Knoll, Inc., today announced financial results for the fourth quarter ended December 31, 2020.
Fourth Quarter Highlights Versus Prior Year
Net Sales decreased 15.8% to $312.9M
Gross Margin decreased 320 bps to 35.6%
GAAP Operating Expenses decreased $9.9M to $104.3M or 33.3% of net sales
Adjusted Operating Expenses decreased $11.0M to $94.1M or 30.1% of net sales
GAAP Net Earnings/(loss) decreased $10.9M to $(0.6)M or (0.2)% of net sales
Adjusted EBITDA decreased $21.2M to $30.6M or 9.8% of net sales
GAAP Diluted EPS decreased $0.26 to ($0.05)
Adjusted Diluted EPS decreased $0.38 to $0.14
Full Year Highlights Versus Prior Year
Net Sales decreased 13.4% to $1,236.4M
Gross Margin decreased 260 bps to 35.8%
GAAP Operating Expenses decreased $4.1M to $415.1M or 33.6% of net sales
Adjusted Operating Expenses decreased $36.5M to $365.9M or 29.6% of net sales
GAAP Net Earnings decreased $59.8M to $7.7M or 0.6% of net sales
Adjusted EBITDA decreased $67.5M to $126.7M or 10.2% of net sales
GAAP Diluted EPS decreased $1.27 to $0.09
Adjusted Diluted EPS decreased $1.01 to 0.95
To Our Fellow Shareholders:
We hope this finds you and yours safe and well. 2020 was a year of unimaginable challenge and we could not be prouder of the way our team rose to the occasion to support our clients, dealers, the architectural and design community, and our fellow Knoll associates. Across the Knoll constellation, our associates successfully kept our plants and warehouses operational, re-opened showrooms where allowed by government regulation, and found new and innovative ways to connect digitally and in-person with the design community, commercial clients and residential consumers.
Solid Financial Results From Our Diversified Portfolio
Our long term strategy of diversifying our sources of revenue, both organically and through acquisition, away from a sole dependence on commercial workplace sales, with fluid brands that can pivot between sectors, has paid off exceedingly well this year. Sales to residential end users represented over a third of our total revenue, up from a fifth just a year ago. These sales increased 34% from prior year levels to a record $107M in the fourth quarter, and increased over 20%, to $335M, for the full year 2020. This helped to offset a 22% decline in our commercial workplace sales in 2020 and resulted in total revenues of $1,236.4M, down 13.4% vs prior year. For the quarter, sales of $312.9M declined 15.8% vs prior year driven by a 30% decline in workplace sales.
We took important steps to reset our cost structure in terms of both manufacturing costs, which were reduced by approximately $10M annually with the closing of our Grand Rapids manufacturing site and the pending consolidation of our NA warehouse locations in mid-2021, as well as approximately $25M of operating expense reductions, including headcount, travel and entertainment, variable incentive and other discretionary expenses while protecting our core digital and product development initiatives. These actions, combined with the favorable mix shift between residential and workplace, have allowed us to protect our profitability and deliver double digit adjusted EBITDA margins for the full year 2020. For the quarter, Adjusted EBITDA margin was 9.8% compared to a full year 10.2%.
We solidified our balance sheet with the $164M convertible preferred offering to ensure that we have the financial flexibility to both endure an extended period of soft commercial office activity while leaning in harder to the digital and residential initiatives that led to our strong outperformance versus our office benchmarks. Year-end net debt of $288M and full year Adjusted EBITDA of $126.7M resulted in a leverage ratio of 2.3x well below our 4.0x bank covenant. Liquidity remained strong with $334M of available borrowings.
We are particularly proud of the progress we made on our corporate social responsibility and diversity and inclusion initiatives, including a robust sustainability report prepared in accordance with Global Reporting (GRI) standards; a new scholarship for Black design students; our partnership with Habitat for Humanity and important diversity hires on both our Board of Directors and senior leadership team.
Planning for an Eventual Return to the Office
Let’s be clear, COVID-19 has had a dramatic short-term, and likely long-term, impact on the way we all live and work. In the short term, the disruption to the office market has been profound. Office demand, according to industry data, has plunged from between 22% to 38% monthly since the start of the pandemic. After a brief respite over the summer when it looked like more folks might be returning to the office, demand has been hit again as a second wave of the pandemic swept across North America and Europe. We track both the Google mobility data and the Kassel back to work barometer and both confirm this setback. In this context, it is not surprising to see that our workplace business continued to decline in the fourth quarter.
However, this transient disruption doesn’t mean that the office is going to altogether disappear. Rather, as Robert Hooijberg and Michael Watkins noted in a recent Harvard Business Review article "it's simply too hard to sustain collaboration, innovation, acculturation and dedication without face-to-face interaction." They add, "While we will likely never go back to our pre-crisis status quo, we imagine the future will be a blended one that leverages the best of what both virtual and face to face experiences can offer. While the face-to-face part won’t start happening with any regularity until it is safe and possible to do so, we can be encouraged that this future is on the horizon as newly approved vaccines start to deploy around the world."
In other words, while data today shows 60-80% of all office work is happening remotely, this will not be the case forever. While we believe our office business will continue to decline over the first half of 2021 as clients hold off on en masse returns to work while vaccines are being disseminated, we are heartened by several factors that suggest a return to more normalized levels of demand and a rebound later in 2021. When we survey our clients on their return to work plans we see most falling in the third and fourth quarter of 2021. Our funnel of activity, which has been a good indicator of where demand is heading, shows signs of stabilization of demand three quarters out and the prospect of double-digit growth four quarters out. We think that once there is more clarity on vaccine distribution, companies will start to firm up their return to work plans and activate workplace projects now on hold. Our outlook is not that different than the travel industry where bookings for travel in Q3 and Q4 are strong. Once people start returning to the office, the momentum of more people being in versus out will create an additional impetus for return to work and the in-person interaction we know most of us miss and crave.
In anticipation of this rebound, we are keeping excess sales capacity that we might not hold were these expectations different. This and other spending will be a headwind in the first half of 2021. In addition, we know that the workplace people return to won’t be the workplace they left. There will be a more permanent mix of in-person and virtual collaboration - what we call the "phygital" workplace. Spaces will be de-densified and there will be a focus on spaces designed to allow for safe collaboration as well as individual focus. With the office having to compete with other venues now, it will be more important than ever that the office facilitates collaboration and offers features that the home lacks. As Dror Poleg noted in a piece in The New York Times entitled The Future of Offices When Workers Have a Choice, “The office will become more of a consumer product. And just like every consumer product, the office will have to continually fight for its customers and meet their needs - not only when it’s time to renew the lease.” This plays to the strengths of our constellation of design-driven brands and the fact that change in the workplace has always been good for our business. Timing wise, preparations for the return to the office align with the unveiling of our updated New York showroom this coming April which has been designed as a model post-pandemic workplace.
Work from Home is Here to Stay
While we still believe BIFMA demand will settle somewhere between 80-90% of pre-pandemic levels, we expect our total market potential to actually increase in the medium-term as we benefit from an equally profound and concomitant trend that Scott Galloway calls the “dispersal” of work, both in terms of where work takes place, whether it be in the home or in the office, and geographically between cities and suburbs. This has already acted as an accelerant on our work from home ("WFH") e-commerce sales and overall residential activity, and we believe permanently upsizes the market potential for Knoll and our constellation of brands that target the WFH and residential markets.
Our Digital and Residential Future
In the fourth quarter we experienced a continued acceleration in both our WFH e-commerce activity as well as across every single one of our residential brands and channels. Representing over 10% of our total sales, up from less than 3% a year ago, e-commerce activity at both Fully and Knoll set quarterly records, growing 239% vs prior year. Given the fertile WFH market, we made a decision early in the fourth quarter to significantly upsize our marketing activities at Fully. This included a multimillion dollar investment in an incremental brand marketing campaign, across diverse media from CNBC to YouTube to ESPN that resulted in over 78 million impressions and drove record web traffic, conversion and revenues. This brand campaign spoke to Fully’s mission and commitment to both diversity and letting your work flow. You can check out this innovative campaign on YouTube at https://www.youtube.com/watch?v=XTP0jL9Cdgw.
We have plans to leverage these investments and learnings in the first half of 2021. And we expect, given the secular outlook for more permanent WFH trends, that the WFH market will continue to grow in the years ahead. According to a recent Upwork study, managers estimate that 20% of all employees will to some extent remain remote and they expect an 87% increase in remote work over the next 4 years. Fully is just scratching their potential, and as we expand their assortment, continue to experiment with more creative and innovative marketing and a smattering of pop-up and other go-to-market tests, they will continue to be an increasingly important part of the Knoll story.
Our digital and residential ambitions and results, however, extend way beyond Fully. Our KnollStudio residential e-commerce business, while much smaller than Fully, also set quarterly records and, when combined with our other residential channels in North America and Europe, delivered just under $90M in full year revenue, which is up again from prior year. Adding in the residential sales of Muuto and HOLLY HUNT, we are ending the year at a run rate at over $400M in residential revenues which we expect to continue to grow double digits in 2021 and beyond at above average levels of profitability.
While we launched a subset of Muuto designs on knoll.com, the standalone launch of muuto.com in North America is scheduled for the back half of 2021 together with a Muuto pop-up space in NYC. And it’s been heartening to see the residential strength extending now from WFH into higher end residential to-the-trade sectors and HOLLY HUNT. Here too, we experienced strong growth as the digital reinvention of the to-the-trade marketplace, which HOLLY HUNT singularly serves so well, is gaining momentum. 2021 should bring more digital innovation at HOLLY HUNT as well as the opening of a new flagship HOLLY HUNT showroom this summer in Los Angeles. While the showroom experience is critical for this high-end brand, the digital platform will be pivotal to changing the economic model that has been to date somewhat limited by the fixed overheads that each showroom brings.
Both and Will Beat Either Or
If you believe, as we do, that the future of the workplace ecosystem will be all about flexibility as to where and when one works, then those with balanced work from home (WFH), work in office (WINO) and residential portfolios, combined with omnichannel distribution capabilities (including dealers for complex enterprise clients, direct to consumer and small to mid-size business (SMB) e-commerce channels, digital to the trade capabilities and traditional bricks and mortar residential shops and showrooms), will be the winners in the post-COVID landscape. Certainly, that is the Knoll we have been and continue to build.
Our 2020 results demonstrate the value of this diversification as we outperformed our office benchmarks on the strength of our WFH and residential businesses and continued to generate double digit levels of adjusted EBITDA profitability. Now, with the reality of a vaccine on the horizon enabling more robust return to work, as the pendulum swings back from all WFH to a more balanced mix of WINO and WFH, we will see the office side of our business recover while we continue to benefit from a more permanent balance of where and how we work and elevated level of investments consumers globally put into their homes.
In closing, let us add that we know it has not been an easy year to be a Knoll shareholder, and we still expect further headwinds in the first half of 2021. However, as we have looked back on past cycles, we have seen a strong correlation between a reacceleration of our office business and significant value creation and recovery in our share price.
Business Segment Results
The Company has two reportable segments: Office and Lifestyle. The Office reportable segment is comprised of the operations of the Office operating segment. The Lifestyle reportable segment is an aggregation of the Lifestyle, Europe, and Muuto operating segments. All unallocated expenses are included within Corporate.
The Office segment includes a complete range of workplace products that address diverse workplace planning paradigms in North America and Europe. These products include: systems furniture, seating, storage, tables, desks and accessories as well as the international sales of our Office products. The Office segment includes DatesWeiser and Fully. DatesWeiser is known for its sophisticated meeting and conference tables and credenzas, sets a standard of design, quality and technology integration. Fully is an ecommerce furniture brand selling height-adjustable desks, ergonomic chairs and accessories principally for individual home offices and small businesses.
The Lifestyle segment includes KnollStudio®, HOLLY HUNT®, Muuto®, KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather. KnollStudio products, which are distributed in North America and Europe, include iconic seating, lounge furniture, side, cafe and dining chairs as well as conference, training and dining and occasional tables. HOLLY HUNT® is known for high quality residential furniture, lighting, rugs, textiles and leathers. The KnollTextiles®, Spinneybeck® (including Filzfelt®), and Edelman® Leather businesses provide a wide range of customers with high-quality fabrics, felt, leather and related architectural products. Muuto® rounds out the Lifestyle segment with its ancillary products and affordable luxury furnishings to make the Lifestyle segment an all-encompassing “resimercial”, high-performance workplace, from uber-luxury living spaces to affordable luxury residential living.
The tables below present the Company’s segment information with Corporate costs excluded from operating segment results.
