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Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

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<h2>KEY POINTS</h2>
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<ul>
<li>Steelcase reported results for its 1QFY23 quarter ending May 27 in June. Quarterly results were better than expected, ending a string of three consecutive quarters that were just in line or disappointing.</li>
<li>Consolidated revenue grew 33% Y/Y to $740.7 million, $53.3 million better than our estimate. Organic revenue growth was impressive across all three operating segments—up 38.2% in the Americas, 36.5% in EMEA, and 13.2% in the smaller Other segment. Overall, organic revenues grew by 35.3% in 1QFY23.</li>
<li>Incoming order growth remained strong, up 27% organically in 4QFY22, with growth across the three reporting segments. Order growth was strongest in the Americas segment, outpacing the US industry order growth rate reported by BIFMA.</li>
<li>On the earnings line, Steelcase reported an adjusted loss per share of $0,10, better than consensus of $(0.19) and the Water Tower Research estimate of $(0.20).</li>
<li>Guidance for 2QFY23 was modestly disappointing. Revenue forecasts were roughly in line at $875 to $900 million. Adjusted EPS guidance was a range of $0.11to $0.15, below the then-current consensus of $0.23 and below our estimate of $0.29.</li>
<li>The variance in guidance lies primarily on the gross margin line. Steelcase has instituted price hikes that it expects will recapture the bulk of $85 million in margin lost to inflation. On its July 20 call, management said that it believes margin recapture will be weighted to 2HFY23.</li>
<li>We now project $878.3 million in revenue and $0.09 in adjusted earnings in 2QFY23. For FY23, we project $3.393 million in revenue and $0.30 in adjusted EPS.</li>
<li>The investment case for Steelcase and its peers rests on the credibility of the forecasts. Steelcase, as well as the other major players, are seeing robust order growth and a solid backlog. The stocks, however, are priced for an industry recession, roughly 30%-50% under median historical valuation metrics. More commentary below.</li>
</ul>
<h2>ESTIMATES</h2>
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<h2>COMPANY OVERVIEW</h2>
<p>Steelcase is one of America’s great companies. Named 15 times by&nbsp;Fortune Magazine&nbsp;as one of the world’s most admired companies, Steelcase is a global market share leader for commercial/contract furniture. Its global capabilities and research-based approach make it a preferred partner for organizations in any part of the world.</p>
<p>Steelcase defines its purpose as “Unlocking human promise by transforming work, worker and workplace.” In this way, the company affirms its mission to the workplace. Today, the company’s family of brands includes Steelcase®, Coalesse®, Designtex®, Smith System®, AMQ®, Turnstone®, and Orangebox®.</p>
<p>The Steelcase growth strategy is to translate research-based insights into products, applications, and experiences. Today, Steelcase goes to market through ~800 independent and company-owned dealer locations (~400 in its Americas segment, ~340 in its EMEA segment, and ~60 in its Other segment). The company has 65 locations in 17 countries, 15 of which are dedicated to manufacturing (seven in the Americas, five in EMEA, and three in the Other segment).</p>
<h2>VALUATION</h2>
<p>Steelcase is trading at the low end of its historical valuation ranges. We suspect that is the result of caution, indeed, a degree of skepticism about two issues.</p>
<p>First, will demand remain robust through the remainder of the year? What effect could a recession have on office demand? Management at Steelcase continues to see solid interest and strong orders. The need to accommodate workers returning to the office and redesign the office space for a new hybrid office/home office work routine is driving meaningful corporate customer traffic. So far, the threat of recession has not affected Steelcase’s market. We have no crystal ball to tell us how this issue will resolve by the beginning of calendar 2023.</p>
<p>Second, can Steelcase margins recover? The company lost about $85 million in margin dollars to inflation and supply chain issues and is seeking to recover $50 million to $60 million of that with announced price increases. Management expects most of that recovery to be weighted to the year’s second half. Guidance for 2QFY23 assumes about $10 million of pricing benefits, net of inflation. The remainder waits for the second half. Supply chain issues appear to be moderating, and inflationary pressures are easing.</p>
<p>With those uncertainties in mind, we present two valuation charts to provide some perspective on the stock valuation now relative to historical levels.</p>
<p>The forward earnings valuation stands at about 10.4x the out-year estimate, which we believe more closely represents the earnings power of the company with solid demand and full margin recovery. The five-year average forward estimate is about 18x and the median is about 20x. On that basis, SCS is 40% to 50% below historical norms.</p>
<p>The case is less obvious on a forward EV/EBITDA. SCS is at about 10.1x on that metric, a discount of about 30% discount to its five-year average forward metric of 14.7x and 37% relative to the median of 15.8x.</p>
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<p>Figure 1: Steelcase, Inc. Consolidated Income Statement Model</p>
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<p>Figure 2: Steelcase, Inc. Balance Sheet Model</p>
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<p>Figure 3: Steelcase, Inc. Cash Flow Model</p>
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<h2>DISCLOSURES</h2>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Budd Bugatch and Rex Henderson, CFA who are the writers of this report, covers the Consumer sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS


Steelcase reported results for its 1QFY23 quarter ending May 27 in June. Quarterly results were better than expected, ending a string of three consecutive quarters that were just in line or disappointing.
Consolidated revenue grew 33% Y/Y to $740.7 million, $53.3 million better than our estimate. Organic revenue growth was impressive across all three operating segments—up 38.2% in the Americas, 36.5% in EMEA, and 13.2% in the smaller Other segment. Overall, organic revenues grew by 35.3% in 1QFY23.
Incoming order growth remained strong, up 27% organically in 4QFY22, with growth across the three reporting segments. Order growth was strongest in the Americas segment, outpacing the US industry order growth rate reported by BIFMA.
On the earnings line, Steelcase reported an adjusted loss per share of $0,10, better than consensus of $(0.19) and the Water Tower Research estimate of $(0.20).
Guidance for 2QFY23 was modestly disappointing. Revenue forecasts were roughly in line at $875 to $900 million. Adjusted EPS guidance was a range of $0.11to $0.15, below the then-current consensus of $0.23 and below our estimate of $0.29.
The variance in guidance lies primarily on the gross margin line. Steelcase has instituted price hikes that it expects will recapture the bulk of $85 million in margin lost to inflation. On its July 20 call, management said that it believes margin recapture will be weighted to 2HFY23.
We now project $878.3 million in revenue and $0.09 in adjusted earnings in 2QFY23. For FY23, we project $3.393 million in revenue and $0.30 in adjusted EPS.
The investment case for Steelcase and its peers rests on the credibility of the forecasts. Steelcase, as well as the other major players, are seeing robust order growth and a solid backlog. The stocks, however, are priced for an industry recession, roughly 30%-50% under median historical valuation metrics. More commentary below.

ESTIMATES

COMPANY OVERVIEW
Steelcase is one of America’s great companies. Named 15 times by&nbsp;Fortune Magazine&nbsp;as one of the world’s most admired companies, Steelcase is a global market share leader for commercial/contract furniture. Its global capabilities and research-based approach make it a preferred partner for organizations in any part of the world.
Steelcase defines its purpose as “Unlocking human promise by transforming work, worker and workplace.” In this way, the company affirms its mission to the workplace. Today, the company’s family of brands includes Steelcase®, Coalesse®, Designtex®, Smith System®, AMQ®, Turnstone®, and Orangebox®.
The Steelcase growth strategy is to translate research-based insights into products, applications, and experiences. Today, Steelcase goes to market through ~800 independent and company-owned dealer locations (~400 in its Americas segment, ~340 in its EMEA segment, and ~60 in its Other segment). The company has 65 locations in 17 countries, 15 of which are dedicated to manufacturing (seven in the Americas, five in EMEA, and three in the Other segment).
VALUATION
Steelcase is trading at the low end of its historical valuation ranges. We suspect that is the result of caution, indeed, a degree of skepticism about two issues.
First, will demand remain robust through the remainder of the year? What effect could a recession have on office demand? Management at Steelcase continues to see solid interest and strong orders. The need to accommodate workers returning to the office and redesign the office space for a new hybrid office/home office work routine is driving meaningful corporate customer traffic. So far, the threat of recession has not affected Steelcase’s market. We have no crystal ball to tell us how this issue will resolve by the beginning of calendar 2023.
Second, can Steelcase margins recover? The company lost about $85 million in margin dollars to inflation and supply chain issues and is seeking to recover $50 million to $60 million of that with announced price increases. Management expects most of that recovery to be weighted to the year’s second half. Guidance for 2QFY23 assumes about $10 million of pricing benefits, net of inflation. The remainder waits for the second half. Supply chain issues appear to be moderating, and inflationary pressures are easing.
With those uncertainties in mind, we present two valuation charts to provide some perspective on the stock valuation now relative to historical levels.
The forward earnings valuation stands at about 10.4x the out-year estimate, which we believe more closely represents the earnings power of the company with solid demand and full margin recovery. The five-year average forward estimate is about 18x and the median is about 20x. On that basis, SCS is 40% to 50% below historical norms.
The case is less obvious on a forward EV/EBITDA. SCS is at about 10.1x on that metric, a discount of about 30% discount to its five-year average forward metric of 14.7x and 37% relative to the median of 15.8x.


Figure 1: Steelcase, Inc. Consolidated Income Statement Model

Figure 2: Steelcase, Inc. Balance Sheet Model

Figure 3: Steelcase, Inc. Cash Flow Model

DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Budd Bugatch and Rex Henderson, CFA who are the writers of this report, covers the Consumer sector for WTR. Mr. Bugatch and Mr. Henderson, CFA including members of their household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Updating Earnings Estimates for 2QFY23 and FY23; Review of Strengths and Challenges Facing Steelcase in the Near and Intermediate Term

Steelcase Inc Cl A

Updating Earnings Estimates for 2QFY23 and FY23; Review of Strengths and Challenges Facing Steelcase in the Near and Intermediate Term