Conferencia de resultados del T1 del ejercicio fiscal 2027 de MillerKnoll (MLKN): mejora de márgenes, reducción de las previsiones de ventas

Puntos clave

• MillerKnoll informó de ventas netas en el primer trimestre del ejercicio fiscal 2027 de 923 millones de dólares, lo que supone un descenso interanual del 3,4%, mientras que los pedidos aumentaron un 3,2% hasta los 914 millones de dólares.
• El BPA diluido ajustado fue de 0,53 dólares. Excluyendo un beneficio neto de 0,11 dólares por acción proveniente de los reembolsos arancelarios de la IEPA, el BPA ajustado fue de 0,42 dólares.
• El margen bruto ajustado alcanzó el 41,8%. Excluyendo los reembolsos arancelarios, mejoró 150 puntos básicos interanualmente, impulsado por la gestión de precios y costes.
• Los pedidos del segmento International Contract subieron un 17,3%, mientras que los pedidos de Global Retail aumentaron un 4,3%. Los pedidos de North America Contract cayeron un 1,7% en medio de una conversión de proyectos más lenta y la debilidad en los sectores gubernamental y sanitario.
• La dirección redujo sus previsiones de ventas para el ejercicio fiscal 2027 a un rango de entre 3.880 y 4.030 millones de dólares, pero mantuvo su previsión de BPA ajustado entre 1,85 y 2,15 dólares.
• La dirección señaló que los pedidos aumentaron un 9% interanual durante las primeras tres semanas de septiembre, con crecimiento en los tres segmentos.

Datos financieros principales

MillerKnoll contabilizó 16,5 millones de dólares en reembolsos relacionados con aranceles IEPA previamente contabilizados como gastos. Los reembolsos aportaron 180 puntos básicos al incremento interanual del margen bruto.

Rendimiento comercial y operativo

North America Contract

Las ventas netas cayeron un 5,3% hasta los 506 millones de dólares, mientras que los pedidos descendieron un 1,7% hasta los 484 millones de dólares. El margen operativo ajustado disminuyó 70 puntos básicos hasta el 10,7%, reflejando el desapalancamiento por menor volumen y la inflación, lo que fue parcialmente compensado por los precios y los reembolsos arancelarios.

La dirección atribuyó el comportamiento más flojo de los pedidos a una conversión más lenta de los proyectos adjudicados, la calendarización de proyectos en el sector sanitario y la cautela entre los clientes gubernamentales federales, estatales y locales. Los servicios financieros, de seguros y para empresas siguieron siendo áreas de solidez.

La empresa afirmó que su embudo de proyectos, las nuevas incorporaciones al embudo y los contratos adjudicados aumentaron interanualmente. Por lo tanto, la dirección considera que la debilidad del primer trimestre es principalmente un problema de calendarización y no un deterioro estructural. Se sigue esperando que North America Contract crezca durante el resto del ejercicio fiscal 2027.

International Contract

Las ventas cayeron un 6,4% hasta los 157 millones de dólares, pero los pedidos aumentaron un 17,3% hasta los 181 millones de dólares, incluida la adjudicación de un destacado proyecto en Corea del Sur. Los pedidos orgánicos crecieron un 17,9%, mostrando fortaleza en Asia, Oriente Medio y partes de Europa y América Latina.

El margen operativo ajustado se redujo 390 puntos básicos hasta el 4,6%. La dirección citó un menor apalancamiento de ventas, inversiones en exposiciones, la calendarización de eventos comerciales y mayores retribuciones variables. La mezcla de productos, la infrautilización de las fábricas europeas y la inflación también han presionado la rentabilidad.

MillerKnoll está ampliando la cobertura de distribuidores e introduciendo categorías de productos adicionales. La línea Knoll Concert, lanzada recientemente, está logrando los primeros contratos para oficinas privadas en Europa.

Global Retail

Las ventas netas aumentaron un 2,6% hasta los 261 millones de dólares, mientras que los pedidos crecieron un 4,3% hasta los 249 millones de dólares. Los pedidos en Norteamérica avanzaron un 7,5%, marcando el octavo trimestre consecutivo de crecimiento de pedidos en ese mercado.

El margen operativo ajustado aumentó 580 puntos básicos hasta el 7,0%, incluyendo un beneficio de 410 puntos básicos por reembolsos arancelarios. Excluyendo dicho beneficio, el margen mejoró 170 puntos básicos mediante la fijación de precios y el ahorro de costes, compensado en parte por las inversiones en nuevas tiendas.

MillerKnoll abrió cuatro tiendas durante el primer trimestre y prevé entre cinco y siete aperturas en el segundo trimestre. La dirección sigue teniendo como objetivo entre 14 y 18 tiendas nuevas en el ejercicio fiscal 2027, con mayor énfasis en los establecimientos Herman Miller de menor formato. La dirección prevé que las tiendas abiertas en la segunda mitad del ejercicio fiscal 2025 y durante el ejercicio fiscal 2026 aporten rentabilidad en el ejercicio fiscal 2027.

Previsiones de la dirección

El rango revisado de ventas para todo el año refleja unas ventas y pedidos en el primer trimestre inferiores a lo previsto. El rango de BPA se mantuvo e incluye un impacto adverso estimado de 0,07 dólares por acción debido a las recientes medidas arancelarias entre Estados Unidos y Canadá.

La dirección prevé que las condiciones de precio-coste se conviertan en un viento en contra interanual de entre 20 y 30 puntos básicos en el segundo trimestre a medida que aumente la inflación. En septiembre entró en vigor un recargo medio de aproximadamente el 4% para International Contract. Las perspectivas también asumen unos 6 millones de dólares de gastos adicionales por trimestre en nuevas tiendas en comparación interanual.

Riesgos y aspectos a vigilar

• La dirección prevé que las recientes medidas arancelarias entre Estados Unidos y Canadá reduzcan el BPA del ejercicio fiscal 2027 en aproximadamente 0,07 dólares.
• El acero, la energía, el flete y otros costes de los insumos siguen siendo presiones inflacionistas, y se espera que la relación precio-coste sea ligeramente desfavorable en el segundo trimestre.
• Los clientes de North America Contract están tardando más en convertir los proyectos adjudicados en pedidos, especialmente en los sectores gubernamental y sanitario.
• Los márgenes de International Contract siguen siendo sensibles a la mezcla regional y de productos, la calendarización de proyectos, las inversiones en exposiciones y la absorción de costes indirectos de fabricación.
• Global Retail se enfrenta a mayores costes de publicidad digital a medida que las búsquedas impulsadas por IA cambian el panorama del marketing. La dirección está reorientando un mayor gasto hacia el correo directo y ajustando su estrategia digital.
• La empresa redujo su rango de ventas para todo el año porque no prevé recuperar por completo la debilidad del ingreso registrada en junio y julio.

Puntos destacados del turno de preguntas y respuestas con analistas

La dirección indicó que los seis indicadores internos supervisados para North America Contract avanzaban en una dirección favorable, aunque los proyectos más grandes requieren más tiempo para concretarse. El aumento de la asistencia a las oficinas entre las grandes organizaciones podría respaldar la actividad futura de proyectos, pero el momento exacto sigue siendo incierto.

La dirección de Global Retail afirmó que las tiendas más nuevas experimentaron una rampa inicial de ventas más floja de lo esperado, en particular en Design Within Reach, pero el rendimiento del primer año comparable ha sido más fuerte de lo proyectado inicialmente. La empresa mantiene su compromiso con la estrategia de expansión de tiendas.

Las medidas de costes a nivel de toda la empresa generaron aproximadamente entre 3 y 5 millones de dólares de ahorro interanual en gastos operativos en el primer trimestre. Las medidas incluyen reducciones de capacidad de fabricación, ahorros en compras, cambios en la plantilla, racionalización de las exposiciones de Holly Hunt y controles de gastos más amplios.

Las prioridades de asignación de capital siguen siendo la inversión en oportunidades de crecimiento con mayor rentabilidad, la reducción de la deuda, el mantenimiento del dividendo y la recompra oportunista de acciones. La deuda neta sobre EBITDA mejoró a 2,75x desde 2,8x en el trimestre anterior.

Transcripción completa de la conferencia de resultados

Transcripción completa de la conferencia de resultados

Comentarios de la dirección

Operator

Good morning and welcome to MillerKnoll Quarterly Earnings Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Wendy Watson, Vice President of Investor Relations.

Wendy Watson

Good morning and welcome to our first quarter fiscal 2027 conference call. With me are Jeff Stutz, MillerKnoll's Interim Chief Executive Officer, and Kevin Veltman, Chief Financial Officer. Joining them for the Q&A session are John Michael, President of North America Contract, and Debbie Propst, President of Global Retail.

We issued our earnings press release for the quarter ended August 29, 2026, before market opened today, and it is available on our investor relations website at millerknoll.com. A replay of this call will be available on our website within 24 hours. Before I turn the call over to Jeff, please remember our safe harbor disclosure regarding forward-looking information. During the call, management may discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors which may cause the actual results to be different than those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release.

The forward-looking statements are made as of today's date and except as may be required by law, we assume no obligation to update or supplement these statements. We also refer to certain non-GAAP financial metrics, and our press release includes the relevant non-GAAP reconciliations. With that, I'll turn it over to Jeff.

Jeff Stutz

Thanks, Wendy. Good morning and welcome, everyone. Before Kevin reviews our financial results and outlook, I'd like to update you on the priorities we outlined last quarter and our commitment to driving improved performance and disciplined execution across the organization. Overall, we delivered solid margin performance, earnings, and cash generation despite revenue headwinds. First quarter sales were $923 million, down 3.4 percent year over year, primarily reflecting softer than anticipated revenue in our North America Contract and Global Retail segments. Adjusted earnings per share were $0.53, and excluding an $0.11 per share net benefit from IEPA tariff refunds, adjusted earnings per share were $0.42. This was above our guidance range and reflecting disciplined execution and cost management. Demand conditions varied across our business.

Orders were particularly strong in International Contract and continued to grow in Global Retail, while North America Contract orders were softer than we anticipated. At the same time, several of our internal demand indicators and customer verticals remained quite constructive. We're encouraged by the progress our teams are making against this backdrop and by the actions underway to strengthen MillerKnoll's performance. As I previewed on our last earnings call, we are focused on three key areas. First, we are elevating the level of operational discipline we bring to setting priorities and running the business by concentrating our resources on the initiatives where we believe we can create the greatest value for the organization and for our business. Last quarter I said this is about focusing on those efforts that will help us grow the top line and improve profitability. And across the company, our teams have sharpened their priorities and aligned resources behind the opportunities that can have the greatest impact.

Let me put a finer point on that. In North America Contract, we are concentrating our selling resources on winning global and national account opportunities and leveraging the strength of our brands and our credibility with A&D and commercial real estate specifiers. In International Contract, new products are gaining traction in the marketplace. Notably, our recently introduced Concert line by Knoll is driving early wins in the private office category, which is an area of our business previously underpenetrated in Europe. We are also targeting efforts aimed at training dealers and expanding distribution coverage in the Asia-Pacific region where we see premium growth opportunities. And in Global Retail, we're executing our store growth strategy and applying our learnings, such as an increased emphasis on our smaller format Herman Miller stores, while continuing to optimize our marketing investments to build awareness and customer acquisition. Second, we're maintaining rigorous cost discipline and aligning expenses with revenue levels.

In the near term, we're making more deliberate decisions about where we deploy capital and resources while reducing expenses where we can. Our first quarter earnings performance, excluding net tariff refunds, demonstrates early progress toward this goal. Third, we're sharpening our focus on capital allocation, cash flow, and balance sheet strength to support debt reduction during FY '27 while preserving our capacity to invest in growth. By bringing greater discipline to capital deployment, we're building upon our business's proven cash generation capabilities. Next, I'll offer some segment highlights for the quarter. In North America Contract, first quarter sales declined year over year due in part to the timing of orders pulled forward late in fiscal '25 that benefited sales in the first quarter of fiscal '26. Still, first quarter orders were softer than we expected, with trends varied across sectors.

We had continued strength in insurance, financial, and business services, and conversely, order patterns were soft in relation to last year within the healthcare sector and with federal, state, and U.S. local government customers. Looking more broadly, we continue to operate in a dynamic environment and are navigating the recent trade developments between the U.S. and Canada. Now, we manufacture in both countries, and our supply chain touches both countries. We're being proactive on both sides of the border and working closely with suppliers, customers, and our own production teams to manage the flow of product and make adjustments where we can. Our full-year outlook includes the most up-to-date assessment of the U.S.-Canada tariff actions. Based on that assessment, we estimate an approximate $0.07 per share impact from costs related to these new tariffs. Given this backdrop, we are managing expenses and production levels carefully while prioritizing investment in our most important growth initiatives. Tariff refunds were also beneficial to help mitigate these pressures to our full-year outlook. And Kevin will cover those details shortly.

Over the last several months, I've spent considerable time with the North America Contract team meeting with dealers and customers, one message has come through very clearly. Strong partnerships are a competitive advantage in this business, and our brands benefit from deeply credible key target markets alongside differentiated product offerings. Our dealers and customers tell us they need two things from us. First, we need to continue to simplify the process of doing business with us. And secondly, to maintain and expand our leadership in product innovation. We're delivering on these needs by improving responsiveness, service levels, and operational execution while also accelerating our new product innovation clock speed. We continue to be optimistic in this business.

Despite the demand softness we saw this past quarter, which varied by sector, our internal forward demand indicators continue to point to healthy conditions across North America. Project funnel and funnel additions were up year over year, along with particularly notable growth in awarded contracts. Externally, Class A leasing in the U.S. continues to show strength, with the latest four-quarter net absorption in Class A buildings improving to the highest total since mid-2020. All of this suggests the order softness we experienced in the first quarter represents a timing issue rather than a structural slowdown in general business conditions. Turning to International Contract, we remain encouraged by the opportunities in this business. Although sales declined year over year, reflecting difficult comparisons in several markets, orders increased across most regions. The activity was particularly strong in Asia, the Middle East, and portions of Europe and Latin America.

We saw healthy demand from financial services and private office customers, along with strength in healthcare and technology. We remain focused on expanding and strengthening our international dealer network, increasing engagement and improving alignment as we continue building our international business. During the quarter, our Asia-Pacific team hosted dealers representing more than 20 countries at an event in Jakarta, Indonesia. Key leaders from across the region all participated, helping us strengthen relationships in the region and position us for further growth. Within the Global Retail segment, we delivered another quarter of sales and order growth, together with meaningful year-over-year operating margin improvement, even after excluding the net benefit from tariff refunds. While June and July had softer than expected sales and orders, performance strengthened significantly across channels and geographies in the month of August. For the first quarter, North America orders increased 7.5 percent, and this represents our eighth consecutive quarter of North America Retail order growth, a key indicator of our ability to effectively navigate a challenging industry environment while advancing our long-term strategy.

During the quarter, we opened a DWR store in Raleigh, North Carolina, and Herman Miller stores in Columbus, Ohio, St. Louis, Missouri, and San Antonio, Texas. Looking ahead, we expect to open 5 to 7 new stores during the second quarter and continue to plan for approximately 14 to 18 new store openings throughout FY '27. Beyond expanding our physical footprint, the retail team is developing new ways to engage customers and build awareness of our brands. These initiatives are designed to reach more consumers across our target markets and included a DWR furnished home on Shelter Island, sponsorship of the Summer Celebration of the iconic Glass House, and increased storytelling on social media with design partners. So with those brief opening comments, I'll now hand the call over to Kevin, who will provide additional details on segment financial performance and our outlook for FY '27.

Kevin Veltman

Thanks, Jeff, and good morning, everyone. I'll start with an overview of our first quarter results and segment detail, followed by our outlook for the second quarter and full fiscal year. As Jeff mentioned, first quarter consolidated net sales were $923 million, down 3.4 percent on a reported basis and 3.3 percent lower organically. Consolidated orders for the quarter were $914 million, up 3.2 percent as reported and 3.5 percent on an organic basis. Our consolidated backlog was $669 million at quarter end, down 3.1 percent from a year ago. First quarter reported gross margin increased 320 basis points to 41.7 percent, and adjusted gross margin was 41.8 percent. The recognition of $16.5 million in refunds from the U.S. government related to previously expensed IEPA tariffs contributed 180 basis points to the year-over-year increases.

Excluding this benefit, adjusted gross margin improved 150 basis points over last year, primarily reflecting pricing realization, partially offset by inflationary cost pressure. Including variable incentive impacts, the net benefit of tariff refunds was approximately $0.11 of adjusted diluted earnings per share. Our quarterly supplemental slide deck posted on our investor relations website provides further detail of the dollar and margin impacts by segment. Adjusted earnings per share were $0.53 in the first quarter compared to $0.45 in the prior quarter. Excluding the net benefit from tariff refunds, adjusted earnings per share were $0.42. This reflects price realization and improved cost management partially offset by lower sales volume and inflation pressure. Turning to cash flow and capital allocation, we generated $49 million in cash from operations during the quarter and invested $33 million in capital expenditures.

We ended the quarter with $580 million of available liquidity. Our net debt to EBITDA ratio was 2.75 times as defined by our lending agreement. In July, our Board of Directors declared a quarterly cash dividend of $0.1875 per share, payable on October 15 to shareholders of record on August 29 of 2026. At an annual indicated dividend of $0.75 per share, the yield is 3.7 percent based on yesterday's closing stock price. With that, I will move to our performance by segment in the first quarter. Net sales in the North America Contract segment were $506 million, down 5.3 percent on a reported basis and 5.2 percent lower organically, primarily due to a challenging prior year sales comparison associated with the order pull forward in the fourth quarter of FY '25 that we have discussed in prior quarters. Orders were $484 million, down 1.7 percent as reported, and down 1.6 percent organically from the prior year, despite a favorable orders comparison.

As a reminder, we estimate that $55 million to $60 million of orders pulled forward from Q1 FY '26 to fourth quarter FY '25 related to tariff pricing actions. The reported operating margin was 9.4 percent and adjusted operating margin was 10.7 percent, down 70 basis points year-over-year. The decline primarily related to deleverage and lower sales and inflationary cost pressure, partially offset by pricing realization and the net benefit from tariff refunds. International Contract segment net sales were $157 million, down 6.4 percent on a reported basis and down 6.2 percent organically year over year. Orders were $181 million, up 17.3 percent versus prior year on a reported basis, and up 17.9 percent organically, which included a notable project win in South Korea. First quarter reported operating margin was 2.4 percent, and adjusted operating margin was 4.6 percent, down 390 basis points compared to prior year. The decline primarily reflected the leverage on lower sales, showroom investments, and timing of sales events, as well as higher incentive compensation.

In the Global Retail segment, net sales were $261 million, up 2.6 percent on a reported basis and up 2.8 percent organically. Segment comparable sales were flat, and comparable sales in North America grew 1.9 percent. Orders in the quarter improved to $249 million, up 4.3 percent year-over-year on a reported basis and up 4.7 percent organically. In North America, orders grew 7.5 percent, reflecting continued market share growth. The reported operating margin was 6.1 percent in the quarter. An adjusted operating margin was 7 percent, up 580 basis points year over year. The improvement included a 410 basis point net benefit from tariff refunds.

Improvement also reflected pricing realization and cost savings, partially offset by planned investments in new store openings. Excluding the net tariff benefit, adjusted operating margin improved 170 basis points year over year as our priority to expand operating margins for this segment gains traction. Now let's turn to our Q2 and fiscal '27 full year outlooks, which includes our most up-to-date estimates on inflation, tariffs, and related mitigation efforts. For the second quarter of FY '27, we expect net sales of $972 million to $1.012 billion. At the midpoint, this represents a year-over-year increase of approximately 4 percent. We expect gross margin of 38.3 percent to 39.3 percent and adjusted operating expenses of $321 million to $331 million. Adjusted diluted earnings per share expected to be $0.43 to $0.49.

This outlook includes estimates for the most recent U.S. and Canada tariff actions. For the full year, with the lower than expected sales and orders in the first quarter, we reduced our expected net sales range to $3.88 billion to $4.03 billion, reflecting 3 percent growth year-over-year at the midpoint. We are maintaining our expected adjusted earnings per share range of $1.85 to $2.15. This includes an estimated $0.07 per share of unfavorable impact from the most recent U.S. and Canada tariff actions. As I mentioned last quarter in FY '27, from an operating expense perspective, our guidance continues to assume an estimated incremental new store expense of approximately $6 million per quarter on a year-over-year comparison. For all other details related to our outlook, please refer to our first quarter results press release. With that, I will turn the call back over to Jeff.

Jeff Stutz

Thanks for that, Kevin. Before we begin Q&A, I want to thank our teams around the world for their continued focus and commitment to delivering for our customers. We are making progress against our priorities to strengthen the business and we remain focused on improving our operating performance, creating long-term value for our shareholders and serving our customers. So with those as opening remarks, we'll now open the call for your questions. Thank you.

Operator

We will now begin the question and answer session. [Operator Instructions] Your first question comes from Greg Burns with CD and Company.

Please go ahead.

Preguntas y respuestas

Gregory Burns

Good morning. So, um, in the North American Contract segment, you mentioned that you're the internal funnel metrics remain positive. Some of the market dynamics also, I think, still constructive for demand. Could you just maybe give us a little bit more color on why that didn't work? Maybe translate to a stronger quarter in the first quarter?

Jeff Stutz

Hey, Greg, good morning. I'll turn things over to John, and he can cover kind of his take on this. Maybe just would reiterate that we, we certainly are seeing in the background continued supportive indicators inclusive of corporate profitability. The Class A leasing commentary that we offered we think is bullish. CEO confidence has been relatively resilient. And so those are supportive. We have internal metrics that I highlighted in my prepared remarks. I think our issue is more of some of the resilient sectors that we've seen strengthened, just had a down quarter, and that happens in a project-driven business. But I'll let John unpack that further.

John Michael

Sure. Thanks, Jeff. Hi, Greg. Yes, to tag on to what Jeff said, I think overall when we look at the indicators, they're positive. I mean, I'm looking at six. The six that we look at on a regular basis are all pointing in the right direction. I will say the reports from the sales organization are that customers seem to be taking a little bit longer to convert from awarded project to orders. And we see that in our indicators as well. We think there's a couple things driving that, certainly there's at the state and local level, which is part of our public sector group. We see some uncertainty and some hesitation, probably related to the midterms that are around the corner.

From a federal government perspective, a lot of activity in key agencies, but certainly some of the agencies that experienced some of the downsizing whatnot over the last 12 to 18 months have been a little slower to return than normal. And in our healthcare sector, a very positive outlook, but a little bit of a pause during the quarter really based on the timing of projects.

Gregory Burns

Okay, so the um, the outlook for the year, I mean, do you still expect growth from North American Contract this year, uh, even with the soft first quarter?

John Michael

We do. Yeah, the forecast for the balance of the year shows growth, but obviously we're a little bit behind after the first quarter, but the teams are working hard to catch that up.

Gregory Burns

Okay. And then in terms of the Global Retail situation, store expansion um efforts. Could you just maybe give us a little color on the sales and margin contributions from stores that have been open for a year, just to give us a sense of kind of what kind of returns you're getting from, from maybe some of the more mature stores that, that have been in market for a little while.

Debbie Propst

Hi Greg, thanks for the question. This is Debbie. Um, so the great news is that the cohort of stores that we opened in the back half of FY '25 and all of FY '26 are really showing progress and getting to a point where we'll have profitability out of those stores in FY '27.

Gregory Burns

Okay, and they're performing to where you expected them to be from maybe a revenue and margin contribution at this point?

Debbie Propst

We're seeing the second, the first comp year ramp actually a little bit more than we expected. So what we've seen through the store growth strategy is a little bit of a softer initial ramp for DWR than we initially performed, but the second year actually showing more. We remain committed to our store growth strategy, and we like the economics and the progress that we're seeing.

Operator

All right, great. Thank you. Your next question comes from Reuben Garner with StoneX. Please go ahead.

Reuben Garner

Thanks. Good morning, everybody. Just to follow up on the North American Contract piece, any, can you give us some insight on the cadence in the quarter? Did it slow as the quarter moved on? Was there kind of a moment where there was a pause and we've since had a recovery? I mean, what is, what is the September kind of look like so far? Any just kind of thoughts on the progression in order patterns? Yes.

Kevin Veltman

Yes, Reuben, this is Kevin. Let me talk you through that. So within the quarter, we saw generally improvement as the quarter went on, particularly in August for NAC as well as the overall business. August was a growth quarter year over year. And then as we look through the first three weeks of September, we're up 9 percent orders year over year, and that is growth across each of our three segments as well right now.

Reuben Garner

Okay, great. Very encouraging. And then in your outlook, can you talk about what you've assumed from a price-cost standpoint and how you guys have handled kind of the latest round? Obviously, steel has kind of trended up through the year. Diesel's moved higher. What's, what's the latest price increase or surcharges or any other metrics you look at to offset these factors and what's embedded for the full year from a price-cost standpoint?

Kevin Veltman

Yeah, Reuben, in the first quarter, maybe to set the stage, as you may recall, we talked last quarter about some pricing actions that we took back in April across our retail in North America Contract in particular. And so those actions have been flowing through in the first quarter. Inflation ramping up, but frankly, it ramped up a little bit slower than we expected during Q1. But to your question, it's still very real. And so we had price cost as we look at it was was slightly favorable in Q1. We expect as inflation ramps up while our pricing actions are also ramping up, we expect it to be a slight headwind, you know, call it 20 to 30 basis points year over year in the second quarter. And it's the things you talked about, you know, oil continuing to remain close to $100 and the derivative effects of that.

Reuben Garner

Yes.

Kevin Veltman

Okay, great. Yes, but we're following, maybe the other point I would make is, we're following the playbook we've done, whether it's tariffs or other inflation, we're following the playbooks we've used in the past to work our way through.

Jeff Stutz

Yes, Reuben, this is Jeff. You had asked about what kind of pricing actions. Kevin, I agree with everything Kevin said. I might add to that that we had not done a surcharge action for the International Contract business. That has been the latest pricing action is actually effective earlier this month, an average of about 4 percent. So that should layer into our results going forward. And as Kevin said, we're following what has become a relatively familiar playbook for the business, but specifically as it relates to Canada tariffs, we're pulling out as many stops as we can, including pulling component inventory into inventory ahead of the implementation date, customer order timing, trying to get in front of that wherever possible. We're working really hand in hand with our key suppliers, uh, on some sharing arrangements and leveraging dual supply wherever we see the opportunity, supplying component parts or, in some cases, finished goods from, you know, outside of the tariff regime regions around the world.

So we're, again, these are all actions that we're familiar with from past experiences.

Reuben Garner

But these are things we're pursuing with vigor. Got it, and that's a good lead into my last question. The margin performance and the outlook is really showing strong, you know, even excluding the tariffs this quarter. Can you discuss, the cost actions that you've taken to date and how much is kind of, how much drove the outperformance this quarter. And then, you know, what you have going forward, you know, how much visibility do you have if revenue doesn't accelerate is there a dollar amount or any kind of quantification that you can give us on, um, on the moves you've been making that can drive kind of, you know, performance to meet or even exceed your your outlook without kind of help from the top line?

Jeff Stutz

Yeah, Reuben, this is Jeff. I'll give you some just high level perspective on kind of under the heading of, of our focus on cost, discipline, and Kevin, you can fill in any additional color you see fit. This is really, I mentioned this last quarter, this is really an enterprise-wide effort to, and it's really about making smarter, deliberate choices on where we spend. I mentioned, I think, on the call last quarter that, you know, this all, it really all ties into some of the priority setting that you've heard us talk about, the idea that, you know, recognizing we do all kinds of things incredibly well at MillerKnoll, but we can't do everything. And so we have to be smart about and choiceful about where we, you know, put our resources. And so, and that includes a focus on expense on all expense lines. So we're really, we've tasked our our team to really make that evaluation. We're also including, that touches on the SG&A side of the business, but it also touches on cost of goods sold.

Our supply management team continues to do incredible work with our supply base and, you know, finding opportunities to reduce the water level on cost of goods sold. We're evaluating manufacturing capacity. We've already made moves in that category, which we've outlined for you in past calls. But just a reminder, we've closed 2 plants, and we're in the process of closing a third year in, uh, in West Michigan. Uh, and there there are longer-term opportunities to consider other actions down the line and we're certainly evaluating all of those things. So that's just a little kind of context to it. This is a ground up review on the part of the organization. And as we move forward, we'll certainly unpack more details on that for you.

I will say, and maybe Debbie you can feel free to talk about this, one of the actions we took this quarter that's reflected in the special charge line items or the restructuring line items relates to some workforce reductions and some reorganization we did with the Holly Hunt brand. So Kevin or Debbie, please feel free to chime in with some additional color. Thank you.

Kevin Veltman

Yeah, maybe overall, and Debbie can share a little bit more on Holly Hunt, which this will be included in this. As we look at our OPEX bridge, there's $3 million to $5 million of savings reflected in that bridge. And obviously, we've talked about the other things. You have standard wage package and the new stores that that is helping to fund, but that's about what was flowing through when we look year over year, of which some of the target things at Holly Hunt is as we look at the performance improvement opportunities in that business.

Debbie Propst

We're working very quickly to improve the outlook of that particular business and was pleased to see the business from an order trend perspective return to growth in Q1 after four consecutive quarters of decline. Some of the restructuring elements that we've been working on, we talked in the last call about some of the leadership adjustment that we had made, and obviously we will have the wraparound effect of some of those cost savings throughout the course of the year. We're also looking at our overall corporate footprint supporting that entity and making adjustments there to right-size the corporate footprint, as well as looking at showroom rationalization. This quarter, we'll be closing our Minneapolis showroom and moving to an outside sales rep structure in that market. So those are a few of the examples of work that has happened thus far.

Reuben Garner

Great. Thanks for the detail, guys. One quick follow-up, that $3 million to $5 million, what you saw in the first quarter on a year-over-year basis? And was that specific to Holly Hunt, or was that broadly?

Kevin Veltman

That was across the business, which would have included Holly, Hunt, and Reuben's.

Reuben Garner

Got it. All right. Thank you, guys, and good luck going forward.

Jeff Stutz

Thank you.

Kevin Veltman

Thanks, Reuben.

Operator

Your next question comes from Philip Blee from William Blair. Please go ahead.

Phillip Blee

Good morning, guys. Thanks for the question. So you slightly brought down your sales guide for the year. Can you just provide a bit more color on what specifically you're seeing in NAC and Global Retail that's giving you that additional caution? Do you think it's more of a temporary deferral on a choppy macro, or do you think it's potentially a temporary deferral on a choppy macro? a more structural hit here. And then what's your degree of confidence this is the right outlook now? Assuming that macro maybe remains at status quo, I guess any quantification on what you're seeing in terms of the contract pipeline or second quarter to date retail trends would be helpful here. Thank you.

John Michael

John, why don't you start us off and Debbie, you can chime in. Yes, I think in terms of the pipelines from a contract perspective, it's encouraging. I think we've seen what's been interesting for the last 30 to 60 days is the activity, talking to our dealer network, the activity is still very robust. Some of the projects are larger, and as a result, they take a little longer to come to fruition. And I'd say in the immediate past, we've seen a lot of activity in smaller projects. So it requires a similar amount of effort from a dealer processing perspective, but the size of the projects have been a bit smaller. So it, we're really seeing customers in kind of two groups. That did some retooling of their workplace previously and are making some modest adjustments to it, and then some others that have waited and now realize that they have some significant work to do over the next six to 12 months to make sure the workplace is ready for the future of work, as you've seen in the headline. A lot of the larger organizations are bringing their workforces back to work for four or five days a week.

And I think over time that bodes well in terms of the project activity that we'll see.

Debbie Propst

From a Global Retail perspective, the change in our full year outlook is largely reflective of our soft June and July and not feeling like we can make up that softer than expected revenue. And that softness in June and July, those are typically our softest months of the year. The year was largely driven by web and in particular our outdoor category. We were missing some inventory due to the PFAS regulations. That is subsequently in a much better position and we saw a very strong August. around the globe, but in particular in our North America comp, where we outpaced the prior five or so months in terms of comp trends. And quarter to date, we're also seeing strength. And the back half of our year is forecasted more or less in line with what we're seeing right now.

Phillip Blee

Okay, very helpful. And just maybe doubling down then on the Global Retail side. I guess there was a lot of noise during the quarter between macro pressures and then changes in the digital marketing landscape. So I guess just from what you're seeing from an underlying fundamentals perspective, what we should see, I guess, an acceleration in trends from maybe the first quarter as we go through. Is that reasonable? And then I guess just from a contribution from the new stores entering the comp base, I guess, how do you think about that here going through the second half of the year, remainder of the year?

Debbie Propst

All right, there's a lot in that question, so let me make sure I capture it. So from a shifting digital landscape perspective, I think that's the first thing you mentioned, Philip. What you're referring to is obviously the rapid increase in AI search and I think some of the shifts in the price of digital advertising as a result of Google's shift to AI mode. We are definitely seeing increased digital advertising costs. And as such, in August, we leaned more heavily into our direct mail distribution, and we'll continue to do that throughout the balance of the year, particularly because of the upcoming midterms. Likely driving up digital marketing costs more as well. But we're very focused on making sure that we meet our customer where they are and and moving very quickly to evolve our digital product roadmap and our brand marketing strategies to ensure that we get the best results we can out of AI search. We feel like the heritage of our brands and the authenticity of our brands well positions us to speak to both humans and machines in the appropriate ways to drive traffic and progress in our business performance.

And we have seen a significant rebound of our web performance in August and into this month as well as we eliminated some of that inventory issue noise. As it pertains to the new stores, as I mentioned already, we're excited that we're going to be getting all our expansion in the Global Retail segment in FY '27 from the new stores that opened in '25 and '26. And in light of the changing digital customer journey, I think our store growth strategy becomes more and more important, more important than ever. And our store comparable performance in North America in Q1 was in line with Q4, but continues to be a real driver of our overall success as well. Okay.

Phillip Blee

Thank you. Yeah, no, you got it all. I appreciate it. And then just one quick last one, just as you kind of see improving profitability in the business through cost savings and the retail ramp, and then you've spoken about focusing on expansion for the Herman Miller store base, which requires less upfront capital, something that free cash flow should really improve here. How are you thinking about capital allocation? Any kind of changes to your thoughts, uh, going forward, especially just around debt pay down? Thank you, guys.

Kevin Veltman

Yeah, Philip, this is Kevin. I'll cover that. So capital allocation, our priorities remain the same. Invest in those growth opportunities to the point, we're continuing to look at where the opportunities that we believe generate the strongest return. So the mixture and leaning into those Herman Miller stores is a good example of that. Paying down debt is our second priority, and we were at 2.75 from a net debt to EBITDA. From a covenant perspective this quarter, we were at 2.8 last quarter. Then maintaining the dividend and being opportunistic on share repurchase would round out the priorities.

Phillip Blee

Excellent. Thank you all. Best of luck.

Kevin Veltman

Thanks, Hope.

Operator

Your next question comes from Linda Bolton-Weiser with Water Tower Research. Please go ahead.

Unknown Speaker

Yes, thank you. Hi. So I was just curious about, you know, a little more explanation on the International Contract profitability. You talked about all the things you're doing to improve profitability, and it's evident in the North American Contract segment, but International seems to be going the wrong way on a longer-term basis. In the last few years, you've had modest revenue growth there, and yet the operating margin seems to be declining. So can you just explain a little bit more what impact to that margin and why the decline in the last few years and then sort of what are the factors that are going to improve it kind of going forward? Thanks.

Jeff Stutz

That's a great question. This is Jeff. I'll start, and Kevin, welcome, any additional comments you have. Yes, we've been really working hard to try to bring more balance to the overall product mix that's sold through our International Contract segment, you know, historically. That business is really indexed very heavily into task seating, which is really good because as an individual product category, it is, uh, it's high profit, which is really good for us. And we want to continue to do that, and we are doing that. We're focusing very heavily on that. But we're also recognizing the importance of finding ways to to pull through other categories of furnishings because that's how you have access to larger project opportunities that will then bring you, I mean, carry with it profitable seating and ancillary products. And so part of the answer is we've seen a bit of a pivot towards some other relatively lower gross margin product categories, but with the broader goal in mind of driving improved top-line performance and more profit dollars over time, as opposed to just the percentage.

So some of it is a product mix. And I'd also be remiss if I didn't highlight the fact that, you know, we're, we're seeing cost inflationary pressures in that business and have been for some time like everywhere in the company. Energy prices have put a real pinch on all manner of businesses across our industry, contract markets, and so that's played a role as well. And the last thing would be, again, we have regional shifts and mix that well on one hand, you may pick up production volume in one part of the, of the world where you have a manufacturing presence. It may shift in fact has shifted away from other areas where we maintain fixed overhead in terms of manufacturing, and then you lose some overhead leverage in that instance. And that's particularly been true across our factories in Europe. So those are some initial thoughts. I don't know, Kevin, if you'd add anything.

Kevin Veltman

Yeah, I think I would just add the comment that International is definitely project-based and moves around from quarter to quarter, whether it's the mix of the products in the projects or which regions were having activity. This quarter was a good example. So the operating margins this quarter were tied to the lower order levels and backlog going into the quarter. But then as you saw in our order numbers, up almost 18 percent for the quarter. And that's the kind of volume that will flow through. It's in Asia Pacific is a good region for us as well. And so you'll see that move around from time to time.

There are a few other things unique to this quarter. We have a new showroom that we're opening up in Mexico City, so you have some initial costs to get that ramped up. We had the timing of some sales and marketing events. One of the significant opportunities we see internationally is our share of wallet. Lower than it is in North America Contract as we expanded some of the new product categories that Jeff was talking about. And so training folks on those and then expanding our dealer relationships in certain faster growing regions. And so some of those sales and marketing events were tied to the opportunities that we see there.

Unknown Speaker

Okay, thank you. That's all for me today. Thank you very much.

Operator

Thank you. There are no further questions. We will now turn the floor back to Vice President of Investor Relations, Wendy Watson, for any closing remarks.

Wendy Watson

Thank you all for joining us today. We look forward to speaking to you again next quarter.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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