TRG | The Bottom Line – 10/28

We are in the thick of Q3’22 earnings season, that time of year in which clues about the following year come to light. This past week, HNI Corporation (HNI) earnings provided clues on both office and residential trends, a unique combination for this residential hearth and office furniture manufacturer focused on small and medium sized workplaces. Iowa—based HNI historically has been more conservative (and early) to cut costs with signs of any moderation of demand. What did the company have to say? While Workplace sales slipped 5% in Q3, Residential sales grew 16% (+10% organic). Q3 orders for Workplace fell 15% on tough comps, and Resi reversed trends, falling 6%. How does this translate to Q4’22? HNI expects Workplace sales down low teens and Resi still up low to mid-single digits. The company announced a $30MM/annum cost reduction initiative should be fully realized in 2023 and expectations are to fully recover price/cost by the end of 2022. TRG is forecasting a low to mid-teens declines in top line in FY’23, with Resi down closer to mid-teens on tougher comps and Workplace down low teens. The silver lining (and has been the trend for HNI in previous cycles) is that the macro recovery should act as a catapult to HNI earnings as sales (driven by higher volumes in both segments) will drop down to margins at a greater rate (we believe FY’24-25 timeframe). We use the term “catapult” to reflect our view that a relatively modest increase in the top-line would drive a much greater increase in the bottom line, for the margin-enhancing measures already put in place.