MLKN's Strategic Retail Expansion: A Path to Long-Term Value Creation Amid Short-Term Margin Pressures

MillerKnoll (NASDAQ: MLKN) has embarked on an aggressive retail expansion strategy in 2025, opening up to 15 new stores in North America by year-end as part of its long-term growth plan. While the company's third-quarter fiscal 2025 results revealed a 70-basis-point decline in gross margin to 37.9% and a negative net margin of -0.41%, its Global Retail segment showed resilience, with orders up nearly 15% year-over-year and cyber-adjusted orders rising 14% in North America. This duality-short-term margin pressures versus long-term growth potential-raises critical questions about the sustainability of MLKN's strategy.

Financial Performance and Industry Context

MLKN's Q3 2025 results reflect the challenges of scaling a retail footprint in a competitive market. Consolidated net sales of $876.2 million marked a modest 0.4% year-over-year increase, driven by strong performance in the North America Contract and Global Retail segments. However, the International Contract segment saw a 5.0% decline in net sales, underscoring regional volatility. Operating expenses surged to $414.6 million, up from $294.2 million in the prior year, due to restructuring costs and special charges.

Despite these headwinds, MLKN's adjusted operating expenses decreased by $4.5 million year-over-year, and its liquidity position remains robust, with $548.3 million in cash and cash equivalents as of November 29, 2025. This financial flexibility positions the company to absorb near-term costs while investing in growth.

In the broader furniture industry, average gross margins range from 6–12% globally, with luxury segments commanding 15–18%. MLKN's 37.9% gross margin, while significantly higher than industry averages, reflects its premium product mix and contract business model. However, the decline in margin year-over-year highlights vulnerabilities, including unfavorable channel and product mix, higher commodity costs, and lower fixed cost leverage.

Retail Expansion: Balancing Costs and Payback

MLKN's retail expansion strategy is anchored in its belief that new stores will become accretive by year-end as they ramp to full sales potential. The company's guidance for Q3 2026 revenue of $923–$963 million, above the consensus estimate of $909.6 million, suggests confidence in this trajectory.

Industry benchmarks indicate that furniture store payback periods average 26 months, with opening costs ranging from $50,000 to $500,000 depending on scale according to industry data. MLKN's $876.2 million in Q3 sales and its $64.6 million in cash flow from operations provide a strong foundation to fund expansion while maintaining operational flexibility. The company's focus on North America, a region with 25–31% e-commerce penetration, also aligns with trends toward omnichannel retailing, which can enhance customer retention and cross-selling opportunities.

Mitigating Risks and Leveraging Trends

MLKN's strategy must navigate macroeconomic headwinds, including tariffs and supply chain disruptions. The company has taken proactive steps, such as pricing actions to offset tariff pressures, which are expected to ease by year-end. Additionally, consumer financing trends-such as buy-now-pay-later options and lease-to-own models-are gaining traction, enabling retailers to maintain conversion rates despite higher prices. These tools could help MLKN sustain demand in its new stores.

The furniture industry's projected CAGR of 5.2–5.4% through 2034 further supports MLKN's long-term vision. By expanding its retail footprint and leveraging digital channels, the company is positioning itself to capture a larger share of a growing market. However, the path to profitability requires disciplined cost management, as evidenced by MLKN's adjusted operating expenses declining year-over-year despite higher restructuring costs.

Conclusion

MillerKnoll's retail expansion strategy is a calculated bet on long-term value creation, even as short-term margin pressures persist. The company's strong liquidity, resilient Global Retail segment, and alignment with industry growth trends suggest that its investments will pay off as new stores mature. While challenges like tariffs and rising commodity costs remain, MLKN's proactive pricing strategies and financial flexibility provide a buffer. For investors, the key will be monitoring whether the company can achieve accretion from its expansion by year-end and sustain its adjusted earnings performance amid a volatile macroeconomic environment.