Bassett Furniture Industries, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended February 27, 2016. Comparisons are with the quarter ended February 28, 2015. Amounts are in millions of dollars unless stated otherwise; statements are unaudited.
Business context
Bassett designs, sources, manufactures and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. Its wholly owned Zenith Freight Lines subsidiary provides logistics services. At quarter-end, the network included 91 stores: 59 company-owned and 32 licensee-owned.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $106.9 | $92.8 |
| Furniture and accessories revenue | $92.4 | $89.5 |
| Operating income | $5.8 | $2.9 |
| Income before taxes | $5.1 | $9.5 |
| Net income | $3.2 | $6.0 |
| Diluted EPS | $0.30 | $0.56 |
| Operating cash flow | $2.4 | $(0.9) |
- Total revenue rose 15.2%, largely because Q1 2016 includes a full quarter of Zenith, versus only about one month in Q1 2015. Furniture and accessories revenue increased 3.2%.
- Furniture and accessories gross profit was $50.4 million, or 54.6% of sales, versus $47.6 million, or 53.2%. Consolidated operating margin was 5.4%, up from 3.1%.
- Wholesale revenue increased 1.3% to $59.6 million; operating income rose to $4.4 million from $2.9 million. Wholesale margin improved to 34.0% from 32.0%.
- Company-owned retail revenue increased 7.7% to $61.6 million. Comparable-store sales rose 6.1%, although comparable-store written sales declined 0.9%. Retail operating income was $0.3 million versus a $0.04 million loss; gross margin fell to 49.2% from 50.3%.
- Logistics revenue was $14.5 million in the consolidated statements; Zenith reported segment revenue of $24.7 million before intercompany eliminations and operating income of $0.7 million.
- Net income and EPS fell despite higher operating income. Q1 2015 included a $7.2 million pretax, noncash gain from remeasuring Bassett’s prior Zenith interest, contributing approximately $0.42 per share after tax. Q1 2016 had no comparable gain.
Cash, liquidity and debt
- Cash and cash equivalents were $25.1 million at February 27, 2016, down $11.2 million during the quarter. Short-term certificates of deposit were $23.1 million, bringing cash and short-term investments to $48.2 million.
- Operating activities provided $2.4 million, compared with $0.9 million used a year earlier. Investing activities used $8.5 million, including $8.6 million of capital expenditures; financing activities used $5.0 million, including $3.1 million of dividends, $1.8 million of share repurchases and debt repayments.
- Total debt had a $13.9 million principal balance and a $13.6 million net carrying amount; $6.0 million of principal was due within one year. Quarter-end current assets were $133.6 million and current liabilities were $71.0 million.
- The unsecured credit facility provides up to $15.0 million and matures in December 2018. After $2.0 million of standby letters of credit, $13.0 million remained available. The company reported compliance with its covenants.
- Future minimum operating lease payments were $126.4 million. Licensee lease guarantees totaled $2.4 million.
Outlook, commentary and risks
- No specific financial earnings or revenue guidance was provided. Management plans to average three to five net new stores annually over the next five years, primarily in underpenetrated markets. It expected to close two stores in Q2 2016 and open stores in Sterling, Virginia in Q2 and Hunt Valley, Maryland later in 2016.
- Management attributed improved wholesale margins to pricing and lower discounting, and stronger operating results to fixed-cost leverage and the absence of prior-year store-closure charges. Retail margins were pressured by store-closing sales and clearance activity.
- The company began production at a new upholstery facility in Grand Prairie, Texas, and planned to expand its Bench Made furniture line and shift store floor plans toward upholstery offerings.
- Risks identified include consumer demand and retail traffic, competition, store execution and profitability, raw-material and fuel costs, import supply-chain disruption, concentrated domestic upholstery manufacturing, and risks associated with freight and logistics operations. Weak commercial real estate markets could impair property values or increase exposure on guaranteed leases.
- Management stated that legal and environmental matters arising in the ordinary course were not expected to materially harm financial position or future results. Disclosure controls were assessed as effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of revenue growth and operating improvement reflects Zenith’s full-quarter inclusion versus underlying organic growth and profitability.
- Whether retail comparable-store sales and margins remain resilient, given the decline in written sales and planned store closures and openings.
- Whether operating cash flow can support capital spending, dividends, buybacks and scheduled debt maturities while cash declined during the quarter.
- How the large operating-lease commitments, licensee lease guarantees and real-estate exposure may affect future liquidity or impairment risk.
- Whether the stated store-expansion plans and new manufacturing and product initiatives achieve management’s expected returns.