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Updating FY25 and FY26 EPS Estimates Following HBF Restructuring Announcement; FY24 EPS Estimates Unchanged

With this note, we update our FY25 and FY26 EPS estimates following HNI’s earlier announced plant consolidation and restructuring initiative. Our note from May 21 discusses HNI’s plans to close its Hickory, NC Workplace Furnishings (WF) furniture manufacturing operation and transfer that production to its other North American facilities. Our refreshed estimates give effect to management’s targeted cost savings and synergies in production and logistics. We expect FY25 EPS of $3.64, up $0.08 from our prior estimate of $3.56, and FY26 EPS of $4.11, up $0.19 from our prior estimate of $3.92. Our FY24 EPS estimate of $3.08 is unchanged. Notably, our revenue estimates are unchanged at this time. Given the choppy revenue outlook in its two segments ([WF], which focuses on office and contract furniture, and Residential Building Products (RBP), which focuses primarily on fireplaces for the home), we remain cautious (and unchanged) with respect to our revenue expectations at this time. This is a margin story. As discussed in the earlier note, HNI management, consistent with its lean discipline (titled Rapid Continuous Improvement [RCI]) relentlessly seeks incremental operational efficiency and cost savings in order to improve the bottom line to its shareholder stakeholders. Its discipline and extended history of growing profitability, particularly in RBP, makes us sanguine about management succeeding in (and ultimately beating) its avowed WF profitability goal. Earlier, HNI publicly targeted double-digit WF operating margin. In its 1Q23 report, it demonstrated progress to reaching that goal. This restructuring moves HNI closer to that goal. Leveraging fixed costs will be, of course, an important element in this story. However, the timing of future revenue growth remains uncertain in the current macro environment. The restructuring of HBF’s seating business and the rationalization of the firm’s production footprint within ‘centers of excellence’ across North America are, however, achievable in the near term and should yield margin improvement regardless of what is going on with the revenue picture and industry demand. But we do not believe its leaders will be satisfied with double-digit margins. Notably, RBP has consistently delivered operating profitability in the mid- to upper teens, even when revenue has been flat to down. Irrespective, enabling RBP for that profitability took time and multiple acquisitions. Management noted that its integration of Kimball International, acquired in mid-2023, partially enabled this consolidation in a way that will not disrupt production or disappoint customers. We see HNI leaders continuing to target further improvements to bolster margins even beyond the double-digit level currently targeted. Our revised model is included below.