Steelcase moves higher on pricing power

Steelcase (NYSE: SCS), a maker of office and industrial purpose furniture, has been struggling over the past few years but those times are changing. Postponed demand and a return to in-person operations at many businesses have reinvigorated the company and have it set up to outperform in 2022. The latest results show that not only is the demand coming back, but pricing power is offsetting inflationary pressures and that is great news for the dividend. Steelcase is among the highest-yielding stocks in the furniture industry and it is on track for distribution increases next year if not this year. With shares trading at the lowest levels since the pandemic began, we can’t help but think this is a comfortable time for income investors to get into the name.

"Inflationary pressures continued to grow this quarter across a number of commodities, and we responded by announcing our fifth price increase over the past 16 months, to be effective in July," said CFO Dave Sylvester. "In addition, we recently announced a surcharge in the Americas in response to rapidly increasing costs of petroleum-based products, freight and delivery, and we have been slowing incremental spending to help offset some of the cost-price timing lag."

Steelcase outperforms consensus in fiscal Q1

Steelcase had a robust quarter driven by a strong beginning backlog, pricing power, and new orders. The company reported $740.7 million in net revenue for a gain of 33.15 over last year which beat the consensus by 720 basis points. The gains were underpinned by a 38% increase in the Americas offset by a smaller 27% gain in the EMEA region. In both cases, new orders are up at least 19% and indicate strength should continue into the coming quarter at least.

Moving on to the margin, the news is mixed but much better than expected. The GAAP margin contracted by 190 basis points due to the impact of inflation but internal efforts to mitigate those costs trimmed 640 basis points off the operating expenses. This left the GAAP earnings in negative territory at -$0.05 but these results are $0.13 better than consensus and cut the prior year’s loss by 80%.

Looking forward, the company says its backlog is up 52% from last year and includes a high number of orders slated for delivery in follow-on quarters. This should drive YOY revenue growth in the fiscal 2nd quarter to 21% to 24% and we see some potential for upside surprises. With supply chain and freight issues showing some signs of improvement, there is a real chance that delayed revenue from prior quarters will be recouped faster than expected.

Steelcase dividend is comfier than it looks

Steelcase pays a high 5.5% yield that looks a little iffy at face value. The payout is not only less than the TTM earnings but the consensus for FY23 is only slightly better at roughly 100% of the payout. The takeaway is the company has a solid balance sheet, positive adjusted EBITDA, and an outlook that includes not only a chance for outperformance this year but an expectation for EPS to double in the following year. In this scenario, we aren’t expecting any dividend increases this year but see no reason why the company won’t keep paying the current distribution. In regard to the balance sheet, the company is net debt but leverage is low, debt is down slightly YOY, and there is still ample cash on the books.

The technical outlook: Steelcase confirms bottom

Shares of Steelcase have been struggling over the past two years but appear to have confirmed the bottom. Price action retreated to the $10.20 just prior to the earnings release and now it is moving higher. Assuming that this move has legs, we see the price action trending higher and up to the top of the range near $16 and possibly by the next reporting season. If not, price action may continue to wallow at the current level until there is more clarity on supply chain issues, inflation, and the economy.


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