Herman Miller MLHR’s plans to invest in digital growth opportunities could lead to greater differentiation versus rivals. The office furniture retailer is seeking to become more efficient through combining its various brands, while a focus on cost reductions may lead to higher margins.
Although its stock price has risen 30% in the last year versus a gain of 7% for the S&P 500, it seems to offer good value for money based on its financial forecasts.
Increasing efficiency
The company’s plans to combine its various brands and businesses could lead to improved efficiency and financial performance. As part of this, Herman Miller is in the process of combining its legacy North American and Specialty businesses. This is expected to allow its sales force to more easily help customers to visualize and order products from its range of brands. It could also lead to improved customer satisfaction, since they will have greater choice and product availability in order to achieve their desired end result.
The business is transitioning from an existing distribution center in Kentucky to a larger facility in Ohio. The new facility provides enhanced technology benefits that include auto positioning and sliding optimization capabilities that are due to reduce overheads and improve the efficiency of its supply chain. The distribution center move is expected to contribute to annual run rate savings of $40 million across the business, having generated $24 million of savings in the most recent quarter.
Investing in growth opportunities
Herman Miller is investing in a frictionless customer experience in order to differentiate itself from peers. For example, it is enhancing its retail e-commerce experience through providing improved functionality and new visualization tools as it expands its online presence across new brands and geographies. In addition, it has created 1,700 projects in its new proprietary visualization tool for the North America Contract business since the start of the year. This could increase customer engagement levels and lead to higher conversion rates.
The company is in the process of launching a new brand, HAY, in North America. This is part of an overall strategy to localize key products in North America in order to drive improved lead times for delivery.
In the most recent quarter, it opened new studios in California and New York, while at the same time exited an underperforming studio. In international markets, it opened eight new studios in the most recent fiscal year, with there being plans for it to further expand its estate over the long run.
Threats
The outlook for the retail furniture sector is uncertain. In the first four months of 2019, retail furniture sales declined 1% compared to the same period of the previous year. The imposition of tariffs on a variety of goods could lead to further weakness, as well as pressure on consumer disposable incomes. This could cause investors to demand wider margins of safety from retail stocks in the near term.
In response, the company’s plans to improve efficiency and reduce costs are expected to fully offset the impact of any further tariffs that are implemented in future. In addition, its international expansion plans are diversifying its operations. This could mean it is less susceptible to the outcome of trade talks between the U.S. and China, as well as a further slowdown in the domestic retail furniture sector.
In the most recent quarter, the company recorded robust demand across its North American operations. High employment levels and buoyant contract industry order growth contributed to sales growth of 9%. This suggests that its business model may be more defensive than the wider retail industry.
Outlook
The company’s plans to improve efficiency and combine its various brands could create an improved customer experience. The investment it is making in digital growth and in expanding internationally may act as growth catalysts in an evolving retail environment.
In the next fiscal year, the stock is forecast to record a rise in earnings per share of 13.3%. With a price-earnings ratio of 16.8, it seems to offer good value for money. Even though the stock has beaten the S&P 500 in the last year, it has a wide margin of safety that suggests it has investment appeal.
Disclosure: the author has no position in any stocks mentioned.
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