Steelcase Cost Reductions Drive Results
At first glance, Steelcase (NYSE:SCS) might seem like a great pandemic stock. It’s a furniture maker, after all, and the furniture industry is booming from strong home-improvement demand. Aaron's Inc (NYSE:AAN), recently guided its 3rd quarter higher and above consensus lifting just about every other name in the business. A slightly deeper look reveals Steelcase to be a maker primarily of industrial-use furniture, furniture for businesses that is, which answers the question of why is business not rebounding.
The company has seen an improvement in business from the prior quarter but not enough to regain last years strength. This is a concern but may not matter in light of recent cost saving initiatives. Teh company too the bull by the horns and enacted a series of drastic measures that helped boost results in the 2nd quarter. Among them a major work-force reduction to include early retirements, voluntary and involuntary separations. The move incurred some expense but it’s non-recurring and largely water under the bride at this point. The savings, however, are long-term in nature and set the company up not only for profitably operations but profit growth this year and next.
Steelcase Results Top Consensus
Steelcase reported a near -18% decline in YOY revenue but topped consensus by $36 million or 4.6%. Revenue was supported by a strong back log but that can’t be counted on in future quarters. The back log was up 11% on a YOY basis due to pandemic-related closures of manufacturing facilities. Orders fell 32% in the quarter but show positive improvement on a month to month basis falling 37% in June but only 22% in August.
"Our year-over-year order decline rates have moderated for four consecutive months, but the continued high level of COVID cases in the Americas has delayed our customers' return to the office and suppressed demand levels. In EMEA and Asia Pacific, our order patterns have improved and our opportunity pipelines are increasing as many workers have returned to the office in those markets,” said Jim Keane, presiden and CEO.
Gross margins fell 80 basis points but 50 basis points are due to restructuring costs. The restructuring costs are related to aforementioned cost-cutting efforts and will impact future quarters on a declining basis. Cost-savings are expected to top $10 million per quarter or roughly 20% of 2nd-quarter EPS. Regarding EPS, the company’s GAAP earnings came in at $0.47, adjusted at $0.55, both better than expected and up from the previous year.
The Dividend Looks Safe Enough
If not for the company’s actions to curb costs and reposition for the post-pandemic environment I might be worried about the dividend. As it stands now, the yield is running close to 4.10% and the payout ratio is very attractive. The payout ratio based on the GAAP Q2 earnings is just under 25% which makes it not only sustainable but increasable. This is important because Steelcase cut its payout as part of cost-cutting efforts early in the pandemic. At current levels, it’s about two-thirds its former value which is an easy gap to close. It’s also worth about 2.0% in terms of yield.
A Value Stock Waiting To Pop
Steelcase is not exactly a bargain if you base the valuation on the consensus figures. But that’s where the mistake is. The consensus figures are too low. The 1st half results have the company on track to surpass consensus by roughly 100% which puts the valuation more in the range of 12X earnings versus the 24X you might see listed elsewhere. Yes, business is impacted by the virus but there is the earnings picture to consider. With earnings showing such robust improvement and a dividend hike in the cards, this stock could easily grab the market’s attention and have a multiple expansion unfold.
“Based on the strength of our cash generation during the quarter, we chose to repay all of the $245 million in remaining borrowings under our credit facility which we had drawn as a precaution earlier in the year. We ended the quarter with $684 million of liquidity which supports our ability to stay invested in new solutions to drive growth in the changing workplace,” said CFO Dave Sylvester.
Today’s news has shares down nearly -15% despite the fundamental improvement to earnings. Price action appears to be finding support near the $9.50 level. Price action may fall a little further before rebounding but, in my view, this is a buying opportunity that should not be passed up.