MillerKnoll, Inc. Common Stock 2027 Q1 Earnings Call

Good morning, and welcome to our first quarter fiscal 2027 conference call. On with me are Jeff Stutz, MillerKnoll's Interim Chief Executive Officer, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are 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 29, 2026 before market open today, and it is available on our investor relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Jeff, 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 actual 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. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn it over to Jeff.

Thanks, Wendy. Good morning and welcome, everyone. Before Kevin reviews our financial results and outlook, I'd like to update you on the priorities we outlined last quarter and our commitment to driving improved performance and disciplined execution across the organization. Overall, we delivered solid margin performance, earnings, and cash generation despite revenue headwinds. First quarter sales were $923 million, down 3.4% year-over-year, primarily reflecting softer than anticipated revenue in our North America Contract and Global Retail segments. Adjusted earnings per share were $0.53, and excluding an $0.11 per share net benefit from IEPA tariff refunds, adjusted earnings per share were $0.42, above our guidance range and reflecting disciplined execution and cost management. Demand conditions varied across our business. Orders were particularly strong in International Contract and continued to grow in Global Retail, while North America Contract orders were softer than we anticipated.

At the same time, several of our internal demand indicators and customer verticals remained quite constructive. We are encouraged by the progress our teams are making against this backdrop and by the actions underway to strengthen MillerKnoll's performance. As I previewed on our last earnings call, we are focused on three key areas. First, we are elevating the level of operational discipline we bring to setting priorities and running the business by concentrating our resources on the initiatives where we believe we can create the greatest value for the organization and for our stakeholders. Last quarter, I said this is about focusing on those efforts that will help us grow the top line and improve profitability. Across the company, our teams have sharpened their priorities and aligned resources behind the opportunities that can have the greatest impact. Let me put a finer point on that.

In North America Contract, we are concentrating our selling resources on winning global and national account opportunities and leveraging the strength of our brands and our credibility with A&D and commercial real estate specifiers. In International Contract, new products are gaining traction in the marketplace. Notably, our recently introduced Concert line by Knoll is driving early wins in the private office category, which is an area of our business previously under-penetrated in Europe. We are also targeting efforts aimed at training dealers and expanding distribution coverage in the Asia-Pacific region, where we see premium growth opportunities. In Global Retail, we are executing our store growth strategy and applying our learnings, such as an increased emphasis on our smaller format Herman Miller stores, while continuing to optimize our marketing investments to build awareness and customer acquisition. Second, we are maintaining rigorous cost discipline and aligning expenses with revenue levels.

In the near term, we are making more deliberate decisions about where we deploy capital and resources while reducing expenses where we can. Our first quarter earnings performance, excluding net tariff refunds, demonstrates early progress toward this goal. Third, we are sharpening our focus on capital allocation, cash flow, and balance sheet strength to support debt reduction during FY 2027 while preserving our capacity to invest in growth. By bringing greater discipline to capital deployment, we are building upon our business's proven cash generation capabilities. Next, I will offer some segment highlights for the quarter. In North America Contract, first quarter sales declined year over year, due in part to the timing of orders pulled forward late in fiscal 2025 that benefited sales in the first quarter of fiscal 2026. Still, first quarter orders were softer than we expected, with trends varied across sectors. We had continued strength in insurance, financial, and business services.

Conversely, order patterns were soft in relation to last year within the healthcare sector and with federal, state, and local government customers. Looking more broadly, we continue to operate in a dynamic environment and are navigating the recent trade developments between the U.S. and Canada. Now we manufacture in both countries, and our supply chain touches both countries. We are being proactive on both sides of the border and working closely with suppliers, customers, and our own production teams to manage the flow of product and make adjustments where we can. Our full year outlook includes the most up-to-date assessment of the U.S.-Canada tariff actions. Based on that assessment, we estimate an approximate $0.07 per share impact from costs related to these new tariffs. Given this backdrop, we are managing expenses and production levels carefully while prioritizing investment in our most important growth initiatives.

Tariff refunds were also beneficial to help mitigate these pressures to our full year outlook, and Kevin will cover those details shortly. Over the last several months, I have spent considerable time with the North America Contract team, meeting with dealers and customers, and one message has come through very clearly. Strong partnerships are a competitive advantage in this business, and our brands benefit from deeply credible key target markets alongside differentiated product offerings. Our dealers and customers tell us they need two things from us. First, we need to continue to simplify the process of doing business with us. Second, we need to maintain and expand our leadership in product innovation. We are delivering on these needs by improving responsiveness, service levels, and operational execution while also accelerating our new product innovation clock speed. We continue to be optimistic in this business.

Despite the demand softness we saw this past quarter, which varied by sector, our internal forward demand indicators continue to point to healthy conditions across North America. Project funnel and funnel additions were up year-over-year, along with particularly notable growth in awarded contracts. Externally, Class A leasing in the U.S. continues to show strength with the latest four-quarter net absorption in Class A buildings improving to the highest total since mid-2020. All of this suggests the order softness we experienced in the first quarter represents a timing issue rather than a structural slowdown in general business conditions. Turning to International Contract, we remain encouraged by the opportunities in this business. Although sales declined year-over-year, reflecting difficult comparisons in several markets, orders increased across most regions. Activity was particularly strong in Asia, the Middle East, and portions of Europe and Latin America.

We saw healthy demand from financial services and private office customers, along with strength in healthcare and technology. We remain focused on expanding and strengthening our international dealer network, increasing engagement, and improving alignment as we continue building our international business. During the quarter, our Asia Pacific team hosted dealers representing more than 20 countries at an event in Jakarta, Indonesia. Key leaders from across MillerKnoll participated, helping us strengthen relationships in the region and position us for further growth. Within the Global Retail segment, we delivered another quarter of sales and order growth, together with meaningful year-over-year operating margin improvement, even after excluding the net benefit from tariff refunds. While June and July had softer than expected sales and orders, performance strengthened significantly across channels and geographies in the month of August.

For the first quarter, North America orders increased 7.5%, and this represents our eighth consecutive quarter of North America retail order growth, a key indicator of our ability to effectively navigate a challenging industry environment while advancing our long-term strategy. During the quarter, we opened a Design Within Reach store in Raleigh, North Carolina, and Herman Miller stores in Columbus, Ohio, St. Louis, Missouri, and San Antonio, Texas. Looking ahead, we expect to open five to seven new stores during the second quarter and continue to plan for approximately 14 to 18 new store openings throughout FY 2027. Beyond expanding our physical footprint, the retail team is developing new ways to engage customers and build awareness of our brands.

These initiatives are designed to reach more consumers across our target markets and included a Design Within Reach furnished home on Shelter Island, sponsorship of the summer celebration of the iconic Glass House, and increased storytelling on social media with design partners. With those brief opening comments, I will now hand the call over to Kevin, who will provide additional details on segment financial performance and our outlook for FY 2027.

Thanks, Jeff, and good morning, everyone. I will start with an overview of our first quarter results and segment detail, followed by our outlook for the second quarter and full fiscal year. As Jeff mentioned, first quarter consolidated net sales were $923 million, down 3.4% on a reported basis and 3.3% lower organically. Consolidated orders for the quarter were $914 million, up 3.2% as reported and 3.5% on an organic basis. Our consolidated backlog was $669 million at quarter end, down 3.1% from a year ago. First quarter reported gross margin increased 320 basis points to 41.7%, and adjusted gross margin was 41.8%. The recognition of $16.5 million in refunds from the U.S. government related to previously expensed IEPA tariffs contributed 180 basis points to the year-over-year increase. Excluding this benefit, adjusted gross margin improved 150 basis points over last year, primarily reflecting pricing realization partially offset by inflationary cost pressure.