Steelcase execs attribute salaried job cuts to ‘dark clouds,’ slow adoption of hybrid work models
Steelcase Inc.’s plan to eliminate up to 180 salaried positions this fall comes as the economy faces what CFO and Senior Vice President Dave Sylvester calls “dark clouds” and as the office furniture maker has experienced reduced incoming orders in recent weeks.
The jobs cuts will occur at corporate functions — human resources, operations, finance, information technology, facility management and other areas — and in the core Americas division.
A Steelcase spokesperson told MiBiz in an email that “these job reductions will impact our workforce in locations throughout North America, including Grand Rapids.”
As well, the cuts will happen even as the Grand Rapids-based Steelcase records strong sales growth, part of which results from price increases to offset high inflation.
Despite the revenue growth, Steelcase’s incoming orders have softened and declined 20 percent in the first few weeks of the present quarter when compared to a year ago. Sylvester attributes that to slower-than-expected pace of clients transitioning to hybrid work models and returning to the workplace coming out of the pandemic — which is a key element of Steelcase’s corporate strategy.
Sales volumes and increased demand linked to large employers transitioning to hybrid work models are “not tracking as we originally planned” back in March when Steelcase projected “continuing improvements in our overall order patterns,” Sylvester said. A slowing U.S. economy and lower CEO sentiment that affects corporate capital spending also contributed to the decision to implement job cuts.
“It’s possible the slow return-to-office trend in the U.S. could be having an impact. It’s also possible that reduced CEO confidence is impacting capital spending in our sector. Decision-makers have a lot to deal with at the moment and they’re also facing a lot of near-term uncertainty,” Sylvester told brokerage analysts this morning during a conference call to discuss quarterly results.
“What we see right now is increased uncertainty on the horizon. It’s no secret that there are dark clouds related to the economy and other factors, and therefore we felt it was prudent to take some action,” he said. “Everybody’s feeling OK or better, but the dark clouds on the horizon related to the economy have people concerned. So that’s possible that could be having some sort of impact on the order patterns right now, or it’s also possible that it just could be an extended pull-forward effect and things will get back to growing at a decent rate in the weeks and months and quarters to come.
“It’s so hard to tell right now. The uncertainty level is very high.”
‘Right-sizing’ response
The U.S. economy has been slowing this year as higher interest rates take their toll.
In a new economic outlook issued Wednesday after another interest rate increase, the Federal Reserve projected the U.S. economy to essentially stall to 0.2-percent Real GDP growth for 2022. Real GDP growth will inch back up to a projected 1.2 percent in 2023 and 1.7 percent in 2024, according to the updated Fed outlook.
Most of the job cuts will occur in the present third quarter of Steelcase’s 2023 fiscal year and result in restructuring costs of about $8 million, Sylvester said.
“These actions, along with some re-prioritization of our remaining resources, will help us remain invested in our most important strategic initiatives and provide some additional protection in the event of continued uncertainty and impact on our demand environment,” he said.
President and CEO Sara Armbruster said that orders for Steelcase’s second quarter that ended Aug. 26 declined 8 percent from a year earlier. Armbruster told investors that Steelcase was now “rightsizing” its core business in the Americas division and corporate functions. The Americas division drives three-quarters of corporate revenues.
“There have been some very recently released data points which show an uptick in the return-to-office level in many cities in the U.S., but the reality is that some companies have paused their investment as they define their own workplace strategies or weigh their choices in a volatile macro-economic environment,” Armbruster said. “The lagging return to the office that so many companies are facing, primarily in the Americas, along with the possibility of a recession, are likely contributing to slower decision-making. We’ve begun to see the impact of that slowdown on incoming order volume level in the Americas and we believe others in our industry are feeling that same downward pressure.”
An indication of that pressure on the broader office furniture industry could come next when Zeeland-based MillerKnoll Inc. (Nasdaq: MLKN) reports quarterly sales and earnings.
Customer sentiment not aligning with orders
Steelcase’s job reductions target about $20 million in reduced annualized spending “and position us to organize more fully around our plan to reinvest for growth and to diversify our revenue while remaining more profitable (with) current levels of volume,” Armbruster said.
During the morning’s conference call, Armbruster and Sylvester repeatedly cited positive sentiment the company hears from clients, though that has not translated into the kind of order rates Steelcase had expected from the transition to hybrid work models and more workers returning to the office.
“While there’s tremendous pre-sales activities and a lot of positive sentiment, there are certainly clients who are just starting to dip their toe in the water now. So for them, activity means a pilot or a test or something on a smaller scale,” Armbruster said. “Our hope, certainly, is that customers who are now becoming active and starting to pilot and test and try things, that those activities will be successful and those will lead to those clients to move on from the pilot to pursue even larger-scale projects or transformation of their space. That may be another dynamic that is influencing what admittedly on the surface looks like a disconnect between the sentiment and the actual level of orders that we’re seeing right now.”
Steelcase on Wednesday reported it generated global sales of $863.3 million for the second quarter of its 2023 fiscal year. That compares to $724.8 million for the same period a year earlier. Quarterly sales for the Americas division that accounts for three-quarters of total revenue grew 25 percent to $651.6 million.
The corporation recorded $19.6 million in quarterly net income, or 17 cents per share, versus $24.7 million, or 21 cents per share, in the second quarter of the prior fiscal year.
Pointing to the lower order volumes at the start the current period, Steelcase expects sales in its current quarter to range from $825 million to $850 million, a 12-percent to 15-percent increase from a year ago that will include the benefits of prior price increases. The company is projecting net income in the range of 8 cents to 12 cents per share.