Barchart.com’s volume leaders on Wednesday morning suggest office furniture manufacturer Steelcase (SCS) is in for a massive day. Up 27% with 2.77 million shares traded -- 5x its 30-day average -- the company’s shares are now above $1o for the first time in a year.
While the FOMO trade appears dialed in, investors should think twice before jumping on the bandwagon. Steelcase’s share price was in single digits over the past year for a reason.
Here’s my two cents on the subject.
Good Guidance Setting Up Nice Rally
The big focus of Steelcase’s quarterly results was the company’s adjusted earnings per share guidance for fiscal 2024 (February year-end). It expects to earn $0.85 at the midpoint of its outlook, 52% higher than its per-share profit in fiscal 2023.
“Based on the strength of our first half results and current market conditions, we expect our full-year adjusted earnings to finish above the target we set at the beginning of the year,” said CEO Sara Armbruster.
More important than the 52% increase over 2023’s adjusted EPS is that its outlook for 2024 earnings when it reported Q4 2023 results in March was $0.65 at the midpoint of its guidance. So, we’re looking at a 31% bump from six months ago.
No question, that’s a big deal. However, we don’t know if the March projection was intentionally conservative, and its sales and backlog remain in neutral, suggesting the EPS bump had more to do with cost savings and cost-cutting than actual margin expansion.
Let’s consider each of those.
Conservative projection: The analyst estimate for Q1 2024 was $0.19 a share. Steelcase delivered $0.31, 63% higher. The company’s guidance in June called for EPS of $0.21, two cents higher than the analyst estimate. However, it’s important to note that only one analyst is currently providing an estimate for the stock. That’s hardly a quorum.
“Through the first half of the year, we expect to be ahead of pace on achieving our fiscal 2024 financial targets in part due to better than expected results from our large corporate customers,” Armbruster said in its Q1 2024 press release.
In June, it knew it had an excellent chance to achieve its 2024 EPS outlook of $0.55 to $0.75 a share, yet it chose to stay the course of its previously stated guidance. The one analyst followed along.
It expects to report adjusted EPS of $0.25 in Q3 2024, 25% higher than its actual result a year ago. For the full year, as the CEO said in its second quarter press release, it will finish the year above the $0.55 to $0.75 target it set in March, somewhere between 80 and 90 cents.
Given that it’s updated its 2024 guidance, I suspect Steelcase won’t deliver a 48% beat on its estimate for Q3 2024 as it did in the second quarter.
Cost Savings and Cutting: In the second quarter, Steelcase’s gross margin was 33.2%, 41o basis points higher than a year ago. Its Americas profitability improvement was outstanding, driving a 430 basis-point increase in the quarter. The higher gross profit margin had to do with an $80 million contribution from higher prices, offset by lower volume.
As for operating expenses in the quarter, they accounted for 27.6% of revenue, 190 basis points higher than Q2 2023. Its International segment needed help reigning in operating expenses in the second quarter. They accounted for 34.3% of revenue, 550 basis points higher than a year earlier. As a result, its operating loss was nearly double to $19 million.
So, Steelcase’s profit improvement was almost solely based on price increases. It’s not going to be able to keep doing that.
Over the past five years, SCS stock hit a high of $23.02 in December 2019. Its gross margin for fiscal 2020 was 32.6%, below where it is today.
So, once inflation goes away, it won’t be able to justify higher margins.
The Bottom Line
The company’s backlog at the end of the second quarter was $700 million, 26% lower than in Q2 2023 and 2% higher than in Q2 2022. So, it's moving sideways when it comes to growing its business.
In Q2 2024, its revenue was $854.6 million. In Q2 2022, it was $724.8 million, a two-year growth rate of 18%, with most of the growth in 2023.
Investors should ask: Is this as good as it gets? The answer is a resounding yes.
Steelcase has a 10-year annualized total return of -1.6%. That is almost 14 percentage points worse than the SPDR S&P 500 ETF Trust (SPY).
Today’s jump is likely a dead cat bounce. Take a pass on SCS stock.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
