Herman Miller is sitting pretty

The office furniture maker rebounds in style.

By Yuval Rosenberg, Fortune contributor

(Fortune Magazine) -- Herman Miller, the company that created the cubicle and the Aeron chair, has long been admired for its innovation and quality. That sparkling reputation made it the top furniture maker on our 2006 ranking of America's Most Admired Companies - a position it's held for 18 of the past 20 years.

But even such enduring esteem could not protect the company from a brutal industrywide slump that saw its net sales plummet 40 percent from 2001 to 2003. "It was a very, very difficult and painful time for everyone," says Herman Miller spokesman Bruce Buursma.

Power suite: A selection of Herman Miller's greatest hits.

Revenues and profits have rebounded solidly since then. The company's latest quarterly earnings report, for example, included a 4.4 percent jump in sales from the prior year and a healthy 20 percent rise in profits, thanks to pent-up demand and renewed spending from corporations flush with record profits.

Radical cost cutting

The numbers have also been boosted by Herman Miller's disciplined strategy during the downturn. When the economy soured, the company slashed costs, scaling back manufacturing facilities and cutting its global workforce by some 5,000 people, or more than 40 percent. It also took steps toward diversifying, spending millions to open a design center in Shanghai and expand operations in Asia.

Despite the drastic cutbacks, Herman Miller (Charts) continued to spend money developing new products. At a key industry trade show in June the company, based in Zeeland, Mich., unveiled the results of its efforts: its largest-ever roster of new offerings, including a well-received new cubicle system called My Studio Environments.

The stock jumped more than 14percent the day after the latest results were announced in September, reaching an eight-year high. And the shares, which bottomed out near $15 in early 2003, are still trading at levels last seen in the days when every dot-commer had to have an ergonomic mesh-backed Aeron.

Whether the company's stock can climb further largely depends on how long the economic expansion lasts. "They're doing really well," says Morningstar analyst Anthony Chukumba. "They have some really innovative products. But that's all priced into the stock, and if we have a downturn they'll really get hit."

Todd Schwartzman, an analyst with independent research firm Sidoti, has a more optimistic view. Trends in corporate profitability, commercial construction, and white-collar hiring have been largely favorable and should stay that way for some time, argues Schwartzman, who has a $41 price target for the stock. "Collectively, all of those leading indicators signal that we've got quite a way to run in this current recovery." If that's true, Herman Miller will be sitting even prettier.

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