Bassett Furniture Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended November 24, 2018 (52 weeks). Financial amounts below are in millions of dollars unless otherwise noted. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels, 65 Company-owned and 32 licensee-owned Bassett Home Furnishings stores, and Zenith Freight Lines, its logistics business. More than 70% of products sold are made in the United States. In December 2017, Bassett acquired premium outdoor-furniture business Lane Venture for $15.6 million.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $456.9 | $452.5 | +1.0% |
| Operating income | $14.1 | $27.0 | -47.9% |
| Operating margin | 3.1% | 6.0% | -2.9 percentage points |
| Income before taxes | $12.2 | $27.9 | -56.2% |
| Net income | $8.2 | $18.3 | -55.0% |
| Diluted EPS | $0.77 | $1.70 | -54.7% |
| Cash from operations | $28.7 | $36.4 | -$7.7 |
Fourth quarter: Revenue was $116.6 million versus $118.2 million in the prior-year quarter; operating income was $2.0 million versus $7.5 million; net income was $1.9 million versus $5.0 million; diluted EPS was $0.18 versus $0.46. Fourth-quarter 2018 results included $0.5 million of asset impairment charges and $0.3 million of lease exit costs, partly offset in net income by a $0.7 million tax benefit.
Segments and material changes
- Wholesale: Revenue rose 2.7% to $256.0 million, including $9.5 million from Lane Venture. Operating income fell 35.8% to $12.3 million; operating margin declined to 4.8% from 7.7%. Bassett cited higher material costs, lower fixed-cost absorption on reduced shipments to its store network, increased brand and digital marketing spending, and Lane Venture startup costs. Targeted upholstery price increases began benefiting margins from July.
- Company-owned retail: Revenue edged up 0.2% to $268.9 million, but the segment recorded an operating loss of $0.3 million versus income of $3.5 million. Comparable-store delivered sales declined 1.6%, and written sales declined 3.6%. Higher non-comparable sales were offset by weaker comparable performance, new-store startup losses and higher SG&A.
- Logistics: Revenue was nearly flat at $82.9 million; operating income fell 52.8% to $1.4 million, primarily due to higher fuel and driver costs. Two customers represented approximately 40% of logistics revenue.
- Wholesale backlog increased to $25.8 million from $22.2 million; management expected it to ship during FY2019, mostly in the first quarter. Retail backlog was $35.5 million, approximately flat year over year.
Cash, liquidity and obligations
- Cash and cash equivalents were $33.5 million, down from $53.9 million. Cash plus short-term investments totaled $56.1 million; short-term investments were $22.6 million, primarily insured certificates of deposit.
- Operating cash flow was $28.7 million. Investing activities used $30.7 million, including $15.6 million for Lane Venture and $18.3 million of capital expenditures. Financing activities used $18.5 million, including $8.8 million in dividends and $5.9 million in share repurchases.
- Current assets were $148.5 million and current liabilities $81.8 million; the reported current ratio was 1.82. Total assets were $291.6 million and stockholders’ equity $190.3 million.
- Year-end debt was $0.3 million, all current; the Zenith acquisition note was fully repaid during FY2018. An amended unsecured credit line of $25 million matures in December 2021. After $2.8 million of standby letters of credit, $22.2 million remained available; Bassett reported compliance with covenants.
- Future minimum operating lease payments were $185.5 million. Lease guarantees for licensees totaled $2.0 million. These are commitments, not reported borrowings.
Outlook, commentary and risks
- Management planned six additional Company-owned stores in FY2019 and a repositioning, then expected to slow network expansion and focus on profitable sales at existing stores. Planned FY2019 capital expenditures were approximately $15–$20 million, mainly for stores, remodeling and technology. No earnings or revenue guidance was provided.
- Management cited digital customer-experience and data-driven marketing investments as initiatives intended to support future growth. The company also transferred Bassett-store home-delivery operations from Zenith to retail during Q4; the segment-income impact of the reporting change was not material.
- FY2018 operating income included $0.8 million of impairment and lease exit costs. The income tax provision included a $1.3 million charge from remeasuring deferred tax assets following U.S. tax-rate changes; the effective tax rate was 32.7%, versus 34.5% in FY2017. FY2017 included $4.2 million of gains on investment sales, making year-over-year earnings comparisons less representative of underlying operations.
- Key risks include weak housing or consumer demand, intense retail and online competition, changing customer preferences, raw-material and fuel cost volatility, tariffs and sourcing disruption, driver availability and transportation regulation, store profitability, licensee credit and lease guarantees, and IT or cybersecurity incidents. Bassett said ordinary-course claims and litigation were not expected to have a material adverse effect; Item 3 reported no legal proceedings.
- Adoption of the new revenue standard was planned for FY2019; management did not expect a material financial impact, but anticipated additional disclosures. The lease accounting standard was expected to materially affect the balance sheet when adopted in FY2020.
Important facts for investors to verify
- Whether comparable and written retail sales stabilize, and whether planned store openings achieve expected profitability.
- Whether upholstery pricing offsets materials inflation and restores wholesale margins.
- Lane Venture’s contribution to sales, margins and cash generation, and execution against backlog expectations.
- Cash conversion and liquidity after investment, dividends, repurchases and ongoing lease commitments.
- Exposure to fuel, labor, tariffs, sourcing concentration, logistics customer concentration and licensee guarantees.
- The timing and balance-sheet impact of lease-standard adoption and the final effects of tax-law changes.
Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.