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Revising FY24 EPS Estimates Following Strong 1Q EPS Beat and Continued Future Margin Expansion

In the wake of HNI’s strong 1Q margin performance, we are revising our FY24 and out-year consolidated revenue and EPS estimates (see Figure 1). In its release and earnings call, management exuded confidence that margins should continue to expand through FY24 given the combined effects of price/cost gains, productivity improvements, simplification/streamlining initiatives, and accretion from the mid-2023 KII acquisition. Our new estimates reflect better margins, with adjustments accounting for a return to the legacy seasonality pattern with respect to revenue and earnings. We expect quarterly revenue comparisons for Workplace Furnishings (WF) and Residential Building Products (RBP) to turn positive in 2H24 as underlying demand factors improve and current drags moderate. Irrespective, for RBP, we still estimate full-year 2024 revenue to compare negatively (down low single digits [-3.6%] to $699 million). However, revenue growth should turn positive Y/Y in 3Q (+2.5%) and 4Q (+3.5%). Also, in line with management guidance, we expect the KII acquisition to add $75.4 million in incremental revenue during 2Q and consolidated WF segment revenue will turn modestly positive in 4Q (+0.5%) as industry conditions begin to improve. The big story is margins. We look for the margin performance to stay impressive, flattish revenues notwithstanding. To wit, RBP posted operating income margin of 14.4% in 1Q even in the face of a steep revenue decline (-17.4%) due to the challenging macro environment for home improvement spend. Likewise, WF margin (+5.98%) impressed, improving 731 bps from the prior year, and beating our expectations for the quarter by 155 bps even as organic revenue in the segment declined by 2.5%. Given the scope for continued margin expansion resulting from productivity improvements and some moderating price/cost benefits, we see room for more margin expansion this year and next. Combined, these trends should drive significant EPS growth, as we now model (see revised estimates and our new model). Our full-year 2024 EPS estimate is now $3.08, up from our prior estimate of $2.90. The second half, seasonally always the strongest, is driving most of this improvement. HNI’s financial condition also remains solid, and management has the flexibility to capitalize on opportunities that may arise. Figure 2 tracks HNI’s daily price trading performance from the onset of the pandemic (March 1, 2020) until now. HNI underperformed the broad market and outperformed its two most direct comparables from the onset of the pandemic until now. Our revised model and quarterly post-announcement tables are included below.