Earnings Call Transcript - MLKN Q1 2026

Operator, Operator

Good evening, and welcome to MillerKnoll, Inc.'s Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations. Good evening.

Wendy Watson, Vice President of Investor Relations

And welcome to our first quarter fiscal 2026 conference call. On with me are Andi Owen, Chief Executive Officer, and Kevin Veltman, Interim Chief Financial Officer. Joining them for the Q&A session are Jeff Stutz, Chief Operating Officer, John Michael, President of North America Contract, and Debbie Propst, President of Global Retail. We issued our earnings press release for the quarter ended August 30, 2025, after market closed today. It is available on our Investor Relations website at millernoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Andi, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors which are detailed in today's press release. The forward-looking statements are made as of today's date, and except as may be required by law, we assume no obligation to update or supplement these statements.

Operator, Operator

We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn the call over to Andi.

Andi Owen, CEO

Thanks, Wendy. Good evening, everyone, and thank you for joining us tonight. We are very pleased with our strong start to fiscal 2026. Our Q1 results significantly exceeded our expectations. Before we get into the financial details, I'd like to recap a few highlights from the quarter including leadership names, progress on our strategic initiatives, and an update on what we're seeing in our markets. First, I want to touch on our recently announced board chair succession plans and leadership changes. I'd like to thank Mike Volkema, our outgoing board chair, for his dedication and leadership for the past 25 years, and congratulate John Hoke as he prepares to succeed Mike as board chair. John has served on our board since February 2005, and I'm looking forward to working closely with him in his new role. We have a strong bench of talent at MillerKnoll, and I'm thrilled to congratulate Jeff Stutz on his well-deserved promotion to Chief Operating Officer. Jeff has impacted nearly every corner of our business during his 25 years with the company, including as Chief Financial Officer for the past ten years. As Chief Operating Officer, Jeff is responsible now for our international contract business, our Europe-based brands, and our global manufacturing and distribution. This evening, Kevin Veltman is joining us as interim CFO. Many of you know Kevin from his prior roles with MillerKnoll over the past ten years, serving in a variety of leadership positions, including investor relations and as the integration lead for the Knoll acquisition. When we spoke last quarter, I set out our priorities for this fiscal year. We are focusing on accelerated product creation and innovation, consistent execution, and prudent cost management while investing for profitable growth across our businesses. In the four years since we combined the strengths of Herman Miller and Knoll, we've had the time to perfect how we go to market, with the full strength of our collective resources. We integrated our world-class dealers who are now well-versed in our unmatched product portfolio. We are now capitalizing on our opportunities. Every day, we're presenting our customers with state-of-the-art solutions for what's possible in their spaces. We're implementing our geographic and channel expansion plans, and developing innovative new products. We have a balanced long-term approach to our businesses, with the cash flow and balance sheet strength to capitalize on our multiple opportunities. Now on to the quarter. As I just mentioned, we outperformed our expectations and delivered strong revenue and profitability, with consolidated net sales growing almost 11% and adjusted EPS increasing 25%. Our results underscore the strength of our business model, strong execution by our team, improving conditions in several key markets, and continued progress on our strategic growth initiatives. In our contract businesses, we believe growth momentum is building. More companies are recognizing the benefit of bringing their employees together and looking to refresh their spaces. Office leasing activity for class A space continues to be robust in many markets, with Manhattan leasing activity in August well above the ten-year monthly leasing average. Orders in the industry and dealer optimism are up, and we are seeing strength in our own preorder metrics, with our twelve-month funnel up year over year in both North America and international contract. On the product side, in addition to healthcare solutions from Herman Miller, private office solutions from Geiger, and new workspace solutions from Knoll that were introduced at Design Days, we launched an electrostatic discharge version of one of our icons, the Aeron chair, allowing it to be used in data center clean room environments. We are excited to see such strong interest in this product globally. Turning to our global retail business. First, a reminder that our growth strategy for this business is currently focused on the North America region, and comprised of four levers: opening new stores, expanding our product assortment, growing e-commerce sales, and increasing our brand awareness. Kevin will discuss the segment financials, but I want to share some North America retail-specific performance for the quarter which includes all of our North American operations with the exception of Holly Hunt. Net sales in the North America region were up 7% compared to last year, and North America orders were up over 5%. Web traffic in North America was up a strong 17% over last year. We opened four stores during the quarter, two new DWR locations in Sarasota, Florida and Las Vegas, and new Herman Miller stores in Chicago and Philadelphia. In the second quarter, we expect to open four additional stores, a DWR in Salt Lake City, and Herman Miller stores in Nashville, and in El Segundo and Walnut Creek, California. For the full fiscal year, we anticipate opening a total of 12 to 15 new stores in the US, as we execute on our strategy to more than double our DWR and Herman Miller store footprint over the next several years. We are launching 50% more new products than we did in fiscal 2025. New products are already positively impacting our performance with new product order growth of over 20% in the quarter. This bodes well for the future. We see a direct correlation between categories with the most newness and overall growth. New products are driving demand from customers who are brand new to MillerKnoll, so assortment expansion fosters new customer acquisition and provides a platform for building long-term customer lifetime value. Before I turn it over to Kevin, I want to thank and recognize our associates around the world for their hard work and dedication to MillerKnoll. Our performance this quarter reflects their commitment to outstanding execution. Our people are the key to our success. I'm proud that MillerKnoll was recognized as the best workplace for innovators by SAS and named overall as a great place to work. Kevin, welcome. I'll hand it over to you.

Kevin Veltman, Interim CFO

Thanks, Andi, and good evening, everyone. I'll start with an overview of our first quarter performance followed by our outlook for the second quarter. In the first quarter, we generated adjusted earnings of $0.45 per share, significantly outperforming the midpoint of our guidance and 25% ahead of the prior year, driven by better than expected sales and strong gross margin performance that benefited from leverage on our sales growth. Consolidated net sales in the first quarter were $956 million, above the midpoint of our guide. Versus prior year, net sales were up 10.9% on a reported basis and up 10% organically, driven by strength in all segments of the business. New orders at the consolidated level in the first quarter were $885 million, down 5.4% as reported and 6.2% lower on an organic basis. As a reminder, we expected lower orders in the first quarter due to the $55 million to $60 million in pull-forward activity we saw in the fourth quarter in our North America contract business, related to our pre-announced tariff surcharge and list price increase. I will touch more on this later in the call. In keeping with this same dynamic, our consolidated backlog decreased by $67 million to $691 million. First quarter consolidated gross margin was 38.5%. Gross margin included approximately $8 million in net tariff-related impacts. As mentioned last quarter, we expect margins to be negatively impacted through the first half of our fiscal year by tariffs currently in place but remain confident our pricing actions will ease these in the second half of the fiscal year. Turning to cash flows and the balance sheet, we generated $9 million in cash flow from operations in the first quarter and ended the quarter with $481 million in liquidity. In August, we refinanced our Term Loan B to extend its maturity to February 2032. In connection with this refinance, we incurred a non-cash debt extinguishment charge of $7.8 million that is recognized in other expenses on the P&L. We finished the quarter with a net debt to EBITDA ratio, as defined by our lending agreement, of 2.92 times, comfortably under the maximum limit defined in those agreements. Now I will move to our first quarter performance by segment. In the North America Contract segment, net sales for the quarter were $534 million, up 12% from the same quarter a year ago. New orders during the period were $492 million, down 8% from last year. Given the order pull-forward dynamic in 2025, in order to better normalize the order trend, order growth in the segment over the prior year for the combination of 2025 and 2026 was 3.3%. Shifting to earnings in the North America Contract segment, first quarter operating margin was 10.7% compared to 3.4% in the prior year. Adjusted operating margin improved by 200 basis points in the quarter to 11.4%, illustrating the benefit of fixed expense leverage we have in this business from higher sales volumes. This operating margin strength was partially offset by the net tariff impact. In the International Contract segment, net sales in the first quarter improved to $168 million, up 14.4% on a reported basis and up 11.3% on an organic basis year over year. New orders during the quarter were $155 million, 6.5% lower than the prior year on a reported basis, and 9.2% lower organically, primarily from lower year over year orders in the Asia Pacific, Middle East, and Africa (APMEA) and Latin America regions, partially offset by higher orders in Europe and the UK. First quarter reported operating margin for the International segment was 8.1%, compared to 6.5% in the prior year. On an adjusted basis, segment operating margin was 8.5%, down 60 basis points primarily from the regional and product mix of sales in the quarter. Turning to our Global Retail segment, net sales in the first quarter were $254 million, up 6.4% on a reported basis and up 4.9% organically. New orders in the quarter improved to $239 million, up 1.7% compared to last year on a reported basis and up 0.3% on an organic basis compared to last year. Operating margin in the Retail segment was 0.6% in the quarter compared to 2.2% last year. On an adjusted basis, operating margin was 1.2%, 190 basis points lower than the prior year, primarily from new store opening costs, increased freight expense, and higher net tariff-related impact. As Andi mentioned, we opened four new stores in the first quarter. We expect to open four additional stores in the second quarter and anticipate opening a total of 12 to 15 new stores in the full fiscal year. Now let's turn to our Q2 guidance and outlook, which is informed by our most up-to-date information on tariffs and related mitigation efforts. For 2026, we expect net sales to range between $926 million and $966 million, down 2.5% versus the prior year at the midpoint of $946 million. This implies our expectation that sales for 2026 will be up approximately 3.8% at the midpoint, and this first half view normalizes the impact of the $55 million to $60 million of order pull ahead into our fiscal 2025 fourth quarter. Gross margin is expected to range between 37.6% and 38.6%. Adjusted operating expense is expected to range from $300 million to $310 million, and adjusted diluted earnings are expected to range between $0.38 and $0.44 per share. The gross margin and EPS outlook includes our estimate of the net impact of tariffs currently in place. In total, we expect net tariff-related impact to reduce gross margin in the second quarter by $2 million to $4 million before tax or between $0.02 and $0.04 per share after tax. We believe our collective mitigation actions will fully offset these costs as we move into the second half of this fiscal year. Another factor included in our expectations for operating expenses and earnings per share are the costs associated with planned new store openings in our global segment. As a reminder, due to the time it takes to prepare a new store for daily operation, we typically begin to incur occupancy and other pre-opening expenses one to two quarters before the first products are sold. In the first quarter, this expense was approximately $3 million. We estimate approximately $4 million to $5 million in incremental operating expense tied to these new locations in the second quarter. We expect to incur a similar range of incremental expense over the prior year in each quarter this year related to the planned new store openings. For all other details related to our outlook, please refer to our press release. I will now turn the call over to the operator and we will take your questions.

Operator, Operator

We will now open the floor for questions. If you would like to ask a question at this time, simply press star followed by the number one on your telephone keypad. Our first question comes from the line of Reuben Garner with Benchmark Company. Reuben, please go ahead.

Reuben Garner, Analyst

Thank you. Good evening, guys, and congrats to Jeff and Kevin.

Andi Owen, CEO

Hey, Reuben. How are you? Good. Thanks.

Reuben Garner, Analyst

Doing well. So I guess to start off in The Americas, if I try to normalize for the pull forward, you've been consistently growing in the low to mid single digits the last I think, three or four quarters for both revenue and orders. Okay. I guess, one, do I have that right? And two, can you break down what that looks like from a volume and a pricing standpoint? Is that evolving, I guess, in the more recent quarters, is it more volume driven than price? And how do you feel about that trend in the last four quarters? Based on what you're seeing here, of late, I don't know if things have strengthened or weakened throughout the quarter. But how do you feel on a go forward about those numbers?

Kevin Veltman, Interim CFO

So, Reuben, I could unpack your question. Maybe to start, you're thinking about it the right way looking for North America Contract at the combination over the two quarters between Q4 and Q1. If you normalize for North America Contract, it averaged 3.3% growth over that period. Your other question was related to price versus volume, and volume was a key driver for us. We expected, with the pull forward, we might see some lighter demand in the quarter, and underlying demand was more positive during the quarter. We also had a surcharge adjustment during the quarter in July that customers responded to by placing some orders. So we had fairly strong orders in July. Given our lead times, we were able to ship some of that activity as well. The last point I would make as we look at external demand indicators, we mentioned in the prepared remarks, the funnel is looking positive year over year, additions to the funnel, and mock-ups were all looking positive. Early in the quarter, we often comment that our orders are up about 6% on a consolidated basis in the first three weeks of the quarter as well.

Andi Owen, CEO

Yeah, Reuben, you'll recall from the last call, thank you, Kevin, we discussed a little bit about the makeup of the funnel and international contract as well as North America contract. We've seen a consistent shift from orders that are four and five quarters out to orders that are one to three quarters out. Those orders have more certainty and drive more revenue close in, so that is also a good sign that continues to bode well for consistent growth in North America contract. I would also add that what we expected for the Q2 results is unfolding exactly as we thought it would. We feel good about the results and the trend, especially in North America. Would you add anything, John?

John Michael, President of North America Contract

No. I think that's spot on, Andi.

Reuben Garner, Analyst

Well, how about any discounting? I understand that the surcharges and tariff pricing, but has there been any increase in discounting necessary to win projects or has that been pretty stable?

Andi Owen, CEO

You know, that's been pretty stable for us, Reuben. We haven't seen increased discounting at this stage. We feel good about that trend holding steady.

Reuben Garner, Analyst

Okay. And then my last question is on retail profitability. In the press release, you listed a few sources of what appear to be near-term pressures. Can you break down the freight, new store expenses, and there was one other bucket, the tariff-related, those three items, how much in either dollars or basis points did those drag the retail margins on a year-over-year basis? And then how the new store expense in particular, like, how is that gonna play out through the year? Is that something we should expect in each of the next three quarters, and then next year we'll get relief? Or how do we map that out? Thank you.

Andi Owen, CEO

Those are all great questions. I'm gonna let Kevin break down the details about a high level, Reuben. The bulk of what you'll see as margin degradation is really new store expenses. We're being aggressive in opening more new stores than we have before. So you will see in Q1, Q2, and Q3 those expenses will hit our bottom line, but as we get further into the year, the revenue from those new store locations will start to minimize that impact. We imagine that by the end of Q4 and into Q1 of next year, those stores will start to be accretive to the top line and the bottom line. But this year, these first three quarters will see a margin impact. In terms of tariff perspective, we had some unplanned tariff expense this quarter based on mix and what customers bought. So that's one of the other factors. What would you add, Kevin?

Kevin Veltman, Interim CFO

Yeah. Just a reminder, Reuben, that Q1 is always our lowest seasonal point in the retail segment. So from an absolute margin, that would be a lower volume quarter for us. The 190 basis points decline in retail margins are lower than last year from an operating margin perspective, as Andi mentioned, the new stores would account for more than half of that. The tariff impact and freight would split the remainder.

Reuben Garner, Analyst

Can I squeeze one more small follow-up in? Is the new store impact at both the gross margin and operating margin line? Or were there other factors impacting gross margin, whether it's product mix or door or some other driver?

Kevin Veltman, Interim CFO

The new store costs are in the operating expense, so they're impacting the operating margins. You'd have those other items in gross margins.

Andi Owen, CEO

The only other thing in gross margin was some unfavorable FX impact this quarter versus last year.

Reuben Garner, Analyst

Perfect. Thank you, guys, and good luck.

Andi Owen, CEO

Thanks. You too.

Operator, Operator

Thanks. And our next question comes from the line of Greg Burns with Sidoti and Company. Greg, please go ahead.

Greg Burns, Analyst

Good afternoon. Just wanted to talk a little bit about the recent consolidation. Does that in any way change the competitive outlook for you in terms of how you go to market? And do you feel like there needs to be further consolidation, or is M&A or acquisitions on the table for you in terms of gaining greater scale in any areas of the business? Thanks.

Andi Owen, CEO

Listen, I think consolidation for the industry where we are right now is a good thing for all of us. I do think that the industry has shifted to growth mode. I can't say whether I anticipate further consolidation, but it presents opportunity for all of us. From our perspective, we're excited. We think we're competitively differentiated. We know what integrations will be like, and we are looking forward to the opportunities it presents for MillerKnoll. As far as M&A acquisitions, we are always opportunistic in that arena.

Greg Burns, Analyst

Okay. I know you're focused on the retail business in North America. But can you talk about the rest of the world? It seems to be lagging kind of the performance that you're delivering in North America. Longer term, what is your view for those markets? How might you be able to bolster them or have them catch up to what you're doing in North America?

Andi Owen, CEO

Yeah. I think it's a smaller part of our business, but I think just as a reminder, Greg, that the international markets are primarily wholesale and have been slower to recover from over-inventory during COVID, but we are seeing them start to rebound. I think it's a bit of a slower trend. I'll let Debbie elaborate, but I think it is an area that will grow for us and continue to grow slowly, but in the future. Probably not this year. What would you add, Debbie?

Debbie Propst, President of Global Retail

I'll just start by saying where we do have DTC internationally, we're pleased with the growth performance we're seeing in those channels. As Andi suggested, the more challenging areas are our wholesale business, where we are still beholden to the lack of demand from the dealer or retail network. However, we're seeing some green shoots, particularly with our Hay and Mitchell brands, which hit a lower price point within our portfolio, and we're making progress this quarter with our Knoll and Herman Miller brands.

Greg Burns, Analyst

Okay. Thank you.

Operator, Operator

And our next question comes from the line of Doug Lane with Water Tower Research. Doug? Please go ahead.

Doug Lane, Analyst

Yes. Hi. Good evening, everybody. Thank you. I'm trying to understand how these tariffs have impacted your business because there's a lot of moving parts as a result of all this. Can we start with just in the first quarter, you had $8 million of net tariff-related impact? And does that mean there was some mitigation to the tariffs? Did you get some pricing or some cost reductions, or is that mostly just the cost of the tariffs at this point?

Kevin Veltman, Interim CFO

Yeah. Doug, this is Kevin. Exactly right. The point of the net is to say we've been working on pricing. We put a surcharge in place and had a price increase in June as well. These changes take a little while to flow through our contracts with customers. The net impact in the short term is the $8 million that we called out from a pressure perspective, and we expect that to be less in Q2 at $2 million to $4 million of net impact. When we get into the back half of the year, we believe our pricing mitigation actions will be offsetting those costs based on the current tariff environment.

Doug Lane, Analyst

Oh, okay. So you're well underway with the mitigation efforts. And the disruption to order patterns because of the buying ahead for the tariffs is pretty much behind us? The way to address that is to look at the fourth quarter and first quarter in aggregate to capture the broader trends. Beginning in the second quarter, we should expect a more normal ordering and sales pattern?

Kevin Veltman, Interim CFO

Correct. We feel like we're in a more normalized place related to that. The other way we tried to clarify this in our prepared remarks was to say sales year to date through Q2, including the midpoint of our guide, are up 3.8% on a consolidated basis. That takes out some of that noise for you.

Doug Lane, Analyst

Right. No. That's very helpful. And then at the adjusted operating profit line where margins are up in the quarter, I know you don't have a full year number out here. But should we be modeling improvements in the adjusted operating profit margin for this year despite all these cross currents?

Kevin Veltman, Interim CFO

Yeah. On that front, we'll hold off on commenting with the uncertainty that's out there in the macro. We're guiding right now on a quarter-to-quarter basis as we're still watching visibility and feeling fairly limited beyond that.

Doug Lane, Analyst

Okay. Fair enough. Thank you.

Operator, Operator

There are no further questions. We turn the floor back to President and CEO, Andi Owen, for any closing remarks.

Andi Owen, CEO

Thanks again, everyone, for joining us on the call. We really appreciate your continued support of MillerKnoll, and we look forward to updating you on our next quarterly call. Good night.

Operator, Operator

That concludes today's conference call. You may now disconnect.