Contemporary professional office settings manufacturer Steelcase (NYSE: SCS) ended its fiscal 2019 year with a second consecutive quarter of high-teens revenue growth. However, the company issued tepid projections for fiscal 2020 revenue and earnings expansion in the fourth-quarter report (covering the three months ended Feb. 22, 2019), which was released on Tuesday after the markets closed. We'll examine the reasons behind the middling forecast after walking through the headline numbers and important details from the last three months.
In the discussion that follows, all comparative numbers are presented against the prior-year quarter, the fiscal fourth quarter of 2018.
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Steelcase: The raw numbers
What happened at Steelcase this quarter?
- Reported revenue expansion of 18% was paced by 15% organic revenue growth (i.e., reported growth adjusted for acquisitions, divestitures, and foreign currency effects).
- All three major segments -- the Americas, EMEA (Europe, Middle East, and Africa), and "other" categories (primarily Designtex textiles, PolyVision ceramic surfaces, and the Asia-Pacific region) -- achieved mid- or high-teens revenue growth over the past three months.
- Management attributed reported revenue growth to acquisitions including the purchase of British collaborative furniture designer Orangebox, as well as recent pricing increases that were designed to offset rising commodity costs.
- Order flow remained healthy at a 5% growth rate. The Americas and EMEA booked order growth of 4% and 9%, respectively, while other categories saw new order growth of 8%.
- Steelcase's gross margin slipped by 160 basis points to 31%, which management attributed to the rising cost of sales in the Americas segment. Lower gross margin in EMEA also contributed to the overall decline. However, the company noted that the recent pricing actions more than offset the effects of climbing labor, freight, and commodity costs for the first time in three quarters.
- The company increased its quarterly dividend by 7% to $0.145, which equates to an annual yield of 3.8% at the current share price.
What management had to say
In Steelcase's earnings conference call, CEO Jim Keane discussed factors behind anticipated revenue growth in the new fiscal year:
However, in his prepared opening remarks, Keane also mentioned factors that have introduced uncertainty in Steelcase's top-line prospects, including still-unresolved trade disputes and import tariffs, and the political limbo surrounding Brexit -- which has become more pertinent for Steelcase since its acquisition of London-based Orangebox last quarter.
These uncertainties appear to be manifest in the company's fiscal 2020 projections. After achieving year-over-year organic revenue growth of 9% in fiscal 2019, Steelcase expects just 2%-6% organic growth this year, which should equal reported growth of 5.5%-9.5%.
Management expects that diluted earnings per share (EPS) will land between $1.20 and $1.35. At the midpoint, this will represent an improvement of roughly 21% over the $1.05 in diluted EPS booked in fiscal 2019. Investors were perhaps expecting a more vigorous earnings forecast, given that the company will soon initiate a third round of targeted price increases (slated to fall in the low single digits) in the first quarter of fiscal 2020.
Between muted revenue growth and a perhaps disappointing EPS target range, Steelcase shares lost nearly 14% in the trading session following the earnings filing. Steelcase stock often seems to react with heightened volatility around earnings releases, nonetheless, this most recent scorecard has wiped out much of the 18% year-to-date gains the SCS symbol had chalked up until yesterday.
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