Q & A Highlights

Q: Can you provide more color on your view on margins for the second half and what's driving the softer margins in the second quarter? A: Jeff Stutz, CFO: We expect improvements in labor and overhead efficiency due to increased order activity. However, this is offset by a shift in business and product mix, particularly moving out of higher-margin retail sales. Additionally, marketing spend for cyber promotions is front-loaded, but the associated revenue will be split between Q2 and Q3.

Q: Are you seeing any positive outlook in the retail market for the coming quarters? A: Debbie Propst, President of Global Retail: We are optimistic about retail demand trends. The recent interest rate cut should boost consumer confidence. Our marketing spend was down 11% in Q1, but orders were only down 1.6%, indicating a positive relationship. We plan to increase advertising spend in Q2 to capitalize on the cyber promotional period.

Q: Why are customers asking for delivery further away from the order date? Is this an ongoing trend? A: John Michael, President of Americas Contract: Larger projects, which have increased significantly, typically have longer lead times. Additionally, clients are getting orders in earlier to ensure delivery times are met due to longer construction project timelines. This trend has been ongoing since COVID, with backlog now accounting for 10-12 weeks of revenue.

Q: What industry groups are driving the order growth in North America Contract? A: John Michael, President of Americas Contract: Financial services, banking, pharma, public sector, healthcare, and technology sectors are driving growth. Notably, Northern California was one of the strongest performing regions this past quarter.

Q: Can you provide an update on integrating Knoll and other brands into the international dealer network? A: Jeff Stutz, CFO: As of the end of Q1, we have integrated about 60% of the international network. The goal is to complete the integration by the end of this fiscal year. We are starting to see real opportunities with the Knoll brand through this combined network.

Q: What are you hearing from customers and dealers about back-to-work and hybrid trends? How do you feel about your product portfolio for hybrid and collaboration? A: Andrea Owen, CEO: We are hearing less about the return-to-office quandary and more about the push to be together more frequently. Our product portfolio is well-suited to meet the evolving needs of the workplace. Our research and insights team has helped drive innovation and develop a strong product assortment.

Q: What are your expectations for the macroeconomic backdrop in the second half of the year? A: Andrea Owen, CEO: We expect improvements across all our businesses. The recent Fed decision adds certainty, and indicators we've been tracking are coming to fruition. We anticipate mortgage rates and the resale market in the US will buoy the retail business, with consistent order growth expected.

Q: What are your long-term expectations for gross margins? A: Jeff Stutz, CFO: We expect gross margins to improve with economic conditions, leveraging overhead costs across our manufacturing footprint and SG&A costs in retail. Long-term growth plans for retail, which has higher margins, will also contribute to stabilization and balance.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.