s chief financial officer. “It may take time to get back to pre-pandemic levels, but we are seeing momentum.”
The demand for home offices is increasing rapidly. Miller’s home office furniture sales jumped 326% in its most recent quarter, from pre-pandemic levels.
“The home office has gone from a convenience to a necessity,” says Karl Mistry, regional president of the home builder
Retail is not only flourishing (orders up 59% in the first quarter), but very profitable. Its operating margins reached 20% in the first quarter, compared to 4.4% for commercial sales in North America.
E-commerce is also booming and the company is opening stores in affluent places like Southampton, New York; Greenwich, Connecticut; and Tokyo. The retail segment is expected to reach $ 595 million this year, or 24% of Miller’s estimated $ 2.5 billion in revenue. The goal, says Stutz, is $ 1 billion in annual revenue from retail.
It seems doable, in part because Knoll is expanding Miller’s product line. Knoll posted $ 1.2 billion in revenue in the past 12 months, about half of Miller’s total of $ 2.3 billion. Knoll also reported $ 127 million from EBITDA, which was earnings before interest, taxes, depreciation and amortization. Miller paid a 45% premium for Knoll’s equity and took out $ 1.8 billion in debt and lines of credit to fund the transaction. But Miller sees its Ebitda margin reach 16%, up from 14% before the merger, thanks in part to cost savings and a shift in its sales mix to retail.
To be sure, Miller’s margins could come under pressure in the short term: the prices of steel, one of its biggest manufacturing costs, have skyrocketed. Global shortages of container ships and supplies from China have resulted in shipping and manufacturing delays. Miller may pass some higher costs on to consumers, says CFO Stutz, but corporate contracts are more difficult to change because they typically last a year before being renegotiated.
And its core market is still in a rut: Commercial sales in North America were down 35% in the first quarter from pre-pandemic levels.
Still, investors don’t pay much to bet on the Miller-Knoll combo. At 16 times earnings, Miller’s stock is trading above its five-year average of 13, based on estimates for the next 12 months.
Rudy Yang of Berenberg Capital Markets likes the title for Miller’s growing retail presence. Higher margins in consumer sales should help offset some pressure on margins on the commercial side, he says. He also sees a bounce in office furniture lifting two of Miller’s rivals,
(SCS), assigning all three a purchase.
Craig-Hallum Capital Group analyst Alex Fuhrman believes Miller could hit $ 100 with Knoll in the mix. By 2023, he estimates the combined company will reach $ 3 billion in revenue and $ 600 million in EBITDA. That could take the stock to $ 100 at a multiple of 15 times the enterprise value for Ebitda, he estimates, although his 12-month target is $ 60.
A new trendy market: video games. Miller recently released a $ 1,600 gaming chair, co-branded with Logitech G and designed to “eliminate pressure build-up and keep you cool.” Professional players Electra and Timthetatman approved it. Stutz says the product line could be a $ 100 million opportunity.
Not bad for a desk chair for gamers to blow up zombies all day long.
Write to Daren Fonda at [email protected]