Executive Summary / Key Takeaways

• The HNI Merger Creates a Strategic Crossroads: Steelcase's pending $2.2 billion acquisition by HNI Corporation represents both a potential catalyst for scale and a significant execution risk, with a $67 million termination fee and regulatory hurdles that could derail the deal or impose unfavorable conditions, leaving shareholders with a 36% ownership stake in a combined entity facing integration challenges.

• Underlying Business Resilience Masks Margin Pressure: While Steelcase achieved its 11th consecutive quarter of gross margin expansion in Q4 2025 (improving over 500 basis points since FY22), adjusted operating margins have plateaued around 5-6% as tariff costs, restructuring expenses, and competitive discounting in Europe offset volume gains and pricing actions.

• Workplace Transformation Tailwind Is Real but Concentrated: Strong order growth from large corporate customers in financial services and technology sectors (+8% in Q2 2026) demonstrates genuine demand for "AI-ready workplaces," yet this strength is offset by sharp declines in education and government verticals, which represent one-third of Americas orders and are impacted by federal funding policy changes.

• International Segment Remains a Profitability Drag: Despite 13% revenue growth in Q2 2026, the International segment posted a $14.6 million operating loss, with Germany and France continuing to face macroeconomic headwinds while Asia Pacific shows promise but insufficient scale to offset EMEA weakness.

• Valuation Reflects Merger Uncertainty, Not Fundamentals: At $16.36 per share, Steelcase trades at 0.69x EV/Revenue and 12.07x EV/EBITDA—reasonable multiples for an industrial undergoing transformation—but the stock price likely embeds merger arbitrage dynamics rather than reflecting the company's 2.44% dividend yield and improving cash generation.

Setting the Scene: A 113-Year-Old Company Reinventing Itself

Steelcase Inc., founded in 1912 and headquartered in Grand Rapids, Michigan, has evolved from a traditional office furniture manufacturer into a global provider of workplace solutions spanning furniture, architectural products, and technology-enabled services. The company operates through two reportable segments: Americas (78.8% of Q2 2026 revenue) and International (21.2%), serving corporate, government, education, healthcare, and retail customers under brands including Steelcase, AMQ, Coalesse, Designtex, HALCON, Orangebox, Smith System, and Viccarbe.

This isn't your grandfather's furniture company. Steelcase's strategy centers on "leading the transformation of the workplace" by addressing seismic shifts in how work gets done. The company identifies four converging trends: screen-based interactions overtaking in-person communications even in offices, rapid AI adoption requiring "AI-ready workplaces," demand for collaborative spaces to tackle complex issues like sustainability, and growing employee well-being concerns driving needs for privacy and autonomy. These trends aren't just marketing fluff—they represent a fundamental rethinking of the $16.64 billion U.S. office furniture market that has seen more change in five years than in generations.

The competitive landscape reveals Steelcase's positioning among three primary rivals. MillerKnoll Inc. (MLKN) competes in the premium design segment with iconic brands but faces margin pressure and recent net losses. HNI Corporation (HNI) targets the value-oriented mid-market with strong operational efficiency but less emphasis on workplace consulting. Haworth Inc. (private) matches Steelcase's global scale but lacks the same Americas dealer network penetration. Steelcase's differentiation lies in its research-backed approach, extensive dealer relationships, and integrated ecosystem of furniture, consulting, and asset management services that competitors struggle to replicate.

Technology, Products, and Strategic Differentiation: Beyond the Chair

Steelcase's moat isn't just its brand—it's the accumulation of workplace research translated into tangible solutions. The company's "community based design" approach creates dynamic workplaces providing choice and control across multiple work types, directly addressing the hybrid work revolution. This matters because it transforms Steelcase from a product vendor into a strategic partner, embedding the company into customers' long-term real estate and workforce planning decisions.

The "Circular by Steelcase" initiative represents another strategic differentiator. With 40% of global companies now having science-based carbon reduction targets (up over 100% in the last year), Steelcase's remade services—launching in the U.S. and expanding in Europe—empower customers to meet sustainability goals while reducing waste. This isn't just corporate social responsibility; it's a revenue driver that commands premium pricing from ESG-focused clients and creates switching costs through integrated asset management.

Steelcase's AI-ready workplace positioning is particularly compelling. As management notes, "the installed base of conference rooms in the world is enormous... Even if it's half of that, they need to modernize." The company's products integrate technology infrastructure for hybrid collaboration, addressing the reality that people are more likely to join meetings on screens at their desks than walk to meeting rooms. This technological integration—while not as software-centric as SaaS companies—creates higher-margin opportunities and cements Steelcase's role in the digital workplace stack.

Financial Performance & Segment Dynamics: A Tale of Two Segments

Americas: The Engine with Mixed Signals

The Americas segment delivered $707.1 million in Q2 2026 revenue (+3% year-over-year, +3% organic), representing 78.8% of consolidated revenue. Adjusted operating margin reached 11.0%, flat with prior year but showing impressive resilience given external pressures. This performance matters because it demonstrates Steelcase's ability to maintain pricing power in its core market despite tariff headwinds and competitive pressure.

The segment's strength is concentrated but fragile. Large corporate customers drove the 8% order growth in Q2, particularly in financial services and technology sectors that are increasing workplace presence. However, this was partially offset by a 1% decline in Q1 orders and weakness in education and government verticals, which management attributes to changes in federal funding policies including ESSER fund expiration. With these verticals representing approximately one-third of Americas orders, the concentration risk is material—what helps Steelcase when large corporates spend freely becomes a liability when public sector budgets contract.

Cost management shows discipline but reveals pressure points. Cost of sales as a percentage of revenue improved by 20 basis points in Q2 and 50 basis points year-to-date, driven by higher volume benefits and cost reduction initiatives. However, operating expenses increased by $42 million in Q2 (360 basis points as a percentage of revenue) due to lower gains on land sales, $7.1 million in merger transaction costs, and higher non-employee director deferred compensation. This expense inflation offset gross margin gains, illustrating the challenge of maintaining operational leverage while investing in transformation.

International: The Turnaround That Hasn't Turned

The International segment's $190 million Q2 revenue (+13% reported, +8% organic) looks strong on the surface, but the $14.6 million operating loss tells a different story. While adjusted operating loss improved to $2.7 million from $7.6 million prior year, the segment remains far from profitability. This matters because it represents a significant drag on consolidated margins and consumes management attention and capital.

The geographic breakdown reveals a bifurcated recovery. India posted strong growth and Asia Pacific achieved profitability in Q2 through continued cost reductions and demand improvement in China. Conversely, Germany and France "continue to be impacted by macroeconomic challenges," with demand declines offsetting growth in the U.K., Spain, Middle East, and Eastern/Central Europe. This divergence suggests Steelcase's cost reduction actions—$10 million in Q2 restructuring costs for EMEA employee exits—are necessary but insufficient; the segment needs revenue stabilization in its largest European markets to achieve sustainable profitability.

Management's commentary that "it feels relatively broad-based" regarding competitive discounting in Europe indicates structural market challenges. The 20 basis point year-to-date increase in cost of sales as a percentage of revenue in International, driven by higher discounts in EMEA, shows Steelcase is sacrificing margin to maintain volume. This strategic discounting may preserve market share but delays the path to breakeven, which management targets for fiscal 2026.

Outlook, Management Guidance, and Execution Risk

Steelcase's decision to withhold forward-looking guidance due to the pending HNI merger creates uncertainty for investors. The transaction, expected to close by end of calendar 2025, will result in Steelcase becoming a wholly-owned subsidiary with Class A shares delisted from NYSE. Shareholders will receive consideration comprising 0.22 HNI shares plus $7.20 cash per share (subject to adjustment), representing a 36% ownership stake in the combined entity. This structure matters because it ties Steelcase shareholders to HNI's performance post-merger, introducing execution risk beyond Steelcase's control.

The merger's strategic rationale—combining "the industry's best brands to more customers"—sounds compelling but faces practical hurdles. HNI's hearth products business provides diversification that could stabilize cash flows, but integration costs and cultural differences between premium-focused Steelcase and value-oriented HNI could dilute margins. The $67 million termination fee payable under specific circumstances creates a financial penalty if Steelcase receives a superior offer, effectively locking in the deal regardless of whether a better alternative emerges.

Management's qualitative outlook suggests cautious optimism. The company is "still targeting mid-single-digit organic revenue growth" and "still targeting to expand our adjusted operating margin for the year," but acknowledges tariff volatility makes the environment "quite volatile week-to-week." The admission that "it's going to probably take another couple of quarters before we fully catch up on a cumulative basis" regarding tariff cost recovery indicates margin pressure will persist through at least mid-2026.

The ERP system go-live, targeted for calendar 2026, represents another execution risk. With approximately 78% of costs capitalized as of Q2, the $90 million planned capex for 2026 will strain cash flow while the system stabilizes. Management expects "some inefficiency during the cutover," meaning the very tool designed to simplify processes will initially complicate them, potentially disrupting operations during the critical merger integration period.

Risks and Asymmetries: What Could Break the Thesis

Merger Execution Risk: The HNI transaction faces multiple failure points. Regulatory approvals could impose conditions that delay closing or force asset divestitures. Shareholder approval, while likely given the 15% premium to Steelcase's pre-announcement price, is not guaranteed. If the merger fails, Steelcase would owe HNI a $67 million termination fee under certain scenarios, representing nearly 15% of its $448 million cash position—a material financial hit that would derail its transformation timeline.

Tariff and Trade Volatility: Steelcase's exposure to new tariffs creates margin uncertainty that pricing actions can't immediately offset. Management's candid admission that "tariffs hit us right away and pricing lagged, given the amount of backlog that we had in place that we did not apply the tariff surcharge to" reveals a structural timing mismatch. With $20 million in higher tariff costs in Q2 alone and the environment "quite volatile week-to-week," a sudden escalation in trade tensions could compress margins faster than Steelcase can implement surcharges, particularly on existing backlog.

Customer Concentration and Cyclicality: The company's reliance on large corporate customers, while currently a strength, creates vulnerability to economic downturns. Management's observation that "we are discretionary" and "nowhere near a peak right now" suggests demand could evaporate quickly if corporate budgets tighten. The concentration in financial services and technology—sectors currently investing heavily in return-to-office—exposes Steelcase to sector-specific downturns. Additionally, the one-third exposure to education and government creates policy risk, as evidenced by federal funding changes already impacting orders.

International Profitability Challenge: The International segment's persistent losses, despite restructuring actions, represent a strategic quagmire. The $10 million Q2 restructuring charge for EMEA employee exits, expected to continue through 2027, shows management is committed to fixing the segment, but the "macroeconomic challenges" in Germany and France may be beyond Steelcase's control. If European demand doesn't recover, the segment could remain a perpetual drag, consuming capital that could otherwise fund Americas growth or be returned to shareholders.

ERP Implementation and Operational Disruption: The new ERP system, while necessary for long-term efficiency, poses near-term operational risk. The shift in go-live target to calendar 2026, delayed from earlier plans, suggests complexity challenges. During implementation, Steelcase faces the risk of system outages, data migration issues, and process disruptions that could impact customer deliveries and financial reporting—particularly problematic during the merger transition when operational excellence is paramount.

Competitive Context: Where Steelcase Stands

Against MillerKnoll, Steelcase holds advantages in education and healthcare verticals where its research-backed approach and dealer network create stickier relationships. MLKN's 38.6% gross margin exceeds Steelcase's 33.6%, but MLKN's -0.41% profit margin and 174% payout ratio indicate financial stress that Steelcase's 2.92% profit margin and 50% payout ratio avoid. Steelcase's stronger cash generation and lower debt-to-equity (0.61 vs MLKN's 1.34) provide financial flexibility that MLKN lacks.

Versus HNI, Steelcase's premium positioning commands higher prices but creates cyclical vulnerability. HNI's 10.82% operating margin and 5.46% profit margin exceed Steelcase's 8.37% and 2.92%, respectively, reflecting HNI's cost-competitive manufacturing and hearth products diversification. However, Steelcase's 0.69x EV/Revenue multiple trades at a discount to HNI's 0.91x, suggesting the market values HNI's stability more highly—a gap that could close if Steelcase successfully executes its transformation.

Haworth's private status limits direct comparison, but Steelcase's public market access and stronger Americas presence provide capital and growth advantages. Both companies emphasize sustainability and modular design, but Steelcase's "Circular by Steelcase" program is more advanced in linking sustainability to revenue, while Haworth's customization strength remains concentrated in EMEA where Steelcase struggles.

Valuation Context: Pricing Merger Uncertainty

At $16.36 per share, Steelcase trades at a market capitalization of $1.88 billion and enterprise value of $2.24 billion. The valuation multiples reflect a company in transition: 20.47x P/E, 12.07x EV/EBITDA, 0.69x EV/Revenue, and 0.58x P/S. These metrics place Steelcase in the lower half of its peer group, suggesting either opportunity or justified skepticism.

The 2.44% dividend yield provides income while investors wait for transformation to bear fruit, with a 50% payout ratio indicating sustainability. Free cash flow generation of $101.4 million over the trailing twelve months implies a 5.4% FCF yield—attractive in a low-rate environment but requiring confidence that capex (targeted at $90 million in 2026 for ERP alone) won't consume cash flow.

Comparing to peers, MLKN trades at 0.73x EV/Revenue despite negative margins, while HNI commands 0.91x with superior profitability. Steelcase's discount to HNI likely reflects its International segment losses and merger uncertainty. If the HNI deal closes successfully, the combined entity's scale ($5.9 billion revenue) and cost synergies could justify a re-rating. Conversely, if the merger fails, Steelcase would need to demonstrate standalone International profitability and consistent Americas margin expansion to merit a multiple expansion.

The balance sheet provides a floor: $426.8 million in total liquidity against $447.4 million in debt creates minimal net leverage (0.61 debt-to-equity), and the 1.66 current ratio indicates adequate short-term liquidity. However, the $90 million ERP investment and ongoing restructuring costs will test cash reserves, particularly if the merger timeline extends or integration costs exceed estimates.

Conclusion: A Transformation at the Crossroads

Steelcase stands at an inflection point where workplace transformation trends, operational improvements, and strategic M&A converge. The company's 11 consecutive quarters of gross margin expansion and strong win rates in the Americas demonstrate that its strategy of leading workplace change resonates with large corporate customers. However, this progress is obscured by International segment losses, tariff volatility, and the looming HNI merger that creates both opportunity and uncertainty.

The investment thesis hinges on two critical variables: merger execution and International profitability. If the HNI transaction closes successfully and delivers promised synergies, Steelcase shareholders benefit from scale, diversification, and potentially accelerated margin expansion. If the merger fails or integration stumbles, Steelcase must prove it can achieve its targeted breakeven in International while maintaining Americas momentum—a challenge that has eluded management for several quarters.

For long-term investors, the 2.44% dividend yield and improving cash generation provide compensation while waiting for clarity. The workplace transformation tailwind—AI-ready offices, sustainability demands, and return-to-office mandates—offers genuine growth potential that competitors struggle to match. However, the stock's valuation likely won't reflect these fundamentals until merger uncertainty resolves and International losses materially improve. Until then, Steelcase remains a show-me story where execution, not strategy, will determine shareholder returns.