To our shareholders:
As we review our company's performance since the onset of the pandemic a year ago, we have much to be proud of and even more to look forward to. We are beginning to see a light at the end of the tunnel and have a renewed sense of optimism about the future.
We have a Retail business that continues to outperform, contract segments backed by a leading group of brands primed to leverage recent growth investments and our global dealer network, and the most talented and committed team in the industry.
While the post-pandemic world will undoubtedly be different, change always brings opportunity, and we believe that there has never been a greater opportunity for Herman Miller. With our differentiated capabilities and ability to serve both contract and consumer audiences everywhere they work, live, learn, heal, and play, we are confident in our ability to continue creating value for all of our stakeholders.
Diversified Business Model Delivering Strong Profitability in the Current Environment
Consolidated net sales for the quarter of $590.5 million were down by 11% compared to last year and down 13% organically, which excludes the impact of foreign currency translation. Our Retail and International segments delivered a resilient performance, which helped offset continued pressures on the North America Contract segment as a result of COVID-19. Orders in the quarter of $566.1 million were down 13% compared to the prior year on a reported basis and down 14% organically. Additional perspective on the demand picture for each of our business segments follows:
Momentum continued to accelerate in our Retail businesses, with sales and order growth rates of 63% and 81% over last year respectively. Both sales and orders exceeded the year-over-year growth rates in the prior quarter. Growth was broad-based across our Design Within Reach, HAY, and Herman Miller retail brands. While we have certainly benefited from the surge in demand for home offices generated by the pandemic, with order growth in the category exceeding 326%, the growth we’re experiencing in this segment extended across all of our retail categories. In fact, excluding the home office category and DWR Contract, Retail orders grew by 59% over last year.
North America Contract Segment
Our North America Contract business continued to be impacted by the pandemic with sales and orders down 35% and 38% compared to last year, respectively. Positive signs are emerging – vaccination efforts are progressing, infection and hospitalization rates have dropped dramatically in recent weeks, customers are actively preparing to return to their offices, CEO sentiment measures are improving, and new project inquiries at architecture and design firms reflect a positive trend over the last six months. In fact, we had an improved pace of new projects being added to our sales funnel with 28% sequential improvement from the second quarter and our pipeline data indicates that the back half of calendar 2021 is when many customers are anticipating these new projects will translate into orders associated with returning to their offices.
International Contract Segment
Our International business delivered growth in what remains a challenging demand environment in several key geographies around the world. Net sales were 6% above last year on a reported basis and up 1% on an organic basis. Orders were flat on a reported basis, while down 5% on an organic basis. Regional order growth in mainland Europe was led by the continued strength of the HAY brand, while China and Japan also contributed to quarterly growth. Order demand levels in Mexico and the Middle East were lower than last year.
Operating margin for the quarter was 9.3% compared to 7.6% last year. On an adjusted basis, our consolidated operating margin of 9.4% was 40 basis points higher than last year. These results were driven by a combination of gross margin expansion and our continued focus on managing operating expenses. Gross margin of 39.1% was 260 basis points higher than last year, reflecting strong channel and product mix. The Retail segment delivered another quarter of strong profitability with an operating margin of 20.1%. Operating expenses at the consolidated level, excluding restructuring expenses, were down $13.9 million from last year due to the combination of structural and temporary cost reductions we put in place to weather demand pressures from COVID-19.
We delivered earnings per share of $0.70 on a reported basis and $0.65 on an adjusted basis for the quarter, a year-over-year increase of 9.4% on a reported basis and a 12.2% decrease on an adjusted basis.
Our liquidity position also remains strong, with cash on hand and availability on our revolving credit facility totaling $662.2 million at the end of the quarter. Cash flow from operations during the quarter totaled $45.6 million. Our gross-debt to EBITDA ratio was 1.0x at quarter-end. With cash on hand of $397.4 million and gross debt of $327.0 million, our balance sheet reflected a net cash position at the end of the quarter. After the end of the quarter, we paid down $50 million of private placement notes at maturity with available cash on hand.
Return to Offices is on the Horizon
Our Contract customers share our optimism. We are having more conversations with customers about their return to office plans, and importantly, the tone of these conversations has shifted dramatically – moving from exploration and ideation to urgency and execution. While many companies are rethinking their long-term real estate strategies, the workplace will continue to be an important differentiator for organizations seeking to attract and retain top talent and build strong corporate cultures.
This sentiment is supported by data. In a recent Future of Work report, 93% of executives indicated the office would be important for attracting and retaining talent in the post-pandemic environment and 96% felt the office would be an important part of creating a strong corporate culture post-COVID1. Additionally, according to a recent PwC survey, 75% of executives expect at least half of their workforce to be back in the office by July 2021, 68% believe their employees need to be in the office at least three days a week to maintain a distinct company culture, and 87% of employees rated collaborating with their team members and building relationships as their top needs for the office2.
Our customers recognize they need to be ready to welcome their people back to a reimagined workplace, where employees have more flexibility to choose when and where they work, and office environments foster collaboration and community-building while also supporting focused work that is not easily done at home. With consensus building toward a late summer/early fall return to the office, more and more of our customers are leaning into our research and thought leadership around the future of the office to help them finalize their plans for the future.
Throughout the pandemic we have shared our belief that COVID-19 would accelerate a shift we’ve long been preparing for, where work can be done from any number of places and the office will need to become a destination – a place people want to come rather a place they are required to be. This is exactly what we’re seeing as customers are developing their post-pandemic workplace plans. This shift in the office landscape will generate incredible opportunity for Herman Miller Group as customers around the world rethink their real estate portfolios, redesign their workplaces, and seek to provide healthy and productive environments everywhere their people are working.
A New Day for Herman Miller Retail
Our Retail business delivered the highest quarterly sales level in its history this quarter. Year-to-date sales growth of 42% is also well in excess of industry growth of approximately 5% over the same period (as measured by the U.S. Census Bureau, Furniture and Home Furnishings Retail Sales). This exceptional performance is a result of the intentional investments we’ve made in this segment over the past two years. Today we have a differentiated Retail business built for long-term growth and led by an incredibly talented and experienced team of experts. They bring a deep understanding of retail trends and consumer behaviors as well as the discipline necessary to succeed as a true retailer as they continue to identify opportunities to grow this business.
The investments we’re making in our digital and eCommerce platforms are driving growth, as illustrated by a 313% increase in digital orders this quarter. Similar to the relaunch of the DWR website last summer, a redesign of the Herman Miller eCommerce experience is anticipated this spring, and HAY’s North America website will be refreshed later in 2021. With a much-improved marketing capability, we were able to capitalize on the 2020 holiday shopping season with the most comprehensive seasonal marketing campaign in our company’s history that encompassed all three retail brands.
Building on our strategy to capture new customers through a variety of premium in-person retail experiences tailored to local market needs, we are celebrating the opening of several physical locations. We opened a new small format DWR store in Southampton, NY in early March. Following the successful opening of our first four Herman Miller Seating stores, we are opening our next store in Greenwich, CT later this month. Finally, last week we opened our new location in the Fulton Market area of Chicago. This space will showcase the entire Herman Miller Group of brands, including both a contract showroom space and dedicated retail spaces for Design Within Reach, HAY, and Herman Miller Seating.
Favorable trends in new home construction, home renovation, and long-term demand for high-performing home office spaces are expected for the foreseeable future. In fact, in a recent survey of 1,000 office workers who are working at home due to COVID-19, our research team found that nearly eight out of ten believe a better home office setup would help them be more productive and 95% agreed they need improvements such as an ergonomically designed chair, extra monitor, or height adjustable desk to feel more comfortable and healthy working from home.
Given the projections of continued demand for home furnishings, and our own initiatives to drive growth – including expanded product assortments, digital marketing, new brick-and-mortar stores, and further expansion of our gaming portfolio – we are confident in the long-term potential of our Retail business. We expect to see double digit sales growth and operating margins in the low teens going forward for this segment.
International Continues to Outperform
Our global footprint also provides reasons for optimism. In regions where the impact of the pandemic has already lessened, our customers are resuming their workplace investments, giving us confidence that we will see similar rebounds in other regions as the pandemic retreats.
The recently acquired HAY brand continues to be an important contributor to our International growth, with quarterly orders 18% above last year. The HAY team continues to partner with leading designers around the globe to create high quality products that are accessible and appealing to a wide audience.
Additionally, our consumer channel business continues to grow beyond North America. Our latest Herman Miller Seating Store opened in Tokyo, Japan in December 2020, and is the first outside the United States. Consistent with what we’ve seen in our North America stores, this new store is outperforming expectations and bringing new customers to Herman Miller. Our digital initiatives are also driving results abroad as we’ve seen strong performance from our recently relaunched UK eCommerce store.
Recovery in established markets around the world, our growing presence in emerging markets, and the opportunity to continue to capture global market share all reinforce our belief that we have only just begun to unlock the full potential of a truly global Herman Miller Group.
Innovation as a Differentiator
One of our greatest strengths has always been our ability to bring innovative solutions to market. Of course, this includes product innovation–with our legacy of designing innovative and disruptive products–but today our focus extends beyond products and includes new business models, technology, and customer segments.
Our innovation incubation team is a stand-alone function responsible for identifying emergent concepts that can drive growth across the enterprise. Early successes include our entry into gaming, our Herman Miller Seating Stores, and our Inside Access program that enables our corporate customers to extend our partnership as a benefit to their employees seeking to furnish their home environments. Our recent inclusion in Fast Company’s annual list of the World's Most Innovative Companies further confirms our long-held belief that our innovation capabilities continue to differentiate Herman Miller from the competition.
The latest in a series of innovative solutions designed to accelerate growth in the Contract business is Herman Miller Professional – a digital ecosystem designed to meet customer demand for a simple and efficient design and product specification solution. Herman Miller Professional will deliver seamless online experiences to small- and medium-sized businesses, a segment that has historically been underserved by the traditional contract furniture model, while also helping our dealers capture new clients and revenue. Businesses will be able to design their spaces with product from the Herman Miller family of brands, leverage an online quoting and purchasing process to complete their order, and select from several delivery options, including white glove service where appropriate. North America pilots are planned to begin in the fourth quarter with broader rollout in fiscal 2022.
Using Our Business as a Force for Good
Our founder, D.J. De Pree, believed “a business is rightly judged by its products and services, but it must also face scrutiny as to its humanity.” More than 100 years after our founding, we are as committed as ever to operating our company in the best interests of stockholders while also using our business as a force for good.
This past summer we announced a set of actions we would take to increase diversity, equity, and inclusion (DEI) in our company and raise awareness about DEI issues in our industry and our communities. In our third quarter, progress toward our goals included:
- Welcoming Cheryl Kern as Vice President of Global Diversity, Equity, and Inclusion. Cheryl will help us further refine and expand our DEI strategy.
- Extending mitigating bias training beyond senior leadership to all managers across our global enterprise.
- Partnering with Michael Ford to host “Conversations for Change.” Michael has been touring the country with a remixed Eames Lounge Chair with the names of victims of racism in the US handwritten onto the frame. He’s been inviting people of influence to join him for honest conversations about racial inequity, social justice, and hope for real and lasting change.
External recognition, including recently being named as one of Newsweek’s Most Responsible Companies of 2020 and our 14th consecutive inclusion in the Human Rights Campaign Foundation’s Corporate Equality Index, serves as further validation that we are having a positive impact in the communities where we live and work.
While more work remains, we are excited by the progress we have made toward our goals and are committed to doing our part to make our company, our industry, and our communities a safer and more equitable place for everyone.
While we are encouraged by positive signs in each of our businesses, the overall global demand environment and potential pace of recovery remains uncertain. From a demand perspective, our contract sales funnel is pointing to increased demand in the back half of calendar 2021. From a cost perspective, like other industries, we are experiencing commodity pressures, especially associated with steel prices. We are also reinstating our employer retirement contributions, which we temporarily suspended for the first three quarters of fiscal 2021. Our ongoing cost reduction initiatives and a planned price increase will help offset these pressures over time.
We are ready to capitalize on the increased demand expected as the global contract market begins to recover. We believe that recovery, along with our expectation for sustained momentum in our Retail business and our global, multi-channel distribution model, puts us in a strong position to drive growth in our business as we reach the other side of the global pandemic.
Focused on the Future
Through a challenging quarter and difficult year, we’ve stayed focused on our strategy and remain committed to our purpose–design for the good of humankind. We are leveraging our deep understanding of how people work and what it takes to create exceptional workplaces as we walk alongside our Contract customers to redesign dynamic workplace solutions that meet the needs of a changed workforce. At the same time, we are helping our residential customers around the world create home environments that inspire and improve post-pandemic living. We plan to continue investing in diversifying our business and product portfolios, building a high-performing retail business, strengthening our omni-channel distribution network, and growing our digital capabilities. We will call upon the incredible talents of our teams around the world as we respond with speed and agility to new opportunities that arise as the world continues to evolve and emerge from this pandemic.
We appreciate your continued investment in our company and look forward to growing together in the future.