Restoration Hardware 2Q16 Earnings Call Notes

Restoration Hardware’s (RH) CEO Gary Friedman on Q2 2016 Results

Peak and valley promotional model that evolved after 2008-2009 has been difficult to manage

” The gold membership was to eliminate the peaks and valleys in our business, which really create a havoc in the operational infrastructure. And the vendors trying to supply the goods with these peaks and valleys, ordering the goods correctly, it’s really chaotic running a business on what evolved to post 2008 and 2009, a very promotional retail environment. And yes, probably not as difficult if you are in the apparel business, right, but we are a really logistically difficult business like furniture. It’s very costly and it affects execution. So our goal was really to evolve the business to a more consistent model. And so really, we kind of went from an erratic peak and valley kind of promotional cadence to a consistent promotional cadence called membership, right”

Brands are defined as much by what they don’t sell as what they do

” So to build great brands, you have got to decide who you are and who you are not, right. Brands are defined as much by what they don’t sell, as what they do sell. And so we are going to be very disciplined this year editing and eliminating the things that we believe render the brand less clear and less valuable. ”

In furniture 100% of high end business is done on promotion because people use luxury designers

“Obviously, some consumers get into those showrooms with their interior designers. So that business is done on promotion. Designers get 25% to 40% off the business. That’s why we can’t be like a luxury brand like HERMES that has no promotions, right, because at the highest end of luxury apparel, there is no promotions. At the highest end of luxury furniture, it’s 100% on promotion. So we are now 100% on promotion.”

We are making difficult decisions but they are the ones that need to be made

“We are aligning ourselves with the highest end of the business. We have made it a membership model. We think that was the right way to thread this needle. No one has ever done this before. I appreciate all the concern and trepidations and skepticism. I mean we are – we have the same feeling, right. But we think that the decisions we are making this year for the business, while it’s pressuring short-term earnings and results, if you never make these decisions, you never actualize the potential of the business or a brand. And so we are making some tough decisions that are painful on the short-term”

The furniture business is an ugly baby but it’s our baby

“And I have always said for years, I have said being in the furniture business, it’s an ugly baby, but it’s ours, right. And so you have got to love it. You have got to care for it. But it is a tough business. And I think we now elevated this brand. We have elevated the product. We have an average ticket that is significantly higher than our competitors, right. We should be getting massively more leverage, but we are not. And we are not because we are not executing well.”

We need to fix final mile

“And I think if you look at reviews on our company online, talk to each other, you guys are customers. If I took what’s the number one complaint about RH, it’s that final mile, it’s that final delivery, it’s we screwed up. It wasn’t the same quality that you expected. And I think it’s the last piece of the puzzle to solve here. “

Steelcase FY 4Q16 Earnings Call Notes

Steelcase’s (SCS) CEO James Keane on Q4 2016 Results

Order patterns were weak in the US likely due to weak CEO confidence

“In the Americas, order patterns continued to weaken during the quarter and in fact we had a slight year-over-year organic decline. We believe some of this is related to an ongoing decline in CEO confidence which has a strong historical correlation with BIFMA order rates. I attended the recent Business Roundtable meeting in Washington along with many other CEOs across a range of industries and it’s clear there remains a general sense of uncertainty about both economic and political factors.”

CEO confidence may have ticked up

“The most recent data that I saw that I was referring to in my comments earlier would suggest that CEO confidence dropped quite a bit about a quarter ago and then it stabilized and ticked up slightly in this most recent quarter. And if you dive into the details behind that, CEOs are less confident as they look to the future about growth in employment and a little bit more confident about increases in capital expenditures. So I wouldn’t say it’s great news but at least it’s not falling, and you have kind of this mixed bag of detail underneath it”

One concern of CEOs is being able to attract the right talent to their business

“we know we’re already in a very competitive job market. One of the top issues that CEOs face is attracting the right talent to their businesses, and when that is a concern of CEOs, that’s usually also good news for the office furniture industry because that’s when people tend to make investments in their space so they can attract the kind of people they want. So we’re hopeful that we’ll continue to see that confidence rise.”

There’s economic uncertainty all over the world

“There’s economic uncertainty all over the world of course. The tragic incidents in Belgium this week only contributed to that level of uncertainty. You also have political uncertainty in many regions around the world including United States. And whenever there is uncertainty, CEOs have a hard time making longer-term decisions. So maybe that’s as much as I’ll say for now, unless you have additional questions on that.”

We are pleased with our performance in China

“I’ll talk about China. We’re very pleased as we said earlier with our performance in Asia in general and particularly our performance in India and China this past year. We’ve been giving a lot to make sure we’ve got the right products for the market. We have a manufacturing facility, as you probably know, in China that continues to grow in importance for us in the region. We have a very strong team of people that we’ve developed over the last several years.”

Evolution in China has been from Western to local companies

“And importantly, if I were to kind of think back on our evolution in China, as well as really the rest of Asia, at first we were serving a lot of companies that we know very well from Western markets, companies that might be headquartered in the Americas or headquartered in EMEA, and that has helped us get started and establish our brand and establish our footprint and do all the things we’ve done up till now. But one of the things we’ve been doing successfully in the last couple of years is making sure we are also focusing on locally headquartered companies, Chinese headquartered companies, and making sure that our products and our relationships are relevant to them, and we’re really pleased with that success.”

Maybe the seven year cycle is just an illusion

“three of us were kind of laughing at that is because we were circulating a piece internally here over the last few weeks by somebody outside the Company who wrote about how maybe the idea that the economy follows a certain cycle of seven years for example, you often hear that number thrown out, when you go back and you actually test it, it’s not so clear that it’s seven years. Sometimes it’s shorter, sometime it’s longer, and it’s always because of some factor. So maybe the whole idea of it being kind of an inevitable time-based cycle isn’t really as relevant as will we have another financial crisis, will we have a political crisis, will we have something else that could cause uncertainty and therefore growth to slow down.”

We were seeing a slowing down but now we are feeling some resurgence of confidence

“What we felt again is that we saw some signs of a slowing down in our industry over the last several quarters, particularly as we got into December and January, but now we are feeling some resurgence of confidence, at least a flattening out of that trend. So hopefully that was a moment and hopefully we’ll see some growth develop in the quarters to come.”

David C. Sylvester

Healthcare and education showed growth

“Across vertical markets in the Americas, we experienced strong order growth in healthcare and education sectors as well as our untracked sector which includes retail customers and other vertical markets not large enough to track separately. Collectively, orders from this untracked segment comprised approximately 20% of our total orders. Most of the remainder of the 10 tracked vertical markets declined compared to the fourth quarter of the prior year.”

Steelcase FY 3Q16 Earnings Call Notes

Steelcase’s (SCS) CEO Jim Keane on Q3 2016 Results

Saw reduction of revenue in Middle East

“we saw a reduction in revenue in the Middle East where many of our customers are directly affected by declining oil prices. At the same time, we saw growth in demand in Western Europe”

Dealing with business capital spending growth slowing

“In the Americas, we are dealing with two issues; first, business capital spending growth is slowing and our industry’s growth is also slowing; second, Steelcase is growing more slowly than the industry because of our customer mix and some product gaps we are working to address.”

Seeing orders from larger customers slow as is typical when the economy has slowed in the past

“Our orders grew faster than the industry in September, but by November, we were actually seeing year-over-year declines. It’s not across the board, in the past, when the economy has slowed, we’ve seen the largest customers are often the first to cut back and that’s what we’re seeing this quarter. We didn’t see the end of calendar year orders surge, we often see from some of our larger accounts. We’ve seen a reduction in large projects, both in terms of what we booked but also as we look into the pipeline of future opportunities. We also see less of our overall business coming from our larger customers than in the past. And orders from our larger customers were down in the quarter.”

Probably feeling the effect of a slowing economy earlier than others

“As we’ve discussed before, we probably have more of our business from large customers than the overall industry. So we are probably feeling the effect of the slowing economy a little earlier than others might. And in fact, our midsize project orders continue to grow at or above overall industry growth rates.”

We’re not sure if the slowdown in large customer business is foreshadowing further weakness

“Now, what’s going to happen next, we don’t know. Will that decline in large customer business is that just foretelling a decline that we’ll see across the entire industry? We’ve had recessions in the past, in the distant past that have been like that, but we’ve also had times in the past where we’ve seen this moment where you see one segment fall and then it comes back again. So, we can’t predict that exactly. But we’ve seen both occur in the past.”

What really changed in the most recent quarter was the drop in large projects

“In this most recent quarter, the thing that was most pronounced was the drop in the large customers, a decline in orders from large customers and a decline in large projects. And it’s not that they were doing great in the previous quarters, but we saw this decline. If you look at this year versus prior years, large customers were not dramatically up or down but the mid-size and smaller customers, you’re doing pretty well. What really changed in this past quarter was the drop in the large customer of large projects.”

Other CEOs are seeing the same thing

“I will also comment I am a member of various groups where CEOs come together and talk about what they see. And for these large customer CEOs,, some of the outlooks, for example, business roundtables, commentary recently about business capital spending, would confirm that are large customers are seeing this headwind. So, whether we look at our data or we look at economic data or we just listen to what other CEOs are saying, we’re seeing consistent concerns from that customer group about the economic outlook”

Dave Sylvester

Pleased with China

“While there remains a shadow of macroeconomic uncertainty in China, we are pleased with the traction our local sales teams continue to demonstrate.”

The first half of the quarter was strong but then there was a steep fall off

“The first half of the quarter, five weeks in September and the first two weeks of October, were actually quite good and were stronger than we were expecting. In fact, I think they’ve commented that they averaged 7% growth, and so, in the first seven weeks of the quarter. And then in the last six weeks of the quarter, we saw a 9% decline. And really, it fell off suddenly and we believe that it was largely linked to not seeing the same level of year end business from some of our largest customers.”

Herman Miller FY 2Q16 Earnings Call Notes

Brian Walker

Information on the North America consumer is somewhat mixed

“As you know information on the North America consumer is somewhat mixed, as with the contract market some geographic areas are being impacted by the dislocations in the energy complex and the exceptionally strong dollar has reduced some of the appetite for vacation home buyers from some parts of the globe, while these factors are concerning, we believe strong employment, expanding wages and lower interest rates show to go well for investors in housing and furniture.”

There are more projects on the mid and smaller side, not a lot on the large

“Well first of all from everything we can read from dealer, sales people and those kind of things and looking at project activity. We feel pretty good about where that is, activity levels have remained strong and we think we are in a pretty good spot competitively. I’d say if there is anything that you will hear out there certainly the size of projects continues to be on mid to smaller size there is not as many very-very large things out there at least that we can see. ”

ERP conversions are always difficult

‘ERP conversions are always difficult is the best way to describe it so one of the reasons we talked about it on the first quarter call is to how we’re going to go through this. We like always you believe you’ve done everything that you can to prepare, I’ll say as these things go it was actually a pretty good one, but it still had more disruptive impact particularly at the sales level of what was going on to the sales team.”

Jeff Stutz

Commodity prices have been a big benefit for us

“clearly we have benefited from commodities we mentioned that in the prepared remarks. Commodity pricing has been a big benefit for us, I mean, that’s not unique to Herman Miller of course but that’s been very helpful as you know as we’ve talked in the past steel and steel component parts are big driver in our overall cost of goods sold and those levels are at levels that we haven’t seen since the early 2000s, right, so that’s been a big help now intertwined in that a bit that is the currency drag that we have been feeling and of course we feel that as an North American segment in our Canadian business.”

Steelcase FY 1Q16 Earnings Call Notes

Longer time between orders and shipments because customers are taking on more ambitious changes in their work environments

“We have spoken before about how in the Americas, we are seeing a longer period between orders and shipments. As we expected, that pattern continued this quarter. We are getting a better sense of why this is happening. It is clear that customers are taking on more ambitious changes to their work environments instead of simply refreshing the existing design and these changes often involve more construction, even when they are only renovating an existing space.”

Construction issues unrelated to furniture. Also dealers can see they need to reserve capacity

“These customers place orders earlier than normal since their design is complete earlier and planned shipment dates of furniture are often delayed because of construction issues not involving furniture. There are other reasons as well. Today, we have better tools than in the past for our dealers to see our production capacity, and with demand increasing, they have every reason to place their orders early to reserve capacity in the system.”

Demand from middle markets has grown faster than large customers

“Our analysis of BIFMA data and our own order patterns suggest demand for midmarket customers may have grown faster than from the larger customers.”

Feeling good about North America,Europe and Middle East are question marks

“Overall, we are feeling good about how our Americas business is developing for the rest of this year. As for the European economy, questions remain of course about Greece and the impact of Russian sanctions. Our business in Eastern Europe has been affected by the political turmoil and our Middle East business is softer, because of lower oil prices.”

Seeing strength in export markets in Western Europe though

“However, we are also seeing signs of strength in export markets in Western Europe and our order patterns in many of those countries are reflecting that strength.”

Activity by vertical

“Across vertical markets in the Americas, orders grew in the federal government, insurance, financial services, technical professional, state and local government and manufacturing sectors, while information technology and healthcare declined modestly against the prior year.

Orders from the energy sector grew modestly in the first quarter following a significant decline in the previous quarter. We expect this sector to be challenged for the foreseeable future while oil prices remain depressed. Most energy sector construction projects that were well underway are being completed, but many future projects have been postponed and continue [ph] considerably.”

We are able to insource capabilities that we had previously outsourced

“In the Americas, we went through a shift towards outsourcing for a while. This is going back maybe 10 years now. While we were in a transition from the very vertically integrated model to the model we have today. Now, interestingly, and now that we have reached higher level of efficiency in our Americas footprint, we have been able to in-source some of the things that we had previously outsourced.”

Companies with 25-50m in revenue are leading the growth

“if you double-click and triple-click on some of the data, what you see is that the companies that are in the $25 million to $50 million of revenue size are the ones that are leading the growth and that suggest to us that it is possible that that demand is coming from smaller company, and with small company starting to come into the recovery.

That potential that we could be seeing, you know, an acceleration of the cyclical recovery, but I very intentionally use the word may in my quote, because we do not really know, but we like what we are seeing.”

We don’t think the competitive environment is any different than it has been

“The industry is always competitive and in the Americas that has always been true as long as I have been in these various roles. We have talked about that. There are some great manufacturers out there and we compete. I do not really feel it is being any different today than it ever was. There were some saber-rattling perhaps, but if you look at what is actually happening in the marketplace, we have not seen evidence of that.”

You win because of products and relationships. You lose on the same things, but people will tell you price

“you win, because you have got the right products, you have got the right relationships. When you lose, you might be told you lost because of price, but really you lost because you did not have the right relationships and the right products, so that is our philosophy on this.’

Harder to have price competition in an environment with a lot of small projects

” the idea of price competition probably becomes more acute when you have some very large projects that are defining the marketplace. That was maybe more true a couple of years ago than it is today. Today it is much more broadly balanced between projects continuing smaller business and so the idea that you are going to go out and try to change your market share dramatically by being very aggressive on a project – does not work as well when there are not many projects out there.”

Herman Miller FY4Q15 Earnings Call Notes

Initiatives to reignite North American growth are progressing

” the initiatives we outlined last quarter reignite the growth of our North American segment are progressing at an impressive pace and while it is unlikely these actions impacted our fourth quarter sales in a significant manner, we are pleased by the positive feedback from our dealers and among our sales teams.’

Purchased design within reach

“Today, Design Within Reach has a total of 35 studies and outlets, more fewer than we began with, but has increased its retail square footage by 11%.

Going forward, we’ll be aggressive at our studio conversion plans with six additional locations anticipated for fiscal 2016. The second value driver we outlined was our intent to increase Design Within Reach has made some exclusive product designs including Herman Miller brand products.”

$169m in FCF

“We generated $169 million in cash flow from operations and achieved a return on invested capital of 20% for the full year. We also made significant progress paying down the debt we incurred to fund the Design Within Reach acquisition. ”

Expect continued currency headwinds in FY 16

“Considering current exchange rate forecast, we expect these year-on-year headwinds to continue with the most significant impacts expected in the first half of the fiscal year and extending into the earlier part of Q3. We estimate that full year impact on sales will range between $25 million and $30 million with a corresponding impact on EPS of between $0.10 and $0.12 per share relative to the fiscal 2015 comparison.”

See aggressive competition

“while our gross margins over the past several quarters reflect a generally stable discounting environment, we continue to see aggressive competitive pricing within key markets and certain product categories and project sizes. While pricing is only one aspect of our overall value proposition, this is an area we are watching closely as we move forward.’

We think Restoration Hardware’s modern entry helps people see the market that we’re the leader in

“we think it’s probably, it’s nothing else but the validation of our strategy and the belief that modern as a category within residential is growing. And one that we say, more folks validating that in fact and talking more about modernism and the attraction to it, we think does nothing but actually, probably expands the consumers’ knowledge of that segment and as they expand the knowledge teams, we believe we are world’s leader in authentic modern, we believe that that move simply helps us – they’ll help us see the market that we believe we are the leader in.”

We don’t need to respond directly to RH

we don’t believe we have any need to do any direct response to them other than the things that we already have planned for Design Within Reach in terms of expanding our offer, expanding the number of studios that we have, implementing the large studio model which enables people to envision better their places. Those things that we have planned will continue to be on our agenda regardless of what Restoration Hardware or anyone else does.”

Pricing pressures are greatest in areas of the business where it’s difficult to differentiate

“he greatest pressures are in those areas of the business where we start before, where it’s getting increasingly difficult to differentiate. So you’ve got ongoing pressure around some of the benching type applications. Case goods remains an area where it’s highly competitive and other areas like, even just simple product categories like tables, so those are been the ones I’d point to”