TRG | The Bottom Line – 12/1

TRG this week conducted meetings with institutional investors in Boston with HNI Corp. (HNI). Meetings this week highlighted the margin expansion story in the midst of fairly stagnant volumes. We believe the thesis is legitimate and YTD results are validating this. Margins should improve further when people (tenants in offices and homeowners) start moving around more. Despite the stock being up 30% YTD, TRG believes the positive factors in the story are not fully priced in. Workplace is in the early stages of an attractive margin expansion story and believe HNI’s Workplace is positioned favorably given its customer exposure to SMBs. Notably, smaller cities have largely returned to the office and occupancy is largely back to pre-pandemic levels. Smaller cities have also benefitted as many people in large urban areas have left those cities in recent years. Management expects margins to reach the high-single-digit zone at the current volume level. Resi sales are down on tough comps and a slow market (sales evenly split between new construction and R&R). New construction has outperformed Resi much of this year. With SF starts data stabilizing and rising starting mid-23, HNI expects better results in the coming quarters and could show growth in 2024. R&R is fairly tied to housing turnover, and given the higher rates and consumer concerns, management is expecting somewhat flattish sales next year. Note that Resi margins are bottoming (at a still solid) ~17% this year and expect improvement into calendar 2024.