Steelcase: A Contrarian Buy in the Office Furniture Sector's Undervalued Landscape

The office furniture sector faces headwinds from hybrid work trends, macroeconomic uncertainty, and supply chain challenges. Yet, within this environment, Steelcase (NYSE: SCS) emerges as a compelling contrarian opportunity. With a low valuation, improving margins, and a diversified portfolio, the company is positioned to capitalize on structural resilience in the workspace transformation market. Let's dissect Steelcase's Q1 performance, peer comparisons, and why now is the time to act.

Steelcase's Q1 2025: Margin Gains Amid Revenue Headwinds

Steelcase reported Q1 revenue of $727.3 million, a 3% decline year-over-year, driven by lingering supply chain impacts and softness in Asia Pacific. However, the story here is about margin resilience. Gross margin expanded 180 basis points to 32.2%, while operating income surged to $17.6 million—up 138% from a year ago. Orders rose 8%, with the Americas segment (up 10%) and education sector driving demand for workspace transformation solutions. Backlog grew to $764 million, a 1% increase from the prior year, signaling solid demand visibility.

The company's confidence is reflected in its Q2 guidance: revenue of $850–875 million (vs. $866 million in 2024) and adjusted EPS of $0.36–0.40. Full-year targets include 1–5% organic revenue growth and adjusted operating income of $150–175 million. With trailing adjusted EBITDA up 17% year-over-year to $273.6 million, Steelcase is proving its ability to navigate sector turbulence.

Peer Comparison: Steelcase vs. HNI and MillerKnoll

While Steelcase faces challenges, its performance stacks up favorably against peers:

1. HNI Corporation (HNI):
2. Q1 sales fell 6.1% to $861.5 million due to weaker demand in its contract furniture segment.
3. Gross margin held steady at 39.0%, but operating income dipped on restructuring costs.

4. Backlog grew 9%, but its reliance on the Americas market leaves it exposed to regional slowdowns.

5. MillerKnoll (MLKN):

6. Reported a diluted loss of $0.02 but saw orders rise 5.2% in its Americas Contract segment.
7. Backlog jumped 10% year-over-year, reflecting delayed shipments.
8. Margin pressures persist, with adjusted EBITDA down 1% due to promotional spending.

Steelcase's P/E of 10.5x is sharply lower than HNI's 58.9x and MillerKnoll's 23.5x, making it the most attractively priced in the sector. This discount overlooks Steelcase's margin improvements and diversified brand portfolio (e.g., Turnstone, Coalesse, and Smith System), which cater to both corporate and education markets.

Sector Risks vs. Long-Term Opportunities

Near-Term Challenges:
- Hybrid Work: Reduced office density continues to pressure demand for traditional workspace solutions.
- Tariffs and Costs: Steelcase's gross margin improvements are offset by rising material and logistics expenses.
- Geopolitical Risks: Trade tensions and supply chain bottlenecks in Asia Pacific add volatility.

Why Steelcase Can Thrive:
- Contrarian Valuation: At ~49% below its estimated fair value (per analyst consensus), Steelcase offers a margin of safety.
- Free Cash Flow Turnaround: While Q1 operating cash flow was negative due to working capital shifts, its $377.8 million liquidity and $28.2 million adjusted operating income suggest cash flow will stabilize.
- Innovation and Diversification: Steelcase's focus on flexible, tech-integrated furniture (e.g., Roam seating systems) positions it to win in post-pandemic workspace upgrades.
- Share Buybacks: With $87.7 million remaining in its repurchase program, the company is actively returning capital to shareholders.

The Case for Immediate Action

Steelcase's low valuation (P/E 10.5x vs. 5-year average of 16x), improving margins, and strong backlog make it a rare value play in a challenged sector. While peers like HNI and MillerKnoll struggle with margin compression or execution risks, Steelcase's cost discipline and diversified client base (corporate, education, healthcare) create a safer profile.

The stock trades at $10.50, down 20% from its 52-week high, offering a buying opportunity. With a 3.96% dividend yield and a 14.20% return on equity, investors gain both income and growth exposure.

Conclusion: Steelcase—A Hidden Gem in the Office Furniture Sector

The office furniture sector isn't dead—it's evolving. Steelcase's ability to adapt with modular, tech-driven solutions, coupled with its undervalued stock and improving fundamentals, positions it as a contrarian buy. While risks like hybrid work and tariffs linger, Steelcase's margin gains, diversified brands, and shareholder-friendly policies make it primed to outperform as the sector stabilizes.

Act now before the market catches on.

Final Note: Monitor Steelcase's Q2 results (due mid-July . The backlog and margin trends will be critical. A beat on EPS guidance could catalyze a revaluation.*

This analysis is for informational purposes only. Always conduct your own research before making investment decisions.