Bassett Furniture Industries, Inc. — Q1 FY2020 Form 10-Q
Reporting period: The unaudited quarter ended February 29, 2020. Results cover 13 weeks, compared with 14 weeks in the prior-year quarter ended March 2, 2019. Dollar amounts below are in millions unless otherwise noted.
Business context and results
Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. Its Zenith subsidiary provides logistics services. At quarter-end, the network had 103 stores: 69 company-owned and 34 licensee-owned.
- Revenue: $112.1, down 7.2% year over year. Furniture and accessories revenue was $98.9, down 7.8%; logistics revenue was $13.2, down 2.3%. The prior-year quarter included an extra week.
- Operating results: Operating income was $2.2, versus $0.9. Operating margin was 2.0%, compared with 0.8%. The prior-year quarter included $0.5 of store pre-opening costs and an $0.8 early-retirement charge, neither of which recurred.
- Profit: Net income was $1.2, compared with $0.6; diluted EPS was $0.12, versus $0.06. The effective tax rate rose to 34.5% from 26.4%, partly reflecting state taxes, permanent differences, and a $0.1 stock-compensation tax deficiency.
- Segment performance: Wholesale operating income was $2.7 versus $4.2, on revenue down 10.7% as reported; on an average-week basis, wholesale sales declined 3.8%. Retail posted an operating loss of $1.2, improved from a $3.0 loss; comparable-store sales fell 10.4% as reported, or 3.5% on an average-week basis. Logistics operating income increased to $0.8 from $0.7; average-week revenue rose 5.5%.
- Cash flow and capital allocation: Operating cash use was $5.2, improved from $15.7 used. Investing cash use was $0.1 and financing cash use was $2.2. The company paid $1.3 in dividends and repurchased $0.8 of stock. Cash declined $7.5 to $12.2.
Financial position and liquidity
- At February 29, cash was $12.2 and short-term CD investments were $17.7. Current assets were $131.8 and current liabilities were $96.3.
- No credit-facility borrowings were reported; $2.7 of standby letters of credit used the $25.0 facility, leaving $22.3 available. The company reported compliance with facility covenants. It also had $0.3 of letters of credit with another bank.
- Adoption of lease accounting added substantial balance-sheet obligations: operating lease liabilities were $161.5 and finance lease liabilities were $1.0. Total assets rose to $415.2 from $275.8, substantially reflecting recognition of right-of-use assets. Adoption also reduced opening retained earnings by $3.8, primarily for impairment of certain retail-location right-of-use assets.
- Licensee lease guarantees were $1.8. Eight owned store properties had a combined book value of $17.8.
Material changes, outlook, and risks
- COVID-19: After quarter-end, the company temporarily closed its dedicated stores, manufacturing locations, and many warehouses in response to the pandemic. It could not predict when operations would resume and expected a significant adverse effect on Q2 FY2020 results and possibly later periods. The full financial and liquidity impact was not estimable in the filing.
- Liquidity response: Management described rent and vendor payment deferrals, inventory-order cancellations, efforts to collect customer cash and reduce receivables, plant-worker furloughs, and wage reductions. Most employees received 20%–25% reductions; the CEO and certain executives took 50% reductions through May 2020. Management said these actions were intended to support liquidity for the next several months.
- Credit facility amendment: On April 1, 2020, the bank committed to increase the facility to $50.0 through December 31, 2020, then return it to $25.0. The amended line would be secured by receivables and inventory, bear interest at LIBOR plus 1.9%, and carry a 0.25% fee on unused capacity. Financial-ratio covenants would be waived for the remainder of FY2020, and maturity extended to January 31, 2022.
- Operating trends: Comparable-store written sales declined 7.9% as reported, or 0.8% on an average-week basis. Retail backlog was $29.8 versus $31.3 a year earlier; wholesale backlog was $14.6 versus $13.6. Management had no store openings planned and intended to focus on improving the existing company-owned fleet and digital capabilities.
- Other risks and contingencies: The filing cites consumer demand, store traffic, housing-market conditions, competition, input and freight costs, import supply-chain disruptions and tariffs, and COVID-related reopening and liquidity uncertainty. Legal and environmental matters were described as routine, with no expected material adverse effect based on information then known. Raw-material and diesel fuel exposure, owned retail-property values, and licensee lease guarantees are also noted.
- Guidance: No numerical earnings or revenue guidance is provided. Management’s stated outlook is limited by uncertainty around the pandemic; it expected significant adverse Q2 results and potentially further effects.
Important facts for investors to verify
- Subsequent quarterly filings: timing of store, manufacturing, and warehouse reopenings; revenue, margins, backlog, and cash-flow recovery.
- Liquidity and financing: actual availability and terms under the amended credit facility, covenant status, and cash use relative to management’s “next several months” assessment.
- Retail economics: comparable-store trends, performance of recently closed stores, and any further property impairments or lease-related charges.
- Lease and contingent exposure: scheduled lease payments, the $1.8 of licensee guarantees, and the ability to offset guarantee payments through replacement operators, collateral, or sublease income.
- Comparability: the prior-year quarter had one more week, and the removal of juvenile products and wholesale accessory sales affected year-over-year segment comparisons.