Knoll recently presented investors with a snapshot of its financial performance and a road map to what it hopes to be continued growth and success. The presentation by Andrew Cogan, chairman and CEO, and Charles Rayfield, senior vice president and CFO, of Knoll's most recent yearly financial report shows a company that is trying to transform from an office furniture maker to a true lifestyle brand that sells furniture for home and office through its growing “constellation of design-driven brands.”
The company's four strategic imperatives are: target underpenetrated and emerging ancillary categories and markets for growth; expand its reach into residential and decorator channels around the world; maximize office segment profitability and growth; and leverage technology to expand its market visibility and improve its efficiency.
Knoll also made its case as an investment, noting its top line growth is driven by penetration into the expanding ancillary market and expansion of higher margin “lifestyle” businesses. The executives explained to investors the company believes there are “lean opportunities” to drive office margins higher, it has a strong track record of successful acquisitions (including the recent Muuto transaction that is seeing accelerating penetration in North America), and it has a driven and motivated management team aligned with shareholder objectives.
The executives said through organic product development and mergers and acquisitions, the company is shifting its mix of sales to its higher margin lifestyle segment. Sales in its office category in fiscal year 2018 were 60 percent office and 40 percent lifestyle.
“As clients rethink their priorities, we see a major inflection point in workplace design, creating new challenges and opportunities for Knoll,” it was stated in the presentation. That means the percentage of workstations are declining, but sales for “shared spaces” are on the rise. Individual work is making way for group; formal is going away, replaced by casual; and the corporate aesthetic is losing to a hospitality feel.
Just how much have things changed for Knoll? In 2014, the percentage of shared spaces sales as a percentage of total workplace sales was 16 percent. In 2018, Knoll estimates shared spaces rose to 23 percent.
That is reflected in Muuto, one of Knoll's recent acquisitions. The company said it plans to more than double the size of Muuto in the first three to five years following the acquisition. Muuto sales in 2017 were $71 million.
Knoll is also “outpacing the reported industry growth,” according to the presentation. Workplace sales rose 9.7 percent from the fourth quarter of 2017 to the fourth quarter of 2018. During that same period, residential sales rose 23.7 percent. Year over year, from 2017 to 2018, Knoll's workplace sales rose 13.3 percent and its residential 22 percent.
Despite the move to lifestyle and residential products, the company's recently released annual report filed with the Securities and Exchange Commission show a substantial amount of its sales still come from government contracts. For the year ending Dec. 31, 2018, Knoll derived approximately 3.5 percent and 4.6 percent of its revenue from sales to U.S. and state and local government agencies, respectively. “Our ability to compete successfully for and retain business with the U.S. government is highly dependent on cost-effective performance and compliance with complex procurement laws,” according to the government 10-K report. “Historically, federal procurement laws required government agencies to purchase furniture products from Federal Prison Industries, Incorporated. If these or similar laws would be re-instituted, it would make it more difficult for us to sell our furniture to agencies and departments of the U.S. government.”
Maximizing the sales growth and profitability of its office segment — Knoll's largest segment — has been a continuing priority, the report noted. “With respect to growth in our office segment, a variety of initiatives will contribute to making this growth possible: broadening our products portfolio, including those in the lifestyle segment; enhancing strategic sales coverage, including a focus on global accounts; and strengthening our Knoll dealer distribution network,” the report stated. “At the same time, we aim to increase profitability through operational improvements and investments in our infrastructure. Our lean manufacturing initiative, combined with continued modernization of our facilities, is allowing us to progressively deliver on this goal.
“The commercial market has shifted dramatically in the last decade. As clients are re-addressing the relationship between individual and collaborative workspaces, they are reducing the footprint of individual workstations and investing in more ancillary furniture. Knoll is committed to maintaining our leadership in open floor plan workspaces and private offices, while inventing and innovating new ways for people to work. Our constellation of businesses positions us well to deliver in the evolving work environment, where people choose how and where they work throughout the day, as the traditional boundaries between residential and workplace products blur, and the importance of a total environment outshines any one particular element. We are looking beyond traditional office product categories — systems, task seating and storage — to furniture for activity spaces and the in-between spaces where people meet. We believe that our success in our traditional office products gives us an advantage throughout the workplace.”
Same as the investor presentation, the year-end report shows Knoll as a changing company. The office segment comprised approximately 60.1 percent of its sales in 2018, 63.8 percent of its sales in 2017 and 66 percent of its sales in 2016.
Net sales for the year ending in December of 2018 were $1.3 billion, an increase of $169.4 million, or 15 percent, from sales of $1.13 billion the previous year. Net sales for the Office segment were $782 million during the year ended 2018, an increase of $59 million, or 8.2 percent compared to the year ended 2017.
The company said newer workplace platforms and ancillary products experienced significant sales growth complemented by modestly increased legacy product sales. Net sales for the lifestyle segment were $520.3 million during the year ending in 2018, an increase of 26.9 percent compared with the previous year. This increase was primarily driven by the inclusion of 11 months of sales from Muuto and increased volume in contract markets within its the lifestyle businesses.