Executive Summary / Key Takeaways

• The Knoll Integration Paradox: Four years after the transformative Knoll acquisition, MillerKnoll has built a design powerhouse but remains mired in integration costs, goodwill impairments, and operational complexity that mask underlying earnings power and compress valuation multiples.

• Retail as the Escape Hatch: Management is betting aggressively on direct-to-consumer expansion—12 to 15 new stores in FY26 and 50% more product launches—to escape cyclical contract dependence, but this strategy creates a near-term margin drag that threatens dividend sustainability.

• Tariff Headwinds with a Mitigation Promise: Q2 FY26 faces a $2-4 million gross margin hit from tariffs, but management claims collective mitigation actions will fully offset these costs by H2 FY26, a critical test of pricing power and sourcing flexibility.

• Competitive Landscape Reshaped: The impending $5.8 billion HNI-Steelcase merger creates a behemoth with superior scale and cost efficiency, intensifying pressure on MillerKnoll's contract business and making retail differentiation even more critical for survival.

• Valuation Hinges on Execution: At $16.55, MillerKnoll trades at just 0.30x sales and 7.10x EBITDA, a discount to peers that reflects negative earnings and integration overhang; successful retail scaling and margin recovery could drive significant re-rating, while execution failures risk dividend cuts and balance sheet stress.

Setting the Scene: A Design Icon at a Strategic Inflection

MillerKnoll, incorporated in 1905 and headquartered in Zeeland, Michigan, began as Herman Miller and evolved into one of America's most iconic design brands. The July 2021 acquisition of Knoll—a pivotal moment that created a $3.7 billion interior furnishings collective—was meant to combine legendary brands like Herman Miller, Knoll, Design Within Reach, HAY, and Muuto into an unstoppable force across contract and residential markets. The strategic logic was compelling: leverage collective brand equity, cross-sell across dealer networks, and capture the post-pandemic return-to-office wave.

The company operates through three segments that reveal its dual identity. North America Contract (56% of Q1 FY26 sales) designs and manufactures furniture for office, healthcare, and educational environments, distributed through an independent dealer network. International Contract (18% of sales) mirrors this model across Europe, Asia-Pacific, and Latin America. Global Retail (27% of sales) sells direct-to-consumer through e-commerce, catalogs, and physical stores, including the Holly Hunt luxury brand. This segment mix matters because it exposes MillerKnoll to two different demand cycles: the slow-moving, project-based contract market and the faster-paced, consumer-driven retail market.

The industry structure is fragmented and cyclical. The office furniture market is recovering—Manhattan leasing activity in August exceeded its ten-year monthly average, and BIFMA industry orders have trended up year-over-year since December 2024—but the pace remains sluggish. More companies are bringing employees back to the office, with Fortune 100 firms increasing in-office days by 68% since 2022, yet capital expenditure decisions remain tentative amid macroeconomic uncertainty. This backdrop creates a challenging environment for a company still digesting a major acquisition.

MillerKnoll's competitive positioning reflects this tension. The company is "very under-stored compared to our competitors" and "under-assorted" relative to residential home furnishings players, creating a white-space opportunity in retail. However, in contract, the company faces direct competition from Steelcase (SCS) and HNI (HNI), two established players with deeper scale and more efficient cost structures. The recent announcement that HNI will acquire Steelcase for $2.2 billion, creating a $5.8 billion entity with approximately 17% combined U.S. market share, fundamentally reshapes this competitive landscape. The merged competitor will have superior purchasing power, manufacturing scale, and distribution reach, making MillerKnoll's premium design positioning both more critical and more vulnerable.

Technology, Products, and Strategic Differentiation: The Velocity Imperative

MillerKnoll's competitive moat rests on its unparalleled design heritage and brand portfolio, but the company is betting its future on product innovation velocity. In fiscal 2026, management is launching 50% more new products than in fiscal 2025, a dramatic acceleration that has already driven new product order growth of over 20% in Q1. This matters because new products are directly correlated with overall growth and, more importantly, drive demand from customers who are brand new to MillerKnoll. Assortment expansion fosters new customer acquisition and builds long-term lifetime value, creating a flywheel effect that could sustain retail growth even if macro conditions weaken.

The product pipeline spans both contract and retail. Knoll Dividends Skyline, introduced at Design Days, offers a refined, flexible system that reimagines the open workplace for today's dynamic office environments. Herman Miller's Gemma Healthcare Seating Family targets the growing healthcare vertical with thoughtfully designed products for patients, families, and caregivers. Even the iconic Aeron chair has been adapted with electrostatic discharge capabilities for data center clean room environments. These launches demonstrate the company's ability to leverage its design heritage across multiple end markets and price points.

Sustainability initiatives provide another layer of differentiation. The company announced the elimination of added PFAS from its North American product portfolio by May 2025 and globally by May 2027. Herman Miller's refreshed Mirra 2 Chair features more recycled content and a lower carbon footprint. While these moves appeal to environmentally conscious consumers and corporate clients, they also increase manufacturing complexity and costs, pressuring margins in the near term.

The strategic imperative behind this product push is clear: MillerKnoll must differentiate beyond pure design to justify premium pricing in an increasingly competitive market. The HNI-Steelcase merger will create a competitor focused on operational efficiency and cost competitiveness, potentially commoditizing portions of the contract market. MillerKnoll's response is to out-innovate, using its design heritage and brand portfolio to capture higher-margin segments. The risk is that this strategy requires sustained investment in R&D and marketing, creating a drag on profitability if sales growth doesn't materialize.

Financial Performance & Segment Dynamics: A Tale of Two Margins

MillerKnoll's Q1 FY26 results reveal a company in transition, with divergent margin trajectories across segments that define the investment thesis. Consolidated net sales rose 10.9% to $955.7 million, driven by higher volumes across all three segments. However, this top-line growth masks a more complex story of margin pressure and investment trade-offs.

North America Contract delivered the quarter's standout performance. Net sales jumped 12.1% to $533.9 million, while operating earnings soared 253% to $56.9 million, expanding margins from 3.4% to 10.7%. This dramatic improvement was driven by favorable leverage on fixed costs (110 basis points) and reduced freight and distribution costs (80 basis points), partially offset by tariff-related headwinds (130 basis points). The segment's orders declined 8.2% to $492.2 million, but management attributes this to a $55-60 million pull-forward into Q4 FY25 ahead of tariff surcharges and price increases. Normalizing for this effect, combined Q4 FY25 and Q1 FY26 order growth was 3.3%, suggesting underlying demand remains stable.

International Contract posted 14.4% sales growth to $167.5 million, with operating earnings up 42% to $13.5 million. However, margins expanded more modestly from 6.5% to 8.1% as incremental discounting (240 basis points negative impact) and tariff costs (50 basis points) offset operating leverage. Orders fell 6.5% on a reported basis, with weakness in APMEA and Latin America offsetting strength in Europe and the UK. This segment's performance highlights the challenge of maintaining pricing discipline in slower-growing international markets while absorbing tariff costs.

Global Retail presents the most concerning trend. While sales grew 6.4% to $254.3 million, operating earnings collapsed 73.6% to just $1.4 million, with margins compressing from 2.2% to 0.6%. The culprits were increased freight and distribution costs (160 basis points), tariff impacts (50 basis points), and incremental costs from retail store expansion (approximately $3 million). Orders grew a tepid 1.7%, and management acknowledges that Q1 is seasonally the lowest point for retail. The segment's performance underscores the near-term pain of the retail expansion strategy.

Consolidated gross margin declined 50 basis points to 38.5%, entirely due to net tariff-related costs. Operating expenses fell 2% as a $27.8 million reduction in acquisition-related integration charges more than offset increased variable selling costs and retail expansion expenses. The net result was a return to profitability, with diluted EPS of $0.29 versus a loss of $0.02 in the prior year, though adjusted EPS of $0.45 provides a cleaner view of underlying performance.

Cash flow tells a more troubling story. Operating cash flow plummeted to $9.4 million from $21.1 million, primarily due to a net increase in working capital. Free cash flow turned negative at -$21.3 million as capital expenditures jumped to $30.7 million from $22.6 million. The company expects full-year FY26 capex of $120-130 million, up from $107.6 million in FY25, reflecting investments in new stores, manufacturing facilities, and sustainability initiatives. With $167.2 million in cash and $313.3 million in available credit, liquidity is adequate but not abundant, especially given the $550 million Term Loan B refinanced in August 2025.

Outlook, Guidance, and Execution Risk

Management's Q2 FY26 guidance reveals both confidence and caution. Net sales are expected to range between $926-966 million, down 2.5% at the midpoint, but this implies first-half sales up approximately 3.8% when normalizing for the Q4 FY25 order pull-forward. Gross margin is projected at 37.6-38.6%, with a $2-4 million tariff impact before tax. Adjusted operating expenses are expected at $300-310 million, including $4-5 million in incremental costs tied to new store openings. Adjusted diluted EPS is forecast at $0.38-0.44.

The critical assumption embedded in this guidance is that tariff mitigation actions will fully offset costs by the second half of FY26. Management has implemented a 4.5% list price increase effective June 2025, introduced tariff-related surcharges, and is pursuing alternative sourcing and value engineering. However, the competitive environment may limit pricing power, particularly in the International Contract segment where discounting already pressures margins. The ability to execute on these mitigation strategies will determine whether FY26 earnings meet expectations.

Retail expansion costs will remain a headwind through the first three quarters of FY26. Management expects new stores to become accretive to both top and bottom lines by Q4 FY26 and into Q1 FY27, with individual stores typically achieving profitability within their first year. The long-term goal for Global Retail operating margins is mid-teens, compared to the current sub-1% level. This creates a clear timeline for investors: if retail margins don't inflect by early FY27, the strategy will be judged a failure.

Management has adopted a quarter-by-quarter guidance approach, citing limited visibility beyond Q2. This reflects the unpredictable macroeconomic environment and the challenge of forecasting order patterns in the contract business. While this conservatism is prudent, it also signals that management lacks confidence in a sustained recovery, making the stock vulnerable to any negative surprises.

Risks and Asymmetries: What Could Break the Thesis

The investment case for MillerKnoll faces several material risks that could derail the margin recovery and retail growth story. The most immediate is execution risk in the retail expansion. The company plans to more than double its Design Within Reach and Herman Miller store footprint over several years, but each new store requires significant upfront investment in pre-opening costs, inventory, and marketing. If these stores fail to achieve profitability within 12 months, the cumulative drag on earnings could force management to scale back expansion or cut the dividend, which currently consumes 174% of earnings.

Tariff escalation represents a second major threat. While management claims mitigation will offset costs by H2 FY26, further tariff increases or a trade war could overwhelm pricing actions. The contract business is particularly vulnerable, as large enterprise and government clients have procurement processes that limit price pass-through. A 30% tariff on upholstered furniture and 50% on kitchen cabinets and vanities directly hits key product categories. If competitors like the combined HNI-Steelcase entity absorb costs through superior scale, MillerKnoll could lose market share.

The HNI-Steelcase merger fundamentally alters the competitive dynamics. The combined entity will have approximately $5.8 billion in revenue, 17% U.S. market share, and significant cost synergy opportunities. This scale advantage will enable more aggressive pricing in the contract market, potentially forcing MillerKnoll to choose between margin compression or share loss. MillerKnoll's premium design positioning provides some insulation, but in a slow-growth market, price competition intensifies.

Integration risk persists despite the completion of the Knoll Integration program. The 2026 restructuring plan, focused on facilities consolidation, indicates that cost optimization is ongoing. If anticipated synergies fail to materialize or if the company faces unexpected integration costs, the margin recovery timeline will extend, disappointing investors who expect FY26 to be a breakout year.

Finally, cyclical exposure remains a concern. While office market indicators are improving, a macroeconomic downturn could freeze corporate capital expenditure, disproportionately impacting the contract business where MillerKnoll has high fixed costs. The company's debt-to-equity ratio of 1.34 is manageable but leaves limited room for error if earnings disappoint.

Valuation Context: Pricing in Execution Risk

At $16.55 per share, MillerKnoll trades at a significant discount to its design peers, reflecting the market's skepticism about execution. The company's market capitalization is $1.13 billion, with an enterprise value of $2.80 billion after accounting for net debt. This represents 0.30 times trailing twelve-month sales of $3.67 billion and 7.10 times EBITDA, both well below direct competitors.

Steelcase trades at 0.57 times sales and 11.92 times EBITDA, with a market cap of $1.85 billion and a profit margin of 2.92%. HNI trades at 0.75 times sales and 7.38 times EBITDA, with a market cap of $1.94 billion and a profit margin of 5.46%. Both competitors are profitable and generate positive free cash flow, while MillerKnoll posted a negative profit margin of -0.41% and negative quarterly free cash flow of -$21.3 million.

The valuation gap reflects MillerKnoll's integration challenges and margin pressure. However, the company's gross margin of 38.64% is competitive with HNI's 41.55% and superior to Steelcase's 33.60%, suggesting that the underlying product economics remain strong. The issue is operating leverage: MillerKnoll's operating margin of 5.66% lags HNI's 10.82% and Steelcase's 8.37%, indicating that integration costs and retail investments are temporarily depressing profitability.

The dividend yield of 4.55% appears attractive but is unsustainable with a payout ratio of 174%. Management has maintained the dividend, but continued losses could force a cut, which would likely pressure the stock further. The company's liquidity position—$167.2 million in cash and $313.3 million in available credit—provides a cushion, but the combination of negative free cash flow and high dividend payouts is a red flag.

For investors, the key valuation question is whether MillerKnoll can return to profitability and generate sustainable free cash flow. If the company achieves its target of mid-teens retail margins and maintains contract margins in the 10% range, the stock could re-rate to 0.5-0.6 times sales, implying 60-100% upside. Conversely, if retail expansion fails and tariff pressures mount, the stock could trade down to 0.2 times sales, representing 30% downside.

Conclusion: The Next Six Months Will Define the Story

MillerKnoll stands at a critical juncture where the pain of integration and retail investment must soon yield to demonstrable margin improvement. The company's premium design heritage and expanded brand portfolio provide a defensible moat, but the competitive landscape has shifted with the HNI-Steelcase merger, making execution more critical than ever.

The central thesis hinges on two variables: retail store profitability and tariff mitigation. If new stores achieve management's target of profitability within 12 months and the retail segment reaches mid-teens margins by FY27, the heavy investment will be justified. If tariff mitigation works as promised and contract margins hold, the company can generate sufficient cash flow to support both growth investment and the dividend.

However, the risks are material and immediate. The Q2 FY26 guidance embeds optimistic assumptions about both tariff pass-through and retail store performance. Any shortfall could trigger a dividend cut and further multiple compression. With negative free cash flow and a 174% payout ratio, management has limited room for error.

For investors, the risk-reward is asymmetric at $16.55. Successful execution could drive 60-100% upside as margins inflect and the stock re-rates toward profitable peers. Failure could result in 30% downside if the dividend is cut and integration challenges persist. The next two quarters will provide clear signals: if retail margins don't begin to recover by Q4 FY26 and contract orders remain weak, the thesis will be broken. If they do, MillerKnoll will have proven that design-led differentiation can triumph over scale-driven commodification.