Second Wave, Surprise Segment Catches Fire

November 9, 2020

Since the very beginning of this year’s pandemic, one industry has been in investors’ doghouse: office space.

Working in tightly cramped cubicles is probably one of the absolute worst ways to conduct your life during an airborne infectious disease outbreak. And so, as you might imagine, those hurt worst by the new work-from-home norm have been companies owning those office spaces.

Prior to COVID, many of these companies were doing very well. Unemployment was at its lowest level in decades. Companies were still expanding as the economy was tracking for a solid decade of growth.

But that all ended in March:

Boston Properties Inc. (NYSE: BXP), along with its top competitor Vornado Realty Trust (NYSE: VNO) control about one-fifth of the publicly traded office space real estate market. Both have absolutely collapsed with no end in sight.

You may also recall WeWork, the shared office space company, was supposed to be the largest IPO of 2020. It has been delayed due to the pandemic.

But office space and office equipment are two different things. In fact, the second wave of outbreaks now sweeping the U.S. and even more so in Europe puts one particular office equipment segment into an interesting position.

Luxury Office Chairs Are Coming Back

Last month, I pointed out how surprisingly well certain luxury brands like LVMH Moet Hennessy-Louis Vuitton (OTC: LVMUY) were doing this summer and into this fall.

It turns out people with money still want to spend it even if they can’t go on luxurious vacations right now.

What also appears to be emerging from this odd luxury items story is that practical luxury is booming once again. Particularly in a very small segment within that industry.

Herman Miller Inc. (NASDAQ: MLHR) and Steelcase Inc. (NYSE: SCS) are giants in the very niche office chair business.

Despite both being around for more than a century, you’d be forgiven if you aren’t all that familiar with either brand. After all, how often do we think about our office chairs?

Well, in a world shifting to home offices and hours upon hours of sitting in front of computers, more people than you might think are contemplating their most-used piece of furniture.

Now, it hasn’t been a perfect year for either company. Both saw a large chunk of their businesses fade as almost all business office renovations stalled during the outbreak. But both have caught back up earlier than expected.

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During its most recent quarter, Herman Miller saw adjusted EPS grow 47.6% on wide margins. Part of that was cost cutting. The other half was due to better than expected sales (still down in the quarter, but not as much as estimated).

You can see the spike in late September when those numbers came out.

Steelcase too outperformed, but not by as much. It reported a post-restructuring adjusted earnings per share of $0.55 compared to $0.50 a year ago.

How can companies so clearly affected by the exodus of office workers do so surprisingly well? It’s all about their niche market.

These aren’t Ikea-like furniture companies. They specialize in expensive luxury office equipment. A middle of the road office chair at either brand will run you around $1,500.

In a world where white collar worker is moving into and transforming their spare bedrooms into home offices, that’s more appealing than you might think.

Many companies have given their new work-from-home employees stipends to build out their home offices. And comfortable chairs seem to be the top of their priority.

There is one more caveat to this story, before you go picking up shares of both companies. One of them is dealing with a serious problem that hasn’t really made the full news circuit just yet.

Hacked at Just the Wrong Time

Late last month, Steelcase was hit with a massive Ryuk ransomware hack. The company hasn’t stated exactly what systems or data were affected. But it was problematic enough to completely lock down its ecommerce website and delay order fulfillment.

Obviously, that’s a major issue right now as it could cause many much-need orders to be canceled. If it does go on longer, it could eat into the crucial holiday shopping season.

Because of this situation, Herman Miller simply looks better of the two right now.

MLHR also just rolled out luxury video game chairs with its partner Logitech just in time for the new generation of consoles next week.

Strange to say, now seems to be the time to buy into luxury office chairs.

Sometimes you can easily see an emerging profit idea coming. Other times, like this one, it just comes out of nowhere. But you must be ready to act when one does.

Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%

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