Bassett Furniture Industries, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. This unaudited filing covers the quarter and nine months ended August 30, 2014. The nine-month 2014 period comprised 39 weeks, versus 40 weeks in the prior-year period.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $85.2 | $77.2 | $246.0 | $238.2 |
| Gross profit | $45.0 | $38.7 | $130.6 | $121.9 |
| Gross margin | 52.8% | 50.2% | 53.1% | 51.2% |
| Operating income | $3.4 | $0.8 | $8.4 | $6.6 |
| Net income | $2.3 | $0.6 | $5.7 | $3.5 |
| Diluted EPS | $0.21 | $0.05 | $0.53 | $0.32 |
| Operating cash flow | — | — | $18.3 | $0.1 |
Q3 sales rose 10.4% and operating income increased $2.6 million. Nine-month sales increased 3.3%; on an average-week basis, sales were up 5.9%. Operating margin was 4.0% for Q3 versus 1.1%, and 3.4% for nine months versus 2.8%.
At August 30, cash and cash equivalents were $19.4 million and short-term investments were $23.1 million, totaling $42.6 million. Current assets were $126.0 million and current liabilities $56.3 million. Total liabilities were $73.6 million; real estate notes payable totaled $2.5 million, including $0.3 million current. The $15 million bank facility had no reported borrowings; $0.216 million of standby letters of credit left $14.784 million available. The company reported compliance with facility covenants.
Changes and operating drivers
- Wholesale Q3 sales increased 5.9%; operating income rose to $3.2 million from $2.4 million. Wholesale margin improved to 32.5% from 32.2%, supported by upholstery margins and higher-volume fixed-cost leverage.
- Company-owned retail Q3 sales increased 16.7%, including 12.8% comparable-store growth. Retail operating loss narrowed to $0.2 million from $1.5 million. For nine months, retail operating loss widened to $2.6 million from $1.8 million, primarily due to new-store costs and relocation overlap.
- Comparable-store retail gross margin improved, while the nine-month period also reflected higher advertising, health-care, and other overhead costs. The company had 60 Company-owned and 34 licensed stores at quarter-end, six more total stores than at fiscal 2013 year-end.
- Nine-month operating cash flow improved by $18.2 million year over year, attributed principally to working-capital management and better profitability. Capital expenditures were $15.2 million; dividends and share repurchases were $4.3 million and $4.6 million, respectively.
Outlook, risks, and unusual items
- Management expected to spend approximately $2 million on store capital expenditures in Q4 2014 and planned at least three to five new stores in 2015. It expects new stores to reach retail break-even within 12 months, while noting typical start-up losses of $0.3 million to $0.5 million per store.
- Factors that could affect results include consumer demand and retail traffic, competition, store execution and profitability, raw-material and sourced-product costs, labor, and import-supply-chain disruptions. Wood, fabric, and petroleum-based foam costs were identified as exposures. Real-estate values and potential obligations under licensee lease guarantees are also risks.
- Other income items included $0.827 million in life-insurance death benefits and a $0.207 million gain from a partial Fortress fund liquidation during the nine months. New York tax legislation led to a $0.190 million tax benefit; a $0.111 million benefit also arose from expiration of the statute of limitations on certain tax positions. A $0.124 million deferred-compensation credit was recorded in Q3.
- Legal and environmental matters were described as ordinary-course matters not expected to have a material adverse effect. A Supreme Court petition concerning past customs-duty distributions remains pending; management considered repayment risk remote. Future minimum operating-lease payments were $94.4 million, and licensee lease guarantees totaled $3.8 million.
- Management stated that liquidity was sufficient for the foreseeable future. No formal earnings or revenue guidance was provided. Disclosure controls were reported effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether retail comparable-store momentum and wholesale margin improvement continue, and whether new stores meet the stated break-even timetable.
- How much reported earnings depended on life-insurance proceeds, tax benefits, and Fortress recoveries, and whether such items recur.
- Cash conversion, planned store investment, and capital returns, including ongoing buybacks and dividends.
- Exposure to lease commitments, guaranteed licensee leases, real-estate values, and the pending customs-duty distribution litigation.
- Comparability of year-to-date results, given the 39-week current period versus 40 weeks in the prior year.