TRG | The Bottom Line – 9/22

Steelcase had a strong quarterly report this past week (the ole beat and raise), taking EPS guidance up to $0.80-0.90 (from $0.55-0.75). This caused the stock to pop nearly 20% the day following results, and that gain has increased a bit further in the days following. While recent and near-term results are benefitting from the burning off of excess backlog that contains past pricing actions, which is driving higher gross margins, the future results will be more dependent on incoming orders. Orders have been down ~7-8% YOY in each of the last three quarters, which we find encouraging as it shows companies’ willingness to spend on offices amidst an uncertain macro backdrop. This stabilizing pattern comes from: 1) more companies mandating employees be in the office more often, and 2) growth in continuing business activity (smaller office refresh spending) vs. project orders declining. We are modeling that this stability lasts another 2-4 quarters, before showing YOY growth. Since Steelcase has caught up on price-cost and taken dramatic cost saving actions, volumes rising should drop through nicely to earnings. SCS is one of the few potential COVID-recovery plays remaining (current stock is 46% below its pre-COVID quote).