Q4 2024 Earnings Summary
- Increasing Demand in the Contract Segment: The company's sales funnel for contract business continues to grow, with projects marked as 'won but not yet ordered' increasing 7% sequentially from Q3 to Q4. Additionally, return-to-office trends are favoring the industry, with hybrid work shifting from 1-2 days to 3-4 days per week, leading companies to invest in office spaces to attract employees back. This indicates a strong pipeline and growing demand that should contribute to future revenue growth.
- Significant Improvement in Retail Margins and Optimism for Future Growth: Despite a challenging market, the Retail segment achieved a positive 1% organic order growth in Q4 while reducing global marketing spend by 12% year-over-year. The company also achieved higher average order values and significantly improved retail margins through operational efficiencies and product mix optimization, setting a strong baseline for future margin expansion as volumes recover. The company is optimistic about capitalizing on anticipated improvements in the home furnishings market in the latter half of the year.
- Strategic Investments Driving Future Growth and Margin Expansion: The company is making strategic investments in digital platforms, dealer tools, international expansion, and product innovation, which are expected to drive future growth in both the Contract and Retail segments. Additionally, the company anticipates further margin expansion driven by net pricing benefits, planned price actions, and improved operational efficiencies, leading to strong profitability in FY25.
- Retail demand remains weak, with decreased traffic to stores and websites, and the company's expectation of improvement in the back half of the year may not materialize, indicating ongoing challenges in the retail segment.
- The hybrid work environment and uncertain return-to-office trends lead to cautious client behavior, with organizations still sorting out their workspace needs, which could result in delays or reductions in demand for MillerKnoll's office furniture products. ,
- The company is making significant investments without specifying the dollar amounts and has not provided detailed guidance on margins for the full year, creating uncertainty about the potential impact of these investments on profitability. , ,
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Margin Outlook
Q: What is the gross margin outlook for next year?
A: Management expects modest margin expansion in FY '25, driven by continued growth in retail at structurally higher margins and improved unit volume efficiency in factories. They anticipate potential incremental pricing benefits and believe that with top-line growth, margins should expand. Product rationalization and efficiencies from integrating Miller and Knoll products have also contributed to margins, realizing synergies over the past three years. -
Return to Office Trends
Q: Has return to office plateaued or will it increase?
A: Management believes return to office is still increasing, not plateaued. Employees are moving from being in the office 1–2 days a week to 3–4 days or full-time. This favorable trend is expected to continue, benefiting the industry as organizations recognize the value of being together. -
Contract Sales Pipeline
Q: How is the sales pipeline progressing in contract business?
A: The company continues to see strong activity in its sales funnel, with projects marked 'won' but not yet ordered growing another 7% sequentially from Q3 to Q4. Activity is flowing through, as evidenced by order growth in Q4, although some projects remain in the funnel longer than desired. -
Retail Margin Performance
Q: What's driving strong retail margins despite weak demand?
A: Strong retail margins are due to operational efficiencies, focus on last-mile delivery, and effective inventory management. Investments in selling tools like design services have shifted the mix towards higher-margin categories like upholstery. Increased shipping revenue has also helped offset increased inbound costs. Management considers the current margin level a baseline to build upon. -
Dealer Network Integration
Q: Is the domestic dealer network operating at full potential?
A: The domestic dealer network is stable and well-aligned, with dealers fully integrated as MillerKnoll dealers. Strategic consolidations in key markets have strengthened their position. Management sees upside as dealers become more comfortable with products, expecting continued momentum due to project lead times of 6–12 months. -
Growth Investments
Q: Where are the current growth investments focused?
A: Investments are focused on digital platforms and tools to assist dealers, expanding international contract business and showrooms, and growing the global reach of the Knoll brand. The company is also investing in opening stores for Design Within Reach and Herman Miller in North America and expanding product assortments. Additionally, they are innovating and launching new products across all brands. -
Retail Network Plans
Q: Any guidance on retail expansion between DWR and Herman Miller?
A: The company has not provided specific guidance on the retail network mix between Design Within Reach and Herman Miller stores. The retail business is still evolving, with significant potential ("tons of white space"). Each brand targets different customers, and adding stores in a market is almost 100% additive. -
Retail Consumer Demand Outlook
Q: Expectations for consumer demand in retail segment?
A: Despite a tough furnishings market, the company achieved 1% organic order intake growth in Q4 while reducing global marketing spend by 12% year-over-year. They increased average order value and feel optimistic about capitalizing on growth as the home furnishings market recovers, especially in the back half of the year.