MillerKnoll's Retail Expansion and Margin Resilience Signal Long-Term Growth Potential

MillerKnoll (MLKN) delivered a robust Q4 2025 earnings report, showcasing strategic momentum in retail expansion and margin stabilization even as tariff headwinds persist. The company's decision to prioritize store growth and design leadership, while navigating near-term costs, positions it to outperform peers in the coming years.

Retail Expansion: A Catalyst for Growth
MillerKnoll aims to open 10–15 new U.S. stores in fiscal 2026, including flagship locations in Chicago and New York, to double its DWR and Herman Miller footprint over several years. These stores are designed to generate a “halo effect,” boosting e-commerce sales and brand awareness in underserved markets. Despite a 210 basis point margin decline in Q4 to 6.5% due to new store costs and variable compensation, management views 2026 as an “investment year.” With $576 million in liquidity and a net debt/EBITDA ratio of 2.88x—well below covenant limits—the company is financially equipped to execute its strategy.

Margin Resilience Amid Tariff Challenges
The company's gross margin improved to 39.2% in Q4, up 130 basis points sequentially, driven by price optimization, cost synergies from the Knoll integration, and lower freight costs. The North America Contract segment's margin rose 90 basis points to 10%, while the International segment faced a 230 basis point margin drop due to product mix and incentives. Despite tariffs adding $7 million in drag, management emphasized that pricing actions—including surcharges and list price hikes—will fully offset tariff costs by late 2026.

Tariff Mitigation and Order Dynamics
While tariffs are projected to reduce Q1 2026 EPS by $0.09–$0.11, management remains confident in its pricing strategy. The anticipation of price hikes boosted Q4 sales by $55–$60 million but caused a mid-single-digit dip in Q1 order entry. CFO Jeff Stutz noted this aligns with expectations, as customers front-loaded orders. The $761 million backlog and 11.1% new order growth in Q4 signal improving demand, with healthcare and education product lines driving innovation.

Risks and Considerations
Near-term risks include delayed price hikes, macroeconomic softness in housing markets, and execution risks in new stores. However, the company's disciplined capital allocation—$85 million in share repurchases and $52 million in dividends in 2025—demonstrates financial prudence.

Investment Thesis: Buy with a Long-Term Lens
Trading at 12x 2025E EPS, MillerKnoll is undervalued relative to peers. The stock is recommended as a “Buy” for investors with a 12–18 month horizon, supported by its design leadership (e.g., Muuto, HAY), growing backlog, and margin recovery potential. Historical backtests from 2020 to 2025 further validate this thesis: buying MLKN on earnings announcement days and holding for 20 trading days produced an average return of 1.95%, underscoring the stock's positive reaction to financial updates and growth catalysts. While short-term volatility may persist, the company's strategic investments in retail and innovation justify optimism about its long-term trajectory.

As CEO Andi Owen stated, “We are well positioned with cash flow and balance sheet strength to capitalize on opportunities.” With disciplined execution, MillerKnoll is poised to emerge stronger from current challenges.