Story Stocks^®

Steelcase (SCS -7%) is in the hot seat today despite exceeding Q2 (Aug) earnings estimates. The global commercial furniture manufacturer with ties to the office, hospital, and educational markets did come up just short of analyst revenue estimates. However, that is not what is primarily igniting a sell-off today. Instead, investors are disappointed in SCS's downbeat Q3 (Nov) revenue guidance. While management was confident that yr/yr order growth from its largest customers would return during the second half of FY25 (Feb), investors are skeptical, given the turbulence projected over the next three months.

• Turning to Q2 results, SCS enjoyed several bright spots. Adjusted EPS expanded by 25.8% yr/yr to $0.39, SCS's best bottom-line performance since 2020. Propping up earnings was SCS's ninth consecutive quarter of yr/yr gross margin improvement, reflecting continuous success surrounding cost reduction initiatives, including moving production lines and closing a distribution center.
• Revenue may have edged just 0.1% higher yr/yr to $855.8 mln, landing modestly below the midpoint of SCS's $850-875 mln forecast. However, in SCS's core Americas region, order growth climbed by 3% yr/yr, marking the fourth straight quarter of growth. Management cited robust demand from its education segment as the underlying factor. Its Smith System business, which supports U.S. K-12 customers, grew by 18% yr/yr as many school districts issue bonds for new construction or modernization.
• So, what ultimately dragged down revs and led to a bearish Q3 forecast? Soft large customer orders clipped growth in Q2 and are seeping into the next quarter. SCS noted that the decline in orders from its more prominent corporate customers followed several quarters of strong yr/yr growth, signaling a potentially short-lived hurdle as order growth cools down shortly before accelerating. Meanwhile, SCS's International business remains weak, registering an 11% drop in orders yr/yr in Q2. Most of its overseas markets outside of India exhibited weaknesses.
• Against this backdrop, SCS was prudent in its Q3 revenue outlook, projecting $785-810 mln, translating to +1-5% organic growth yr/yr. Expected adjusted EPS of $0.21-0.25 also represents a yr/yr contraction. For FY25, SCS reiterated its adjusted earnings guidance of $0.85-1.00, underscoring continuing benefits from cost reduction actions.

SCS's Q2 report was decent, but its Q3 revenue estimate was concerning. When asked what provides confidence in a bounce in orders from larger customers over the next two quarters, SCS stated that orders expected during Q2 did not come in on schedule but were pushed out toward the back half of the year. This is not as troubling as customers outright cancelling their orders. However, delays create uncertainty and a stock that has added over +55% since September 2023 ahead of Q2 results was ripe for a significant pullback on an injection of uncertainty.

Lastly, keep an eye on peers MillerKnoll (MLKN), which reports AugQ results today after the close, and HNI (HNI), which is scheduled to report SepQ results next month.