Steelcase (SCS, Financial) is experiencing a sell-off today, despite surpassing Q2 (Aug) earnings estimates. The global commercial furniture manufacturer, which serves office, hospital, and educational markets, fell short of analyst revenue expectations. However, the primary reason for the sell-off is SCS's disappointing Q3 (Nov) revenue guidance. While management remains optimistic about year-over-year order growth from its largest customers in the second half of FY25 (Feb), investors are skeptical due to projected turbulence over the next three months.
- Q2 Highlights:
- Adjusted EPS surged 25.8% year-over-year to $0.39, the best since 2020.
- Gross margin improved for the ninth consecutive quarter, thanks to cost reduction initiatives like moving production lines and closing a distribution center.
- Revenue edged up 0.1% year-over-year to $855.8 million, slightly below the midpoint of SCS's forecast of $850-875 million.
- Order growth in the core Americas region climbed 3% year-over-year, driven by robust demand from the education segment, particularly the Smith System business, which grew 18% year-over-year.
- Challenges:
- Soft large customer orders impacted Q2 growth and are expected to continue into Q3.
- International business remains weak, with an 11% drop in orders year-over-year in Q2, except for India.
- Q3 Outlook:
- Revenue is projected to be $785-810 million, translating to 1-5% organic growth year-over-year.
- Expected adjusted EPS of $0.21-0.25 indicates a year-over-year contraction.
- For FY25, SCS reiterated adjusted earnings guidance of $0.85-1.00, highlighting ongoing benefits from cost reduction actions.
SCS's Q2 report was solid, but its Q3 revenue estimate raised concerns. When questioned about the expected rebound in orders from larger customers over the next two quarters, SCS explained that orders anticipated in Q2 were delayed to the latter half of the year. While this is less troubling than outright cancellations, these delays create uncertainty. The stock, which had gained over 55% since September 2023, was vulnerable to a pullback amid this uncertainty.
Additionally, keep an eye on peers MillerKnoll (MLKN, Financial), which reports AugQ results today after the close, and HNI (HNI, Financial), which is scheduled to report SepQ results next month.
