MillerKnoll - Earnings Call - Q2 2026

Transcript

Operator (participant)

Good evening and welcome to MillerKnoll's Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations.

Wendy Watson (VP of Investor Relations)

Good evening and welcome to our second quarter fiscal 2026 conference call. On with me are Andi Owen, Chief Executive Officer, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are Jeff Stutz, Chief Operating Officer; John Michael, President of North America Contract; and Debbie Propst, President of Global Retail. We issued our earnings press release for the quarter ended November 29, 2025, after market close today, and it is available on our investor relations website at millerknoll.com.

A replay of this call will be available on our website within 24 hours. Before I turn the call over to Andi, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied.

Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release. The forward-looking statements are made as of today's date and, except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn the call over to Andi.

Andi Owen (CEO)

Thanks, Wendy. Good evening, everyone, and thank you for joining us. I'm pleased to report MillerKnoll delivered another strong quarter, exceeding expectations and demonstrating the effectiveness of our strategy to drive long-term value. Excuse me. Our performance this quarter is a result of disciplined execution across our core growth levers, expanding our retail footprint, delivering innovative new products across our portfolio, and deepening customer engagement globally. We are entering the second half of our fiscal year with solid order growth in every segment.

Let me begin with our global retail segment. Second quarter orders increased 6% year-over-year, with sales up 5% and comparable sales growth of 3.5%. In North America retail, we navigated one of the busiest periods of the year. Our orders were up 8%, and comparable sales growth was also up 8%, while holding promotions and marketing spend flat to last year.

During our holiday cyber promotional period, the 12 days from the Friday before Thanksgiving through Giving Tuesday, orders rose 12% compared to the same period last year, when orders were up mid-single digit. We set multiple records in North America retail, including the highest orders in DWR brand history, both in store and online, as well as the most single-day web visits for DWR. We continued our store expansion, opening four new locations in Q2, a DWR in Salt Lake City, and Herman Miller stores in Nashville and in El Segundo and Walnut Creek, California. We also relocated two stores, opening a new DWR location in Houston and a new Herman Miller location in Berkeley, California. For the full fiscal year, we now anticipate opening 14-16 new stores in the U.S., advancing our strategy to double our DWR and Herman Miller store footprint over the next several years.

Our North American retail growth is driven by four strategic levers: new store openings, expanded product assortment, e-commerce acceleration, and increased brand awareness. We are encouraged by our customers' engagement with our brands and positive response as we execute this strategy. Another key advantage we have in this business is the strength of our supply chain. With approximately 70% of North America retail's cost of goods sourced from the U.S., our pricing is significantly less exposed to tariff risk compared to most competitors. Turning to our contract businesses, momentum continues to build in North America and internationally as organizations prioritize bringing employees together and refreshing their workspaces. Orders, industry benchmarks, and dealer sentiment were all up this quarter. The return-to-office trend is positively impacting demand for commercial real estate, design services, and contract furniture.

And we're winning projects globally in resilient sectors such as healthcare, where solutions for the entire care journey from waiting rooms to labs to patient rooms are making a meaningful impact. Our total healthcare orders are up 5% year-to-date. New product innovation also remains a key driver. Our Knoll Dividend Skyline launch has been met with strong enthusiasm from customers in the A&D community, resulting in several large project awards well ahead of the official order entry date in January 2026. Internationally, we continue to enhance our global showroom footprint. Last month, we introduced a MillerKnoll showroom in Shanghai to engage A&D, global accounts, and key partners in mainland China. Through my ongoing conversations and visits with our international dealers, I am energized by the significant growth opportunities these markets present.

Looking ahead, we expect to grow share with the most desired product portfolio in the market and through expanding our dealer share of wallet while continuing to generate enviable margins. In closing, we remain optimistic based on our execution and accomplishments in the first half of the fiscal year. Looking ahead, we see encouraging signals that indicate we will continue to grow through our enhanced innovation initiatives, our expanding retail footprint, and our powerful partnerships and dealer networks. Our strategy is developing as planned. We are highly focused on flawless execution. We have demonstrated that we are tenacious and we have the capacity to adapt in order to capture our full potential and navigate disruptions. We are on pace to our plans and disciplined, focused on meeting our potential as a growth-minded company. We have the cash flow and balance sheet strength to capitalize on our opportunities and drive continued momentum.

December is also a time to reflect on our achievements and look forward. I want to extend a heartfelt thank you to our associates across MillerKnoll for their extraordinary commitment every day. Your dedication is the foundation of our success. I am so proud of your unwavering commitment to delight our customers in every brand and our collective with products that define modern design around the globe. With that, I'll turn it over to Kevin to discuss our financial results in more detail and share our outlook for the fiscal third quarter.

Kevin Veltman (CFO)

Thanks, Andi, and good evening, everyone. I'll begin with a summary of our second quarter results and then discuss our outlook. In the second quarter, adjusted earnings per share of $0.43 exceeded expectations, reflecting stronger-than-expected sales and gross margin performance. Consolidated net sales for the quarter were $955 million, down 1.6% year-over-year on a reported basis and 2.5% lower organically. As we have previously discussed, we expected lower year-over-year sales this quarter, given the $55-$60 million in pull-ahead activity in North America contract that pulled forward sales into our first quarter. For the first half of the fiscal year, consolidated net sales reached $1.9 billion, up 4% year-over-year, with this normalized view demonstrating the strength of our business. Orders for the quarter grew to $973 million, up 5.5% as reported and 4.5% higher on an organic basis.

Our order momentum across all three segments reinforces our confidence in an improving demand environment and our ability to execute our growth strategy. Second quarter consolidated gross margin was a strong 39%. This includes approximately $1 million in net tariff-related costs. We expect our proactive mitigation actions to fully offset tariff costs in the second half of our fiscal year, supporting both gross margin and earnings per share resilience. Turning to cash flows in the balance sheet, we generated $65 million in operating cash flow and ended the second quarter with $548 million in liquidity. Our net debt-to-EBITDA ratio of 2.87x remains comfortably below our lending covenant limits, reflecting our disciplined approach to capital allocation and financial flexibility. We continue to balance investments and growth with maintaining a strong balance sheet. Our disciplined approach focuses on driving operational efficiency, leveraging scale, and optimizing production capabilities across our facilities.

As part of this approach, we recently announced the consolidation of our Muskegon, Michigan facility, with production transitioning to other plants. This consolidation is expected to deliver $10 million in annual run rate savings by fiscal 2028. With that, I will move to the second quarter performance by segment. Net sales in the North America contract segment were $509 million, down 3.1% year-over-year, following last quarter's 12.1% sales growth that was partially driven by the tariff-related pull forward. For the first half of the fiscal year, segment sales were up 4.1%. Orders increased to $507 million, up 4.8% from prior year. Operating margin was 8.7%, and adjusted operating margin was 9.7%, down 50 basis points year-over-year, primarily from deleverage on lower sales. International contract segment net sales were $171 million, down 6.3% on a reported basis and down 9.2% on an organic basis year-over-year.

Orders rose to $162 million, up 6.6% versus prior year on a reported basis and up 3.4% organically, driven by strength in Europe, the U.K., China, and India, partially offset by lower orders in Korea and the Middle East. Second quarter reported operating margin was 9.3%, with adjusted operating margin of 9.7%, down 280 basis points, primarily due to deleverage on lower sales and regional and product mix of sales in the quarter. In the global retail segment, net sales were $276 million, up 4.7% on a reported basis and up 3.4% organically. Orders improved to $304 million, up 6% year-over-year on a reported basis and up 4.5% on an organic basis. Operating margin was 1.5% in the quarter.

On an adjusted basis, operating margin was 2.1%, down 170 basis points year-over-year, primarily due to costs related to the new stores, net tariff costs, and foreign currency impact. As Andi mentioned, we opened four net new stores in the second quarter. We expect to open two to three additional stores in the third quarter and anticipate opening a total of 14 to 16 new stores in the full fiscal year. Turning to our Q3 guidance, our outlook incorporates the latest information on tariffs and new store investments, as well as the typical seasonal softness in our contract businesses as the calendar year comes to a close and the timing of the Chinese New Year holiday. We expect net sales to range between $923 million and $963 million, up 7.6% versus prior year at the midpoint.

Gross margin is projected between 37.9% and 38.9%, and adjusted operating expense is expected to range from $300 million-$310 million, higher year-over-year, primarily due to increased variable selling and incentive expenses, along with new store costs. Adjusted diluted earnings are expected to range between $0.42 and $0.48 per share. Based on current tariffs in place, we expect our proactive pricing and tariff mitigation actions to fully offset tariff impacts to gross margin and EPS in the second half of the fiscal year. Included in our expectations for operating expense and EPS are costs associated with new stores and global retail. We estimate approximately $5 million-$6 million in incremental operating expense year-over-year for the new locations in Q3, with a similar range expected in Q4. These investments are aligned with our strategy to expand our retail footprint and drive long-term growth.

For further details related to our outlook, please refer to our press release. With that overview, I'll turn the call over to the operator. As always, we welcome your questions and look forward to discussing our progress, outlook, and strategic priorities.

Operator (participant)

We will now begin the question-and-answer session. I would like to remind everyone, in order to ask a question, please press star, followed by the number one on your telephone keypad. Your first question comes from the line of Reuben Garner with The Benchmark. Please go ahead.

Reuben Garner (Managing Director and Construction Research Analyst)

Thank you. Good evening, everybody. Maybe just to start, Kevin, the second quarter that you just reported, gross margin came in above what was expected. Revenue came in at the high end, and OpEx was a little higher. Was that mix of business, or can you talk about what drove kind of the puts and takes relative to what you were expecting a few months ago?

Kevin Veltman (CFO)

Yeah. So if you look at gross margin for the quarter coming in better than expected, it was a bit of channel mix and a bit of product mix. We also had some good pricing realization, particularly credit to our teams on working through the tariff mitigation as we worked through both price increases and surcharges. And then operating expenses was variable selling costs from the sales over delivery, as well as the timing of some expenses, and FX was something else that played a factor.

Reuben Garner (Managing Director and Construction Research Analyst)

Okay. And then in the press release, you talked about kind of the order rate, the 12-day holiday period. Those growth rates are pretty strong later in the quarter. On the contract side, specifically in the Americas, can you talk about kind of how that ebbed and flowed or orders through the quarter? Were they a little softer during the shutdown period? And just kind of more recent talking points in terms of pipeline or any other data points you have internally would be helpful?

Kevin Veltman (CFO)

Yeah. So we had, from an orders perspective, really across all the businesses, with orders up organically 4.5% in the quarter, it was consistent across all three months of the quarter. So seeing a lot of consistency there, and then even in the first couple of weeks of the new quarter we're in that mid-single-digit range. So it's been fairly consistent. The other thing I would call out as we look at a number of both external measures and internal measures is, if you go back to the springtime, the world was at its highest point of tariff uncertainty. And so we're seeing a lot of sequential improvement in a lot of both external, whether it's leasing activity, but also some of our own internal measures that, as we kind of get past that, we're seeing sequential improvements as well.

Reuben Garner (Managing Director and Construction Research Analyst)

Sorry, I got stuck on mute. And then I'm going to sneak one more in on Americas contract. Any specific geographies or customer types, industries, I guess, that you're seeing particular strength or changes in? And then AI has been a question. We've gotten a lot lately. Just wanted to kind of get your thoughts on how that may or may not be impacting demand going forward in the contract space.

John Michael (President of North America Contract)

Hi, Reuben. It's John. I would say, from a geographic perspective, some of the markets that have been slower to come back are starting to really percolate, so if you think about the Bay Area, Southern California, we're definitely seeing a pickup there. Really, the Northeast Coast has been strong for a number of months. I think, in terms of industries, energy, professional services, legal are all very active. Obviously, public sector or federal government is a little softer than normal, given earlier in the year the DOGE work and then the government shutdown that's had a bit of an impact. And pharma and banking are down slightly over prior year. But other than the public sector, pretty strong across the board, and as Andi mentioned in her opening comments, healthcare continues to be a growth driver.

Andi Owen (CEO)

Andi, Reuben, can you clarify your question on AI? Are you asking about AI implementation in the company, or are you asking about from customers? Just to be clear.

Reuben Garner (Managing Director and Construction Research Analyst)

From customers, how that may impact employment, how that may impact how the office looks going forward, or are you seeing changes in floor plates or anything else in the way that we work?

Andi Owen (CEO)

I think we'll see changes. It's a little early to tell kind of from our customer viewpoint, but as we kind of plan and innovate for the future, we imagine that there will be productivity gains and absolutely changes in how we work together, so we're thinking about that in a more future-forward way. I think, today, the impact on actual workspaces has been pretty minimal, but I do think the conversations are pretty broad and vast in how all of our customers are thinking about it and using it.

Reuben Garner (Managing Director and Construction Research Analyst)

Thanks for the detail, guys. Good luck in the new year and happy holidays.

Andi Owen (CEO)

Thanks, Reuben. You too.

Operator (participant)

Your next question comes from the line of Phillip Blee with William Blair. Please go ahead.

Phillip Blee (Analyst)

Thank you. Good evening, everyone. Can you maybe just talk about your expectations for the contract business in the third quarter a bit more? Maybe some color around key drivers between price versus volume, whether we're fully through the prior quarter pull forward or whether or not any of that sort of is still bleeding into the third quarter as well? And then, obviously, it's a slow time of year for contracts seasonally, but anything to suggest volume trends shouldn't continue at current levels or potentially move up from here in the second half, assuming all macro remains the same. Thank you.

Kevin Veltman (CFO)

Yep. Phillip, this is Kevin. I'll start. North America contract, our orders in the quarter were up about 5% on an organic basis. And similar to the comments earlier, we've been seeing some pretty good consistencies. And so we think in that mid-single digits is kind of a nice spot that that business was in during the quarter and seems to be running from an order-level perspective as well. Year-to-date, to your question on order pull ahead, we think our orders are clear of any of that activity. If you normalize our sales year-to-date in North America contract, those are up about 4%. So also kind of in that mid-single digit range.

Andi Owen (CEO)

John, what would you add?

John Michael (President of North America Contract)

Yeah. I would add that, in terms of external indicators for continuing demand, if I think about the conversations we're having of late with commercial real estate brokers, they seem to generally be very bullish across the board on 2026, and that obviously bodes well for our industry. Similarly, architectural and design firms, while the overall ABI is down a bit, the more premium-based firms seem to be very busy. And if you look at, from an absorption perspective in commercial real estate, it's the Class A space and even the Class A-plus space that is getting the most attention right now as companies are trying to elevate the office experience to get their employees back. And our brands tend to play very well in that sector.

Phillip Blee (Analyst)

Okay. Excellent. Very helpful. Oh, go ahead.

John Michael (President of North America Contract)

I was just going to add, you asked about price versus volume. And it tends to be in the contract businesses, you tend to be able to pass along inflation fairly well through the industry. And so, over the long run, you're passing along that 2%-3%. And we've been seeing a fairly even mix at those levels of growth rates of price and volume.

Phillip Blee (Analyst)

Okay. Excellent. Very helpful. And then growth in retail is very exciting, particularly with the insight into how North America performed during the peak holiday week. So maybe you talk a bit about the acceleration there. What drove that sort of response from the consumer? The competitive environment seems particularly promotional. So did you have to lean in there? Or how do you kind of think about the durability of that kind of growth, particularly as we exit the holiday season? Thank you all.

Andi Owen (CEO)

Phillip, one thing I'll add, and then I'm going to have Debbie give you some of her thoughts. I think the team has done a great job building brand awareness, and since this is such a nascent business for us, I think, as we open new stores and as people become more familiar with the DWR and Herman Miller brands, that's really helping us. I think our promotions were at the same level as they were last year, which I think is pretty phenomenal considering the results we showed. Our marketing spend was also equivalent to last year. So I think building brand awareness, opening new stores, having people be more familiar with our proposition was a winning combination for us in a cyber period, and Debbie, what would you add?

Debbie Propst (President of Global Retail)

I would add the assortment acceleration that we've been pursuing with our collection count up 22% year on year is really helping to contribute to that growth as well.

Phillip Blee (Analyst)

Awesome. Very helpful. Thank you all, and have a great holiday.

Andi Owen (CEO)

Phillip, you too.

John Michael (President of North America Contract)

You too.

Operator (participant)

Your next question comes from the line of Greg Burns with Sidoti & Company. Please go ahead.

Greg Burns (Analyst)

Good evening. Just to follow up on the retail momentum, are you seeing, with the assortment growth, are you seeing bigger order sizes, more net customers coming through your retail locations and e-commerce, or more engagement with existing customers, higher order rates? What is the dynamic you're seeing within your customer segment?

Debbie Propst (President of Global Retail)

Thanks for the question, Greg. I'd say there's two real highlights that we're seeing. Our average order value is up year-on-year, beyond our pricing increases. Our net pricing increases are only about 2.5% year-on-year, thanks to our sourcing strategy, which proves to have 70% of our COGS in North America from North America. So we've been able to be more conservative in our pricing increases. But average order value up, that's really being driven by the assortment expansion that we're doing, as well as design services, as we continue to drive up the penetration of those in stores.

Andi Owen (CEO)

And I think, through opening stores and new markets, we're obviously attracting new customers to the brands as well. Greg, so it's a combination of those things.

Debbie Propst (President of Global Retail)

Absolutely. We're seeing greater demand of our new customers than we have historically as well.

Greg Burns (Analyst)

Yep. Okay. And can you talk about the kind of roadmap to doubling the store count? Are you going to stay on this kind of 14 to 15 stores a year? Is that your thought right now? And how should we think about maybe the margin profile of that business? Are you going to operate it kind of at this low single-digit range for the foreseeable future? How should we think about maybe leverage on some of these investments starting to show through?

Debbie Propst (President of Global Retail)

So yes, we are planning to open in the range of 14-16 a year. And as you can imagine, we have leases signed through middle to back half of next fiscal year already. We have seasonality in our operating income. So the back half of the year always looks better than the front half of our year based on largely where marketing spend falls in support of the cyber period. And we expect, by the beginning of next fiscal year, we'll start to see incremental operating income dollars from these new store investments.

Andi Owen (CEO)

And I think, Greg, as we've mentioned to you guys a few quarters now, we're sort of in the depth of investment right now to open new stores. And as we get into Q3 and Q4, you'll start to see that impact on our bottom line get smaller and smaller. And that's when new stores begin to add revenue to really offset that investment. So we're optimistic that that will turn around in Q4 and Q1 of next year, and we'll start to leverage some of that overhead and expense.

Greg Burns (Analyst)

Okay. So, a gross five to six a quarter, net declining, starting to decline as we move into next fiscal year. That net number will start to decline.

Debbie Propst (President of Global Retail)

That's right.

Greg Burns (Analyst)

Yep. Okay. Okay. All right. Thank you.

Andi Owen (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Doug Lane with Water Tower Research. Please go ahead.

Doug Lane (Managing Director)

Yeah. Hi. Good evening, everybody. Just looking at the top line here with the beat in the first quarter, the beat in the second quarter, the third quarter is pretty meaningfully above consensus. And your orders went from down mid-single digits to up mid-single digits sequentially. So something's getting better out there. And I don't know. It sort of goes counter to what I'm reading anyway about the macro. So what are the two or three key macro trends that are really starting to work here? Is it back to office, or really, what's going on?

Andi Owen (CEO)

I think, in the contract business globally, probably primarily in North America, but definitely globally, we are seeing return to office really taking off. I think the debate about whether to be together is kind of over, and so we're busy at our showrooms. We're busy at our corporate headquarters. We are seeing people make decisions faster. We're seeing orders that are coming through our funnel with more velocity and less people waiting as long as they were waiting during COVID, so I think the impetus is there. I think some of the noise you see in the economy and from a macro standpoint is also driving senior leaders in organizations to get more serious about their spaces and more serious about bringing people together, and it helps us a lot, especially in Class A spaces.

So I think we're in the right place at the right time from a contract standpoint. And then, international, we have a ton of growth potential just in general. We aren't in as many markets as we could be. We can add dealers and still gain a lot of market share. That business tends to be a little lumpier with the size of orders. So you really have to look at a six-month, nine-month, twelve-month trend to understand the growth potential there, but at very enviable margins. And I think, with retail, we're in a really good spot. We're a target end consumer right now that is resilient and that is attracted to the proposition that we're offering. So I think we're in a really good place on both sides of our business and in all channels.

Doug Lane (Managing Director)

Yeah. No question. Something's really coming together there. So shifting gears a little bit with the consolidation going on in the industry, how have you thought about or what changes are you thinking about in reaction to the consolidation now that you've had about six months or so to digest it?

Andi Owen (CEO)

Listen, I think we've been down that road. We know how hard consolidations are. We think the industry, the contract industry, has definitely shrunk. So consolidation, in the end, is good for everyone. We also know that consolidations and integrations can be distracting. So we plan to definitely be on the front foot now that we're on the other side of that.

Doug Lane (Managing Director)

That's true. You've been through a lot of consolidation yourself over the years. And just finally, on capital allocation, what is, is there a target for a leverage ratio here? You seem to be hovering just under three times. And is that sort of a target, a soft target of where you want to be? And then how do you think about capital expenditures and share repurchases in that context?

Kevin Veltman (CFO)

Yeah. So the way we're thinking about capital allocation right now is, one, you've heard us talk about some of the growth investments that we're making sure we can fund. And so we feel well-positioned with the balance sheet to fund those. Paying down debt is the second priority. We would see kind of a midterm target to get to that two to two and a half turns range from the 2.87 we are now as we continue to pay that down. Those would be the first two priorities. And then, obviously, continuing to maintain dividend and periodic share repurchase to offset dilution.

Doug Lane (Managing Director)

Okay. That's helpful. Thank you.

Wendy Watson (VP of Investor Relations)

Okay.

Operator (participant)

There are no further questions. We turn the floor back to CEO Andi Owen for any closing remarks.

Andi Owen (CEO)

Thank you again, everyone, for joining us on the call tonight. With solid order momentum across every segment and encouraging signals in our markets, we were entering the third quarter with confidence. Our teams remained focused on delivering operational excellence, scaling innovation, and executing against our strategic priorities. We appreciate your support, wish you all happy holidays, and look forward to updating you next quarter. Thank you.

Operator (participant)

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.