Bassett Furniture Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended August 29, 2015. Amounts are in thousands of dollars unless stated otherwise. Bassett sells home furnishings through wholesale channels and Company-owned and licensed stores; the report also includes Zenith Freight Lines following its acquisition.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Total revenue | $111,011, up 30% year over year | $315,372, up 28% |
| Furniture and accessories revenue | $97,107, up 14% | $286,122, up 16% |
| Operating income | $7,692; 6.9% of revenue | $17,283; 5.5% of revenue |
| Net income | $4,266, versus $2,256 | $14,751, versus $5,650 |
| Diluted EPS | $0.39, versus $0.21 | $1.36, versus $0.53 |
| Operating cash flow | Not separately reported for the quarter | $11,327, versus $18,270 |
- Furniture gross margin was 53.8% for the quarter, compared with 52.8%; for the nine months it was 53.3%, compared with 53.1%.
- At August 29, cash and cash equivalents were $20,600 and short-term investments were $23,125. Total current assets were $142,398 and current liabilities $68,839.
- Notes payable had $15,224 principal outstanding ($14,836 net carrying amount), of which $4,709 was current. The $15,000 bank facility had $13,175 available after standby letters of credit; it matured in December 2015. Bassett reported covenant compliance and expected to renew on substantially similar terms.
Material changes versus the prior period
- Revenue growth includes Zenith logistics revenue: $13,904 in the quarter and $29,250 since acquisition. Thus, consolidated revenue growth is not directly comparable with the prior year, which did not consolidate Zenith.
- Furniture and accessories sales increased, while operating results benefited from improved fixed-cost leverage and Zenith’s operating contribution of $1,070 for the quarter and $2,089 year to date. Retail comparable-store sales rose 14% for the quarter and 16% year to date; comparable written sales increased 4.4% and 12%, respectively.
- Year-to-date net income includes a $7,212 pre-tax gain from remeasuring Bassett’s former 49% Zenith interest at acquisition, with an estimated after-tax EPS impact of $0.42 basic and $0.41 diluted. It also includes $1,066 of CDSOA distributions. These items are not indicative of ordinary recurring operating earnings.
- Cash from operations fell by $6,943 year over year, principally due to higher inventory associated with new products and order volume, and payment of trade payables built up in late 2014. Cash declined $6,073 over the nine months.
- Bassett acquired Zenith’s remaining 51% on February 2, 2015, for consideration with a fair value of $19,111; the acquisition created goodwill and intangible assets, with purchase accounting still preliminary.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management said it intended to continue opening stores, with a Woodland Hills, California, Company-owned store expected in early October 2015 and a Sterling, Virginia, store planned for the first half of fiscal 2016. One licensee store opened in September and another was expected in the first half of 2016.
- Management cited new product launches and a substantial refresh of imported wood offerings; start-up costs for product development weighed on first-nine-month results. The company closed an underperforming Memphis store and recorded $525 in related lease-exit and impairment charges, plus $449 of executive severance expense.
- Liquidity was described as sufficient to fund operations for the foreseeable future. Future minimum operating lease payments were $109,706; licensee lease guarantees were $2,594. Management considered the fair value of those guarantees immaterial.
- Risks include consumer demand and retail traffic, competition, store execution, raw-material and fuel costs, supply-chain or manufacturing disruption, commercial real estate values, and achieving the expected benefits from Zenith. Legal and environmental matters were described as not expected to materially adversely affect the company. Fiscal 2013 and 2012 tax returns were under IRS examination.
Important facts for investors to verify
- How much reported earnings growth is repeatable after excluding the Zenith remeasurement gain and CDSOA income?
- Whether Zenith’s external revenue and operating contribution continue to grow and deliver the expected strategic benefits.
- Whether inventory levels, operating cash flow and cash conversion improve as new products and higher order volumes progress.
- Renewal terms for the bank credit facility and the company’s ability to meet upcoming debt maturities and lease commitments.
- Performance of new and comparable stores, and whether planned openings reach break-even without materially increasing ongoing costs.