Executive Summary / Key Takeaways

• Steelcase Inc. (NYSE:SCS) is undergoing a significant strategic transformation, highlighted by its pending acquisition by HNI Corporation , which is expected to close by the end of calendar year 2025. This merger will fundamentally reshape its future, offering potential synergies but also presenting integration and market valuation risks.
• The company is actively leading the evolution of the workplace, leveraging innovative design and technology like the Ocular collection and "community based design" to address hybrid work demands, driving strong win rates and market share gains in the Americas.
• Despite macroeconomic headwinds and restructuring costs, Steelcase demonstrated robust financial performance in Q2 2026, with 5% revenue growth and adjusted diluted EPS of $0.45, alongside its 12th consecutive quarter of year-over-year gross margin expansion.
• Strategic diversification into healthcare, education, and small-to-midsize businesses, coupled with ongoing cost reduction initiatives and a new ERP system implementation, are critical to bolstering profitability and mitigating segment-specific challenges.
• Investors should monitor the successful integration with HNI, the impact of evolving tariff policies, and the realization of efficiencies from the ERP system, as these factors will be pivotal to Steelcase's long-term value creation.

A Legacy of Adaptation: Steelcase's Strategic Evolution in a Dynamic Industry

Steelcase Inc., incorporated in 1912 and headquartered in Grand Rapids, Michigan, has long been a foundational presence in the commercial furniture and interior design industry. The company offers a comprehensive portfolio of furniture and architectural products and services, serving a diverse global clientele across corporate, government, healthcare, education, and retail sectors through brands like Steelcase, AMQ, Coalesse, Designtex, HALCON, Orangebox, Smith System, and Viccarbe. Its operations are strategically segmented into Americas and International, with the latter aggregating EMEA and Asia Pacific regions due to their similar market characteristics.

The industry landscape in which Steelcase operates is highly competitive, featuring major direct rivals such as MillerKnoll Inc. (MLKN), HNI Corporation (HNI), and Virco Manufacturing Corporation (VIRC). Steelcase distinguishes itself through its established brand reputation for durability and functionality, particularly in diverse settings like education and healthcare. The company's strategic emphasis on integrated workspace solutions, coupled with a robust global network of independent and company-owned dealers, provides a qualitative edge in offering comprehensive design and consulting services. This approach contrasts with MillerKnoll's focus on high-end aesthetics and design innovation, HNI's strength in cost-effective, scalable manufacturing, and Virco's niche expertise in education furniture. Steelcase's ability to deliver integrated solutions that combine furniture with design services fosters greater customer loyalty, particularly in corporate settings.

However, Steelcase faces competitive pressures. In Europe, for instance, the market has been challenged by soft demand, leading to a competitive environment where higher discounts are sometimes necessary to secure business. While Steelcase's sales force, which was largely maintained during the pandemic, provides a relationship advantage with large global accounts, it must continuously balance strategic discounting with profitability goals. The company's reliance on physical products also exposes it to indirect competition from alternative solutions like modular prefabricated workspaces and virtual collaboration tools, which could reduce demand for traditional office setups.

Technological Edge in the Hybrid Workplace

At the heart of Steelcase's competitive strategy is its commitment to understanding and shaping the evolving realities of work through technological differentiation and innovation. The company recognizes that work has fundamentally changed, with screen-based interactions now prevalent even among in-office employees, and a growing adoption of artificial intelligence. These trends necessitate a redesign of physical spaces to support new work processes and foster productivity, innovation, and growth.

Steelcase's core differentiated technology lies in its human-centered design research, which uncovers insights leading to innovative product development. The company leverages AI-driven analytics to analyze over five million workplace applications weekly, continuously uncovering emerging trends and informing its product strategy. This analytical capability allows Steelcase to remain highly relevant and responsive to evolving workplace needs, providing a qualitative advantage in adapting its offerings faster than competitors who may rely on more traditional market research.

Key product innovations, such as the Ocular collection and Campers & Den solutions, are designed to create reimagined hybrid work experiences. The Ocular collection, for example, aims to improve how people see, hear, and connect with each other and their content, directly addressing the challenges of hybrid collaboration. While specific quantifiable performance metrics like "X% lower degradation" are not provided for these product technologies, their strategic intent is to enhance user experience and workspace efficiency, thereby driving demand from large corporate clients seeking to optimize their hybrid environments. The new Jean Nouvel Seating Collection by Coalesse further underscores this commitment to premium design and functional versatility, creating conversation spaces that maximize limited real estate.

Steelcase is also introducing "community based design," a strategic approach that helps create dynamic and inspiring workplaces by offering employees choice and control across multiple work types. This inherent flexibility prepares companies for the next generation of working and directly addresses the growing number of organizations mandating a minimum number of in-office days. For investors, these technological and design differentiators contribute to Steelcase's competitive moat, supporting higher average selling prices (ASPs) and better margins by providing solutions that directly solve complex customer problems in the evolving workplace.

Beyond product innovation, Steelcase is investing in a significant business transformation initiative, including the development and configuration of a new Enterprise Resource Planning (ERP) system in the Americas. As of Q2 2026, approximately 78% of the costs for this system were capitalized during the application-development phase. The ERP system, targeted to go live in calendar year 2026, aims to simplify processes and enhance capabilities, ultimately strengthening Steelcase's competitive advantage through improved operational efficiency. While the cutover to the new system is expected to introduce "some level of inefficiency" in fiscal 2026, the long-term goal is to capture value from streamlined business processes and enhanced capabilities.

Financial Performance and Operational Resilience

Steelcase's recent financial performance reflects its strategic efforts to adapt to a dynamic environment, marked by both growth opportunities and operational challenges. For the second quarter ended August 29, 2025 (Q2 2026), the company reported revenue of $897.10 million, an increase of 5% compared to the prior year. Diluted earnings per share stood at $0.29, with adjusted diluted earnings per share reaching $0.45. Year-to-date Q2 2026 revenue was $1,676.10 million, up 6% from the prior year.

A notable achievement has been the company's 12th consecutive quarter of year-over-year gross margin expansion. In Q2 2026, cost of sales as a percentage of revenue improved by 10 basis points, and by 40 basis points year-to-date, driven by pricing benefits, cost reduction initiatives, and higher volume. This improvement was partially offset by an unfavorable business mix, particularly a decline in the education business, and higher tariff costs.

The Americas segment has been a strong performer, delivering 3% organic revenue growth in Q2 2026 and 6% year-to-date. This growth was fueled by strong demand from large corporate customers, including the technology sector, and a higher beginning order backlog. The segment posted an adjusted operating income of $78 million (11% of revenue) in Q2 2026 and $118.80 million (9.1% of revenue) year-to-date. This performance demonstrates Steelcase's ability to capture market share, with win rates remaining strong in the Americas.

Conversely, the International segment has faced more significant headwinds. While Q2 2026 saw 8% organic revenue growth, driven by India, China, and the United Kingdom, the segment reported an operating loss of $14.60 million and an adjusted operating loss of $2.70 million. Year-to-date, the International segment's operating loss was $17.10 million, with an adjusted operating loss of $3.90 million. These losses were primarily due to higher restructuring costs and increased discounts, despite some benefits from higher volume. In response, Steelcase initiated further restructuring actions in EMEA and Asia Pacific in Q2 2026 to reduce costs and optimize operating efficiencies, involving employee terminations and real estate consolidation.

Operating expenses increased significantly in Q2 2026 by $42 million, or 360 basis points as a percentage of revenue, and by $54.60 million year-to-date. This rise was attributed to lower gains on land sales, merger transaction costs, unfavorable currency translation effects, and higher non-employee director deferred compensation expense, partially mitigated by lower variable compensation.

Liquidity and Capital Allocation

Steelcase maintains a healthy liquidity position, targeting $75 million to $175 million in cash and short-term investments for daily operations, with additional reserves for strategic investments and economic volatility. As of August 29, 2025, total liquidity, including cash, cash equivalents, short-term investments, and the cash surrender value of company-owned life insurance (COLI), aggregated to $426.80 million.

The company's total consolidated debt stood at $447.40 million as of August 29, 2025, consisting of unsecured term notes due in 2029 with an effective interest rate of 5.60%. Cash flow from operations has been impacted by seasonal disbursements, with annual payments for variable compensation and retirement plan contributions totaling $156.10 million in year-to-date 2026, up from $122.40 million in the prior year. Cash was also used for inventory purchases to mitigate potential supply chain disruptions.

Capital allocation includes ongoing investments in the business, with projected capital expenditures and capitalized cloud computing costs for the ERP system expected to be approximately $90 million in 2026. Steelcase also returns capital to shareholders through dividends, with a quarterly dividend of $0.10 per share declared for Q3 2026. Share repurchases in year-to-date 2026 primarily covered tax withholding obligations for equity awards, with $79.90 million remaining under the current program.

Outlook and Strategic Initiatives

Steelcase's management is targeting mid-single-digit organic revenue growth and a modest improvement in adjusted operating margin for fiscal year 2026. This outlook is predicated on a stable macroeconomic environment, continued strengthening of "return to office" sentiment, and sustained positive demand from large corporate customers, particularly in the technology sector. Management believes demand from this segment may be at an "inflection point". This growth is expected to more than offset anticipated declines in the Education and Government segments, which are facing impacts from changes in federal funding policies.

The company aims to offset higher tariff and related inflationary costs, estimated at approximately $20 million for Q2 2026, through pricing actions, including a recently implemented price increase and a tariff recovery charge. Gross margin expansion in fiscal 2026 is expected to be primarily volume-driven. While the new ERP system is anticipated to yield value, operating expense leverage is projected to be relatively flat year-over-year due to implementation inefficiencies and continued investments in revenue diversification. The International segment is targeted for breakeven adjusted operating income in fiscal 2026, with losses in the first half expected to be offset by profitability in the second half, supported by volume growth and ongoing cost reduction efforts.

Risks and Challenges

The most significant near-term factor influencing Steelcase's future is its proposed acquisition by HNI Corporation, announced on August 3, 2025. This cash and stock transaction, valued at approximately $2.2 billion, is expected to close by the end of calendar year 2025, subject to shareholder and regulatory approvals. Failure to complete the merger could adversely affect Steelcase's business, financial condition, and stock price, potentially leading to negative market reactions or a $67 million termination fee payable to HNI under specific circumstances. Regulatory approvals may also impose conditions that could impact the combined company.

Steelcase is also exposed to broader macroeconomic uncertainties, including evolving tariff policies and related inflationary pressures. The company's ability to offset these costs with pricing actions could be impacted by the speed and pace of tariff changes, available exemptions, and competitive factors. Supply chain disruptions, such as those caused by Hurricane Helene affecting a laminate supplier, also pose a risk to revenue projections and operational continuity. Furthermore, the implementation of the new ERP system carries inherent risks of "some level of inefficiency during the cutover," which could impact operating costs and potentially disrupt shipment timing.

Conclusion

Steelcase Inc. stands at a pivotal juncture, poised for a transformative merger with HNI Corporation while simultaneously executing a multi-faceted strategy to adapt to the evolving demands of the modern workplace. The core investment thesis hinges on Steelcase's ability to successfully integrate with HNI, leverage its technological leadership in hybrid work solutions, and realize the benefits of its diversification and profitability initiatives. The company's consistent gross margin expansion and strong performance in the Americas, driven by large corporate demand and market share gains, underscore its operational resilience and strategic effectiveness.

While the impending merger introduces a layer of uncertainty, Steelcase's proactive approach to cost reduction, investment in its ERP system, and innovative product development position it to capitalize on the secular trend of workplace transformation. The company's commitment to sustainability and "community based design" further enhances its appeal to a growing segment of clients. Investors should closely monitor the merger's progression, the realization of targeted efficiencies, and the company's continued ability to navigate macroeconomic and competitive pressures, as these factors will be instrumental in shaping Steelcase's long-term value proposition and its leadership in the global office furniture industry.