MillerKnoll: Stuck In The Office, Cheap But Not Cheap Enough

MillerKnoll (MLKN), formed by the 2021 $1.8 billion merger of Herman Miller and Knoll, has significantly underperformed initial expectations, with its share price halving since early 2021 to $20. The company reported FY24 sales falling to $3.6 billion from nearly $4.1 billion in FY23, with only a modest 1.1% recovery in FY25, while adjusted EBITDA of $396 million remains well below original pro forma projections, leading to increased leverage of 2.9x net debt to EBITDA. This struggle is attributed to tough post-pandemic office market conditions and high integration costs, indicating the acquisition was likely overvalued and leaving the combined entity facing substantial challenges despite seemingly cheap adjusted earnings.

Analysis

The 2021 merger creating MillerKnoll, Inc. (MLKN) has demonstrably failed to generate shareholder value, with shares having lost half their value since the transaction. The core issue is a significant disconnect between the merger's pro forma promises and the subsequent operational reality. The company was projected to achieve $552 million in EBITDA, including synergies, but delivered only $396 million in fiscal year 2025. Revenue has stagnated around the pre-merger level of $3.6 billion, following an 11% decline in FY24 and a mere 1.1% recovery in FY25, indicating that the combined entity has not effectively countered post-pandemic office market headwinds. Furthermore, the quality of earnings is a major concern; while the company reports adjusted EPS around $2.00, GAAP earnings are nearly 50% lower, reflecting substantial ongoing integration and restructuring costs. This discrepancy makes the stock's valuation, at 12-13 times adjusted earnings, appear deceivingly cheap. The balance sheet has also weakened, with net debt holding steady at $1.14 billion while the leverage ratio has crept up to 2.9x EBITDA. The lack of full-year 2026 guidance and a weak forecast for Q1, which projects declining earnings despite modest sales growth, underscores persistent uncertainty and operational challenges.

Key Decisions for Investors

• Investors should treat the low valuation based on adjusted P/E multiples with extreme caution, given the significant and persistent gap between adjusted and GAAP earnings which masks underlying restructuring costs.
• The balance sheet is a key risk factor; monitor the elevated leverage ratio of 2.9x net debt to EBITDA, especially as the company continues to allocate capital to share buybacks amidst operational weakness.
• Given the lack of full-year guidance and a weak Q1 outlook, any potential investment thesis should be predicated on tangible evidence of sustained organic sales growth and margin improvement, not the current dividend yield or buyback activity.
• The market's current enterprise valuation of $2.5 billion, which is below the pro forma sales figure from 2021, suggests the $1.8 billion acquisition of Knoll has been a value-destructive event, warranting a fundamental reassessment of the company's long-term prospects.