Extraordinary Inflation Cuts Into Steelcase Results
Institutions have been scooping up shares of institutional furniture-maker Steelcase (NYSE: SCS) all year. The institutional activity is marked by rotation into and out of the stock but has been net-positive for each of the last 6 consecutive quarters. Over the past four quarters, buying has outpaced selling by roughly $100 million or about 7.9% of the company’s current market cap. This is good news for investors looking to the long term as it is a real vote of confidence in the company’s operations.
Insiders, on the other hand, have been selling the stock this year but do not read too much into the news. There have been a total of two (2) transactions of record which equal less than 0.001% of the shares outstanding. The transactions were for 5,000 shares each between a VP and a Director with the two of them still holding roughly 0.02% of the shares outstanding. Insiders and large shareholders are holding about 13% of the stock which is a much more important statistic and one that supplies another vote of confidence in the company.
Steelcase Hit Hard By Systemic Challenges
Steelcase had a good quarter with revenue of $738.2 million growing 19.5% over last year. The bad news is that systemic headwinds cut into both top and bottom-line results delivering weaker than expected revenue and earrings. The net revenue is up 19.5% from last year but missed the consensus estimate by 380 basis points when it should have exceeded it. The company estimates shipping disruptions caused the company to lose about $35 in million in revenue for the quarter or more than enough to offset the miss. The good news is that lost revenue should be recouped in the 4th quarter, the questions are how much 4th quarter revenue will get pushed into next year and when will supply chain issues cease?
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On a segment basis, all operating segments produced double-digit growth with inflationary and supply-chain headwinds impacting differently on a region to region basis. America’s produced growth of 20% followed by a 17% increase in EMEA and led by a 21% increase in other. The Asian market was called out for particular strength.
Moving down to the margin, the gross margin fell 120 basis points to 27.6% while the operating margin came in at only 2.15%. Gross and operating margins were hit by higher costs, labor, and freight the company says will persist into the current quarter at least. The good news is that supply chain disruption is expected to subside over the next year and eventually provide a tailwind to earnings.
"We estimate our earnings would have been approximately three times higher this quarter if not for the year-over-year impact of the extraordinary inflation, net of pricing benefits, and the higher costs associated with the supply chain disruptions," said Dave Sylvester, senior vice president, and CFO. "We expect the benefits from the three price increases we've implemented this year, plus the eventual moderation of supply chain challenges to become a tailwind to earnings in fiscal 2023 versus the significant headwinds we've faced so far this fiscal year."
The Technical Outlook: Steelcase Falls To 12-Month Low
Shares of Steelcase fell in the wake of the Q3 report and hit a 12-month low in the process. It looks like support is still present at this level but there is a risk of another new low being set. The price action is moving lower now with both the stochastic and MACD confirming the move. If price action falls below $10.70 we see it moving down to $10.50 and possibly $10 before bouncing again.
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