The CEO of MillerKnoll (MLKN, Financial), Andi Owen, faced social media backlash after encouraging employees to "leave Pity City" and focus on meeting company's goals rather than complain about not getting bonuses. Since then, the company's stock has dropped by 24% year to date in 2023.
However, the chairman of MillerKnoll, Michael A. Volkema, has recently purchased 60,200 shares of the furniture maker's stock for $1 million, bringing his total ownership to 187,086 shares. Volkema previously served as CEO of Herman Miller, and his latest purchase is his first since the formation of MillerKnoll in July 2021. Prior to this, the last insider purchase of MillerKnoll stock was made by Owen in October 2022, when she bought about $1 million worth of shares.
Ticker | Insider | Position | Date | Buy/Sell | Shares | Shares Owned | Trade Price($) | Trade Percentage(%) | Cost($1000) | Price change since trade(%) | Share ownership details | Filing Date |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| MLKN | Michael A Volkema | Director | 2023-05-03 | Buy | 60,200 | 193,768 | 16.61 | 31.07 | 999.92 | -0.54 | 187,086.428 (Direct) by Spouse: 6681.376 | 2023-05-05 |
| MLKN | Andrea Owen | President & CEO | 2022-10-03 | Buy | 60,606 | 100,468 | 16.88 | 60.32 | 1,023.03 | -2.13 | 100,468 (Direct) | 2022-10-04 |
The company's sales have been severely impacted by the work from home trend, which has been slow to recover from pre-pandemic levels. MillerKnoll is a global furniture manufacturer that specializes in creating higher end products for the residential, office, commercial and health care markets. Notably, the company's acquisition of competitor Knoll Inc. by the previous Herman Miller Group has diversified its brand portfolio, with all brands sharing a modern design theme. Herman Miller acquired Knoll on April 19, 2021.
With the company's stock down in the dumps, is it worth it for value investors to go dumpster diving? Let's take a look.
Balance sheet
The company had to take significant debt to pay for the Knoll acquisition and now has a debt-to-Ebitda ratio at 5.85, so the balance sheet has become streched. The acquisition has also impacted the company's Altman Z-Score, which has fallen from over 4 (comfortable) to below 2 (distressed). This leverage may become a major risk for the company if the recession is worse than expected and sales go down further.
In July 2021, the company negotiated a credit agreement for the acquisition of Knoll. The agreement included a revolving line of credit of up to $725 million, which replaced the previous $500 million line of credit, and two term loans totaling $1.025 billion. These funds were used to finance part of the acquisition of Knoll, repay debts of Knoll and cover related fees and costs. Short-term borrowings and long-term debt as of March 4, 2023 and May 28, 2022 consisted of the following:
| (In millions) | March 4, 2023 | May 28, 2022 |
| Syndicated revolving line of credit, due July 2026 | $468.5 | $413 |
| Term Loan A, 6.4821%, due July 2026 | 375.0 | 390.0 |
| Term Loan B, 6.7321%, due July 2028 | 617.2 | 621.8 |
| Supplier financing program | 2.1 | 3.1 |
| Total debt | $1,462.8 | $1,427.9 |
| Less: Unamortized discount and issuance costs | (16.8) | (19.4) |
| Less: Current debt | (30.9) | (29.3) |
| Long-term debt | $1,415.1 | $1,379.2 |
From the above table, it appears that the company is struggling to reduce debt but has made little headway. However on the positive side, the company's quarterly free cash flow (as shown below) has been improving over the last year.
On March 22, 2023, Miller Knoll reported its third quarter fiscal 2023 results, which included lower orders of $885.4 million, down 19.2% on a reported basis and 17.6% organically compared to the same period last year. The company reported gross margin expansion, which increased by 110 basis points (reported) and 260 basis points (organically) over the prior year. The company said it continued to reduce costs and improve operating efficiencies, resulting in $123 million of cost synergies related to the Knoll integration captured to date. The company's liquidity position as of March 4, 2023 was $459.5 million. The company also reported lower operating margins and said it will take several more quarters for price increases to take effect as they work through previously quoted backlogs on orders.
The company expects its net sales for the fourth quarter of fiscal year 2023 to range between $930 million to $970 million with adjusted earnings per share of $0.37 to $0.43. This soft guidance contributed to an over 20% decline in the stock price since the third quarter results were released.
Valuation
MillerKnoll is selling at depressed valuation, as shown in the chart below. Investors are struggling to reconcile this depressed valuation with the uncertainity of the future of the work from home trend, which is lowering office furniture purchases.
With the economy expected to weaken in the months ahead, arguments both in favor and against working from home continue to mount. Senior executives of most organizations want more employees to come back into the office so that top management can justify their own higher salaries, and because some believe that an office environment is more effective. At the same, other companies are enjoying the lower costs for facilities, and some like that they have more choice in attracting strong candidates for their teams and increase in geographical reach if they offer remote and/or hybrid work. The recent labor shortages have given knowledge workers a stronger bargaining position to demand remote or hybrid work versus making the commute to the office very day and the associated time, costs and inconvenience. It is an open question if this trend will survive a recession when employee bargaining power will suffer. I think it will, and furniture makers like MillerKnoll will have to adapt to lower volumes and more home office setups. It will be a uncertain and difficult road ahead.
Conclusion
MillerKnoll's stock is selling at a very undemanding price and has a leveraged balance sheet. Knowledgeable insiders like the Chairman and CEO are buying. The company has strong brand names and position in the office furniture market. The company is profitable and cash flow is improving. Sooner or more likely later, the work furniture market should start to improve, though it's unlikely to get back to pre-pandemic levels any time soon. However, work is not going to disappear, and I think the company will adapt to a changed paradigm of hybrid work. The company has high operating leverage and even small increases in revenue will boost the bottom line substantially as operating margins come back closer to historical levels.
Overall, this company is a mixed bag and a contrarian play if anything. Guru investors are mostly unenthusiastic about the stock. I plan to buy a small speculative position and then wait and watch for improvements before further action. I think the stock is very undervalued compared to the past. The market is saying "this time is different," but my experience is, usually it's not. I agree with the CEO - it's time for both employees and investors to leave the Pity City and take a chance on normalization.
