Herman Miller showed surprising resiliency last year as offices emptied nationwide in the wake of the coronavirus pandemic.
The specter of empty offices would typically be a nightmare for a company that makes office furniture, and Herman Miller (Nasdaq: MLHR) did indeed experience a drop in companywide sales in its second quarter, ended Nov. 28, 2020. During a disruptive era when the conference room has been replaced, albeit temporarily, by video conference calls via Zoom and Microsoft Teams, HM still managed to eke out a profit and perform better than its top competitor, Steelcase (NYSE: SCS).
HM also has plans for future expansion in retail, after opening stores last year in New York City and Los Angeles, targeted, in part, to well-heeled clients who work from home.
While the office furniture industry suffered through a grueling 2020, HM was positioned to capitalize on the nationwide flight of workers from the corporate office to WFH. Slouching on the couch just didn’t cut it anymore for Americans who were stuck in their homes, tapping on keyboards for months at time. They began to spend more money on ergonomic chairs. HM sold them its classic Aeron office chairs, as well as its newer gaming chairs, including the cyberpunk-style Sayl, which was launched as the pandemic gathered steam last year.
“We’ve had a tailwind in demand because of Covid,” said Jeff Stutz, Chief Financial Officer for Herman Miller, referring to the company’s spike in sales related to WFH. “It’s been a very profitable part of our business.”
HM experienced a steep sales decline for its North American contract furniture sector, which represents its domestic B2B sales for office furniture. That’s the biggest sector of its business, and it fell 28% to $323 million in the second quarter. But overall net sales only dropped 7%. That’s because the losses were offset by a 42% surge in international B2B net sales to $135 million, and a 28% jump to $135 million in retail net sales. The retail category represents home furnishings, including chairs marketed for WFH.
“I think that HM can rightly take credit for some of this, and some of it is that we’ve been fortunate to be in the right place at the right time,” said Stutz. “We really doubled down on our belief that residential retail is an area where we can go further.”
Meanwhile, competitor Steelcase (NYSE: SCS) reported a much steeper 35% decline in revenue to $617.5 million in the quarter ended 11/27/2020, with a plunge of 97% in net income to $2.1 million. The Michigan-based office furniture maker released a report on Jan. 21, 2020, based on its own data, finding that 41% of WFH workers “frequently are dissatisfied” with the experience, and saying that 95% of them expect to return to the office “in some capacity.”
Meanwhile, Stutz said that HM has been ramping up its retail division for at least six years, selling home furnishings like lounge chairs and coffee tables, but also office chairs, to individual home consumers. When the coronavirus came along in 2020, driving millions of workers out of their offices and into their homes, HM was ready with its home office chairs.
“Herman Miller’s focus in the past few years on the retail business, which has meaningful home furnishing spending exposure, has paid off during the pandemic in a big way,” said Steven Ramsey, an analyst with Thompson Research Group.
In a note to investors, Ramsey wrote that one of his relatives had recently bought a chair from Herman Miller, “with travel being on hold and spending most days at the home desk.”
So what happens next? While WFH might represent the future, B2B isn’t going away. Of the millions of workers who abandoned their offices to WFH last year, some never looked back, but many have already returned, and more will follow. Upwork, a work marketplace based in California, released a survey in December 2020 saying that 41.8% of the workforce was still working remotely nine months after the pandemic swept through America in March, shuttering cities. According to the survey, managers believe that 26.7% of the workforce will be fully remote within a year “suggesting that individuals will gradually continue to return to the office, but a significant share will remain remote in the near future.”
This seems to suggest a split in the industry, between retail WFH and B2B, rather than the rise of one at the demise of the other. Just because WFH retail is experiencing a meteoric rise doesn’t necessarily mean that B2B will wither away. HM experienced a bump in international sales during the second quarter, rising 42% to $168 million, in contrast to its 28% slump in North American B2B sales.
Ramsey said this is a sign of economic strength in countries in mainland Europe and Asia that are “managing the health crisis fairly effectively.” He was referring to the success in controlling the spread of Covid-19 that some European and Asian nations experienced last year by imposing restrictions on cities. He said this could provide a hint of things to come if the U.S. can get the pandemic under control.
“The current environment for office furniture remains challenging in North America, but international demand is improving at a superior rate and may offer a view on what North America could look like once the virus is past,” he wrote in a note to investors.
He said that vaccinations in the U.S. are providing optimism and better sentiment as the return to offices seems “more tangible,” suggesting that the slump in demand for B2B office furniture in North America could be bottoming.
But of course, the future of office furniture remains uncertain. While the development of vaccines from Pfizer (NYSE:PFE), Moderna (Nasdaq: MRNA) and Johnson & Johnson (NYSE: JNJ) has lifted hopes for economic revival, mutated strains of the deadly coronavirus keep emerging, casting shadows over America’s pent-up demand for recovery.
HM seems to be betting that a lot more home-bound workers are going to be rolling around on gaming chairs for quite some time. But the company hasn’t given up on the office, which has shown signs of life after its pandemic hiatus, as workers begin to drift back in from their home offices in the suburbs.
“We believe the working world will include both offices and WFH, and [HM] is positioned to help companies navigate this evolution,” said Ramsey, in a note to investors.