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3QFY24 EPS Beats; Revenue Misses; Near-Term Expectations Moderated

As noted earlier, MillerKnoll’s 3QFY24 EPS beat expectations but revenue missed widely. 4QFY24 guidance was also below pre-report estimates. With the misses, the stock gapped down by the mid-teens (~$5.00), closing at $24.76, thereby truncating and halting its recent rebound. Y/Y revenue comparisons were negative in all three segments: Americas Contract (AC) at -9% to $441 million, International Contract & Specialty (IC&S) at -10.4% to $217 million, and Global Retail (GR) at -17% to $214 million. Consolidated 3QFY24 revenue fell 11.4% to $872 million and missed our estimate by ~$36 million. Consolidated orders fell 4.7% to $830 million. Gross margin improved by 455 bps to 38.6% and adjusted operating expenses beat our estimate by $20 million. Adjusted EPS was $0.45, $0.02 above our estimate. We are updating our 4QFY24 revenue estimate to $890.1 million (from $977.1 million) and 4QFY24 adjusted EPS estimate to $0.55 (from $0.70). Both metrics are within guidance for revenue of $880-920 million and adjusted EPS of $0.49-0.57. The revenue misses, particularly for order growth and backlogs, are concerning. Order growth and advancing backlogs are key to future sales gains. On its call, management evinced cautious optimism, pointing to: (1) recent Y/Y order growth over the past several weeks; (2) a robust top-of-the-funnel sales activity; and (3) improved AC win rates (+3%). But profitability is heartening. Gross margin improved Y/Y (+221 bps in AC, +306 bp in IC&S, and +1,093 bps in GR), reflecting better pricing, moderating costs, and efficiencies, Operating expense control was also better than forecast, reflecting its discipline and actions to target selected headcount reductions. Management acknowledged the need to increase revenue and emphasized a heightened focus to achieve that goal. As of now, MillerKnoll appears to be lagging the recent progress of its largest competitor, with its leaders arguing, in part, that the current path is not unique and likely reflects differences in the characteristics of each company’s legacy customers. Actions are underway to: (1) integrate its showrooms; (2) develop better access for US and international corporate clients and designers; and (3) capitalize on an opportunity to increase its retail footprint. We forecast better earnings ahead. Our new estimates reflect: (1) management’s heightened focus to increase revenue; (2) no pricing hiccups (leaving recent gross margin gains intact); and (3) actions to extend its expense control. Yet, we understand that timing remains uncertain. Investors will need evidence to allow MLKN to retrace and move higher. Gains in AC and IC&S should mirror the economy. In GR, expectations remain tempered as high-end home sales remain weak and mortgage rates remain elevated versus recent history. Figures 1 and 2 provide a tabular summary of 3QFY24 results. Our refreshed model is appended afterward.