The Steelcase (NYSE:SCS) Investment Thesis Falls Apart

Steelcase Not Participating In Furniture Rebound

 The furniture market is booming, at least on the residential end, and that is driving shares of stocks like La-Z-Boy (NYSE:LZB), Lovesac, (LOVE) and RH (NYSE:RH) to new highs. And that’s the problem for Steelcase (NYSE:SCS). Residential furniture is booming but Steelcase deals more in industrial-use furniture than anything else. Earlier in the year, over the summer, it looked like the stock was rebounding and presented a nice value-opportunity for dividend investors. Now, a quarter later, even with adjustments for one-off events, that thesis is falling apart.

To be fair, the company experienced a massive cyberattack that impacted its operations globally. The cyberattack was centered on the EMEA segments and lead to operational shutdowns and delayed deliveries of orders. Even so, the delays only account for about 6.0% of the 35.4% decline in quarterly revenue.

 Mixed Results For Steelcase And Weak Outlook Drive Shares Lower

Steelcase reported a mixed quarter to be sure. The cyberattack shaved $60 million off of the top-line revenue or more than enough to make the company miss consensus estimates. Adding that back into the mix the company would have reported closer to $670 million or more than enough to beat the consensus by a wide margin. Regardless, the $617 million reported is down on a sequential basis with the YoY revenue decline accelerating. Weakness was centered in the Americas with a 40% decline in revenue. EMEA and Other segments declined by 20% and 29% respectively.

The shutdowns also contributed to a large decline in gross margins. Gross margins shrank by 430 basis points to 28.8% on deleveraging of fixed costs, higher costs related to COVID, as well as the cyberattack. Moving down to the bottom line results are a little better. The company has been working hard to control costs and mitigate the effects of COVID and that is seen in the earnings. The Q3 GAAP earnings came in at $0.02 or $0.07 better than consensus while adjusted EPS of $0.08 beat by a nickel. 

Looking forward, investors should not expect much of a rebound despite optimistic comments from management. The company’s new orders fell -39% for the quarter and do not indicate a resurgence of business. The company backlog is down -15% YOY and that includes the $60 million in delayed shipments recorded in the revenue adjustments. That $60 million is worth 12% of the backlog by itself. Factoring that out of the equation the back is closer to $485 million or about 25%.

"With the early stages of vaccine deployment beginning, some customers are reactivating idled project opportunities so they will be ready to return to their offices next year," says president and CEO Jim Keane.

The Dividend Is Safe, For Now

One of Steelcase’s attractive features is the dividend. The stock yields more than 3.0% with prices near $13 and the balance is rock solid. The company has more than $462 million in cash and liquid securities with very little debt and low leverage. The cash works out to about $4.65 per share but there is a free-cash-flow issue. Free cash flow is tight and the company’s own guidance isn’t favorable in that regard. The company is expecting earnings to be near break-even in the coming quarter and that may be optimistic. With COVID still rising we’re looking at more disruption before the industrial furniture market really bounces back.

The Technical Outlook: Steelcase Falls From Resistance

Shares of Steelcase fell more than 7.0% after the 3Q release confirming resistance at the top of the trading range. The move has the shares below the short-term EMA where bears may take control of the price action. The indicators are mixed but 1) are divergent from the recent high and 2) confirm resistance at this level. In the near-term shares of Steelcase may continue to move lower with the $12 and $10 levels targets for potential support. In the long-term, this stock will likely remain range-bound until a more-positive outlook develops for the commercial market.