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WIKI ANALYSIS
With $2.1 billion in global sales, an installed base of $8 billion in the US and 12% of the industry's market share, Herman Miller(Nasdaq: MLHR) is the third largest player in the office furniture industry[1]. In addition to selling office furniture worldwide, the company also produces interior furnishings for health care facilities, schools, and homes. With a strong emphasis on research and development, the company is recognized as an innovator in furniture design[2].
Although Herman Miller Revenue has grown 16% from fiscal 2006 to 2008, the company faces strong economic headwinds. Herman Miller’s performance, like the entire office furniture industry, is highly dependent on US commercial activity[3]. With declining levels of nonresidential construction, white collar employment, and office occupancy stemming from the 2007 subprime crisis, orders and shipments of US office furniture are expected to decline by 6.3% in 2009[4]. Herman Miller is attempting to weather this downturn by expanding into international markets and other product lines, while maintaining its competitiveness by reducing fixed costs. Nevertheless, with 60% of revenues generated from the US office furniture industry[5] and commodity prices remaining elevated, Herman Miller's management expects quarterly earnings to decline by approximately 34% in Q1 of fiscal 2009[6].
Business Overview
Herman Miller designs and manufactures furniture for office, health care, educational, and residential settings. As of fiscal year 2008, ending May 31, 2008, 70% of the company’s sales were made through 151 independent dealers in the US[7] and several other independent dealers internationally. The other 30% was sold either directly to government institutions and major corporations or through company owned distribution networks [8].
Despite falling demand for US office furniture from 2005 to 2008,[9], Herman Miller has grown revenue by 16% by increasing sales in international markets and non-office related furnishings. Simultaneously, the company has increased profit margins from 5.73% to 7.57% by reducing expenses. Because MLHR pays designers through sales-based royalties[10]. and partially compensates all 6,292 full-time employees by company performance[11], the company's expenses are partially dependent on sales. Therefore, as US office furniture demand has declined, so has the company's expenses. This sales-based cost structure has buoyed margins from declining US office sales.
Business and Financial Metrics
For the fiscal year 2008, revenue grew by 4.9% from $1,918.9 million to $2,012.1 million[13]. Growth in revenue has primarily been driven by international sales. For fiscal 2008, these sales rose by 18%, resulting in international sales representing 24% of total sales[14]. The company’s international sales have also contributed to revenue growth through favorable exchange rates. The depreciation of the US Dollar in fiscal 2008 positively impacted revenue by $27 million as international products priced in foreign currencies yielded more dollars. Additionally, the company’s acquisition of Brandrud, a health care furniture manufacturer, in fiscal 2008 increased revenues by $2.7 million[15]. At the same time, operating income has increased 24.5% from $198.1 million in fiscal 2007 to $246.6 million in fiscal 2008[16]. Growth in income has resulted from both sales growth and operating efficiency.
Business Segments
North American Furniture Solutions
The North American Furniture Solutions segment sells work-related furniture throughout the US, Canada, and Mexico[18]. Because the company is expanding into the US domestic health care furniture market and non-US North American markets, the North American Furniture Solutions segment's share of total revenue has only declined 3% over the past five years[19], despite the push for diversification by the company.
In fiscal 2008, the segment's revenue grew $72.7 million or 4.7% from $1,636.3 million in 2007[20]. Double digit growth in Mexican, Canadian, and health care sales was the primary driver of revenue growth in the fiscal year. On the other hand, revenue growth for US office furniture, representing 60% of total revenue[21], generated growth of only 2.8% due to weakening US economic activity[22]. The segment’s revenue growth and the company’s expense saving measures resulted in a 21% increase in operating income from 10.3% of sales in fiscal 2007 to 12% of sales in fiscal 2008[23].
Non-North American Furniture Solutions
The non-North American Furniture Solutions segment manufactures and sells MLHR furniture products outside of North America. Herman Miller has customers in over 100 countries with the UK and Japan having the largest customer base[24].
Revenue for this segment increased to $323.5 million in fiscal 2008, up from $278.5 million[25]. This 16.2% increase was driven largely by a 17.5% increase in sales in the United Kingdom and a 26.8% increase in the Asia/Pacific region. Concurrently, the company's operating income increased 64% from 10.4% of sales in fiscal 2007 to 14.6% of sales in fiscal 2008[26].
Other
Besides miscellaneous research and design expenses, the company’s “other” category consists primarily of the residential furniture and Convia businesses[27]. Convia, a new product line initiated in 2006, is an instrument built into the building infrastructure that controls the power, environment and data flow of the entire building[28].
The segment’s revenue was $52.3 million in fiscal 2008, a decline of 47% from the previous year[29]. The reduction in sales was primarily due to the loss of $20.4 million from OEM, a former subsidiary of MLHR that was sold in 2008[30].
Trends and Forces
Weakening Economic Conditions are Adversely Affecting MLHR’s US Office Furniture Sales
Because buyers rarely upgrade their products, demand for office furniture is driven by business expansion. Therefore, office furniture sales are highly dependent on nonresidential construction, vacancy rates and white collar employment levels[31]. Because of the recent economic turmoil stemming from the 2007 subprime crisis all of these macroeconomic forces have begun to weaken. As of the second quarter of 2008, unemployment levels have risen to 5.7%[32], non-residential construction growth has declined to 0.8%[33] , and the office vacancy rate has risen for the second consecutive quarter to 13%[34]. The Business and Institutional Furniture Manufacturer’s Association forecasts these negative trending economic fundamentals will cause orders and shipments for US office furniture to decline 6.3% in 2009[35].
Herman Miller Positions Itself in the Chinese Market
As US office furniture demand growth has declined from 2005 to 2008, Herman Miller has focused on achieving geographical diversification to sustain revenue growth. In the past few years, Herman Miller has heavily invested in growing Asian markets, specifically China. With a rapidly growing office furniture market valued at $2.5 to $3 billion, China is a vital driver for international growth[36]. In 2007, the company opened a new commercial headquarters in Shanghai, China [37], and in 2008, MLHR forged a strategic alliance with Hong Kong POSH, a local furniture designer for increased access to Asian markets[38]. By expanding into international markets like China, Herman Miller hopes to generate 50% of annual growth from outside the North American office furniture market by 2010[39].
Rising Raw Material Costs Will Reduce MLHR's Margins
Because of massive demand from emerging economies, the prices of all major raw materials used in Herman Miller’s manufacturing have risen considerably over the past year. As of mid 2008, the price of steel, plastic, and aluminum have risen by 40%[40], 20%,[41] and 40%[42], respectively. Since the company’s procurement of raw materials occurs through long term fixed-price contracts, the company was able to negotiate contracts before the rise in commodity prices for fiscal 2008. Consequently, rising input costs only increased operating expenses by $3 million for that year[43]. However, MLHR management expects most of these contracts to be renegotiated in the first quarter of fiscal 2009 at much higher price levels. Therefore, Herman Miller projects operating expenses to increase by at least $12 million in fiscal 2009[44]. In order to offset the rising cost of raw materials, the company plans to increase prices on all furniture products by 4%. Because increasing prices may adversely affect sales, the company expects operating margins to decline from 34.7% in fiscal 2008 to approximately 33% in 2009[45].
Herman Miller's Introduction of Convia Presents a Long Term Growth Opportunity
Introduced in November 2006, the Convia Programmable Infrastructure is a new product line by Herman Miller. Built directly into the building infrastructure, Convia’s programmable electrical system is supposed to be a more flexible, and cost effective alternative to hardwired switches, lighting, and other electrical devices, increasing energy efficiency by 6% to 30%[46]. Herman Miller speculates that the global market for programmable electrical systems for commercial buildings can eventually grow to $8 billion[47].
Competition
Herman Miller resides in a fragmented and highly competitive office furniture industry. The company believes its primary competitive advantage lies in its focus on research and development to create innovative furniture products[48]. With office furniture demand moderating from a weakening US economy, pricing competition between office furniture companies has escalated. If Herman Miller can continue to successfully innovate, the company can still compete against lower cost producers. In addition, the company’s sales-based cost structure will be advantageous in pricing competition as operation costs will concurrently decline with sales. Nevertheless, the company faces significant competitive challenges. While the company has focused on diversification, the company’s primary business, US office furniture, has lagged the industry. In fact, US office furniture shipments grew 3.5% in the twelve month period ending May 2008 compared to MLHR’s net sales growth of only 2.8%[49]. Herman Miller is also facing stiff competition from abroad. Many of the company’s major competitors are also simultaneously positioning themselves in foreign markets. HNI Corporation and Steelcase have already acquired local manufacturing companies that have established distribution networks in China and the rest of Asia[50] [51].
- Steelcase (SCS) designs and manufactures office furniture and other complementary products like lighting and infrastructure. The company retains the largest market share of office-related furniture in the world and competes with Herman Miller through a greater supply chain and a more expansive distribution network[52].
- HNI Corporation (HNI) also manufactures office-related furniture. Although HNI competes with Herman Miller for both contract sales to large corporations and commercial sales to independent dealers serving small businesses and home office users, each company has a different focus. Herman Miller primarily pursues contract sales while HNI pursues commercial sales[53].
- Kimball International (KBALB) provides products and services for both office furniture and electronic contract assemblies. Kimball mainly competes with Herman Miller's wood furniture product lines[54].
| Company | Total Revenue ($M) | Sales Growth (Loss) from FY06 | Profit Margin" | Net Income($M) |
| Herman Miller | 1,918 | 10.5% | 10.3% | 198.1 |
| Steelcase | 3,420 | 10.4% | 3.9% | 133.2 |
| HNI | 2,108 | (4%) | 4.7% | 120 |
| Kimball International | 1,287 | 16% | 1.8% | 23 |
Note: Financial Data from Fiscal Year 2007
Although Steelcase has the largest market share of the industry, the company's share of total revenue has declined steadily over the past decade. Concurrently, the market shares of Herman Miller and HNI have increased.
| Company | Market Share of US Office Furniture Industry |
| Steelcase | 17% |
| HNI | 16% |
| Herman Miller | 12% |
Note: Data from Fiscal Year 2007[55]
References
- ↑ MLHR Corporate Profile
- ↑ MLHR 10-K Item 1: Business, pg 4
- ↑ "Herman Miller, Inc. Morningstar Analyst Report." Morningstar. July 10, 2008.
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 20
- ↑ MLHR Corporate Profile
- ↑ Herman Miller Reports Fourth Quarter Sales Growth of 7% and Record Earnings per Share for FY08
- ↑ MLHR Corporate Profile
- ↑ MLHR 10-K Item 1: Business, pg 4
- ↑ BIFMA: Statistics
- ↑ "Herman Miller, Inc. Morningstar Analyst Report." Morningstar. July 10, 2008.
- ↑ MLHR Corporate Profile
- ↑ [MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pg 20]]
- ↑ MLHR 10-K Item 6: Selected Financial Data, pg 16
- ↑ Fourth Quarter 2008 Conference Call
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 21
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 26
- ↑ [MLHR 10-K Note 20: Segment Operations, pg 76]]
- ↑ MLHR 10-K Note 20: Operating Segments, pg 75
- ↑ MLHR 10-K Note 20: Operating Segments, pg 76
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ MLHR Corporate Profile
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 21
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 26
- ↑ MLHR Corporate Profile
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ MLHR 10-K Note 20: Operating Segments, pg 75
- ↑ MLHR 10-K Note 20: Operating Segments, pg 75
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ "Herman Miller, Inc. Morningstar Analyst Report." Morningstar. July 10, 2008.
- ↑ United States Employment Situation
- ↑ United States Construction Spending
- ↑ Business Takes Less Office Space Nationwide
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 20
- ↑ US Firm HNI opens Lamex Showroom
- ↑ Herman Miller 2008 Annual Report, pg 2
- ↑ Miller to Partner with Hong Kong-Based POSH
- ↑ Fourth Quarter 2008 Conference Call
- ↑ Global Steel Prices - Brace for a Correction?
- ↑ Dow Chemical Faces Reality with 20% Price Rise
- ↑ Aluminum Prices Jump to US $1.48lb, Analyst Sees Further Rises
- ↑ MLHR 10-K Item 7A: Quantitative and Qualitative Disclosures about Market Risk, pg 38
- ↑ Fourth Quarter 2008 Conference Call
- ↑ Fourth Quarter 2008 Conference Call
- ↑ New Study Shows Convia Programmable Infrastructure Offers Significant Energy Savings
- ↑ MLHR Corporate Profile
- ↑ MLHR 10-K Item 1: Business, pg 6
- ↑ MLHR 10-K Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg 22
- ↑ HNI 10-K Item 1: Business, pg 3
- ↑ SCS 10-K Item 1: Business, pg 9
- ↑ SCS 10-K Item 1: Business, pg 5
- ↑ HNI 10-K Item 1: Business, pg 6
- ↑ KBALB 10-K Item 1: Business, pg 7
- ↑ MLHR Corporate Profile
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