Bassett Furniture Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended May 30, 2020. Unless otherwise stated, amounts below are in millions of dollars. The six-month comparison is 26 weeks in 2020 versus 27 weeks in 2019.
Business context and financial results
Bassett sells home furnishings through company-owned and licensed stores and wholesale channels, and provides furniture-focused logistics through Zenith Freight Lines. COVID-19 led to temporary closures of stores, manufacturing facilities and warehouses during the quarter, materially reducing activity.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $63.8 | $108.2 | $175.9 | $229.0 |
| Operating income (loss) | $(31.2) | $0.7 | $(29.0) | $1.7 |
| Net income (loss) | $(20.4) | $0.4 | $(19.1) | $1.1 |
| Diluted EPS | $(2.04) | $0.04 | $(1.92) | $0.10 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(5.7) | $(8.9) |
Q2 revenue fell 41.0% year over year: furniture and accessories revenue declined 44.7% to $53.0 million, while logistics revenue declined 12.7% to $10.8 million. Six-month total revenue fell 23.2%. SG&A was $50.4 million in Q2, or 79.0% of revenue, versus $64.6 million, or 59.7%, a year earlier. Q2 operating loss included $15.2 million of impairment and litigation charges. Segment Q2 gross margins were 17.6% wholesale (34.3% prior year) and 47.3% retail (50.8% prior year).
Liquidity, obligations and cash flow
- At May 30, cash and cash equivalents were $11.4 million and short-term CD investments were $17.7 million. Current assets were $129.1 million and current liabilities were $95.8 million.
- Cash declined $8.3 million during the first half, ending at $11.4 million. Operating activities used $5.7 million; investing activities provided $0.1 million; financing activities used $2.6 million.
- No funded bank borrowing is reported. The $25 million credit line had $4.8 million of standby letters of credit outstanding and $20.2 million of availability at quarter end. A June 15 amendment raised the limit to $50 million through December 31, 2020, waived financial-ratio covenants for the rest of fiscal 2020 and extended maturity to January 31, 2022.
- Operating lease liabilities totaled $155.0 million, including $29.0 million current; finance lease obligations totaled $1.0 million. Lease liabilities were recognized following adoption of the lease standard in fiscal 2020, limiting direct balance-sheet comparison with November 2019.
Material changes, outlook and risks
- Management attributed the sharp revenue decline and losses to closures and reduced activity during the pandemic. By the filing date, all retail stores had reopened; manufacturing was ramping up but remained below incoming wholesale order levels. Management gave no quantified earnings or revenue guidance and said recovery timing remained uncertain.
- Measures to preserve liquidity included rent and vendor payment negotiations, purchase-order cancellations, workforce reductions and furloughs, wage cuts, and temporarily suspending share repurchases. The company reported a permanent 25% workforce reduction and temporary furloughs affecting an additional 42% of employees.
- The company recorded $12.2 million of asset impairment charges, including $6.2 million related to retail lease right-of-use assets, and a $2.0 million goodwill impairment. It also added $2.9 million to inventory valuation reserves. These estimates may change with demand and market conditions.
- A $1.05 million Q2 litigation accrual brought the reserve for wage-and-hour claims with class-action designation to $1.75 million. The ultimate cost could be substantially higher, according to the filing.
- Unpaid April and May rent of $4.47 million was subject to negotiations with lessors for deferrals or abatements. The company also guaranteed $1.79 million of licensee lease obligations.
- Management identified risks from a resurgence of COVID-19, weak consumer demand and housing conditions, continued manufacturing constraints, store performance and potential further closures, raw-material and fuel costs, supply-chain disruption, and possible impairment of store and lease assets.
- The CARES Act permitted tax-loss carrybacks; the resulting tax benefit contributed to the reported Q2 loss being smaller than the pretax loss. The six-month effective tax rate was (36.5%).
- Strategic changes included virtual design appointments, increased online sales during store closures, plans to improve e-commerce and simplify product offerings, and planned additional store closures. Management expected new redesigned products to begin appearing in fall 2020.
Most important facts to verify
- Whether manufacturing capacity catches up with incoming orders and backlog; wholesale backlog was $17.3 million at May 30, 2020, versus $14.4 million a year earlier.
- Whether reopened stores and demand sustain recovery, and whether planned closures or further restrictions affect revenue and liquidity.
- How rent negotiations resolve, and whether the amended credit facility and cash-conservation measures provide adequate liquidity.
- Whether impairment assumptions, inventory reserves and the $1.75 million wage-claim reserve require further charges.
- The status of the dividend declared during Q2, for which $1.249 million was payable at quarter end, and the timing of any resumption of share repurchases.