International Expansion Fuels Steelcase's Second Quarter

Steelcase, Inc. (SCS) delivered strong second quarter results (see conference call transcript) due to an unexpected 34% jump in international sales. The company blew away top line estimates of $866 million by producing revenues of $902 million. Sales increased 9.2% from the same quarter the prior year. The company’s international sales of $253 million comprised a whopping 28% portion of its total sales.

CEO James Hackett was pleased, “while facing challenges in a variety of markets, we continue to see evidence that our growth strategies are gaining traction”. The office furniture giant was also able to beat earnings estimates of 22 cents, by a penny, despite a compression of its gross margin due to runaway commodity prices.

Second quarter analysis: SCS’s gross profit margin fell 170 basis points from 33.5% to 31.8%, however the company was successful in reining in its operating expenses, as it trimmed them 130 basis points from 27% of sales to 25.7%. The office furniture manufacturer also got help juicing up its bottom line with a 6.5% reduction in its outstanding shares from 144 million to 135 million.

Balance sheet is solid: The company has $250 million of  investment grade long term debt and $129 million of cash, providing an outstanding liquidity position. Its 60 cent annual cash dividend translates into a hefty 5.7% yield,  and earnings appear adequate to cover it.

Stock buyback program: SCS announced in December of 2007, a $250 million stock buy back program with $220 million remaining accessible  for future purchases. Management reiterated its shares represent compelling value at these levels and are worthy investment. The company repurchased $7.8 million worth of its shares, via open market transactions during the second quarter.

Third quarter guidance: Management ratcheted down its sales forecast to range between $840-$875 million,  with a bottom line producing amid 16 and 21 cents. This is below previous guidance of 25 cents on revenues of $886 million. Steelcase blamed the downward adjustment to: (1) a $6 million anticipated restructuring charge (2) commodity cost inflation of $15 to $20 million.

Outlook: The shares look compelling at 11 times 2010 analyst estimates of 97 cents compared to its main competitor, HNI Corp (HNI), selling at a multiple of 15 times its 2010 estimates. Although the stock has a very generous one year price target of $21.50, set by the analysts at BB&T Capital Markets and Longbow Research, a $15 target appears more reasonable.

Disclosure: Author holds a long position in SCS