Bassett Furniture Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended May 30, 2015. Unless otherwise noted, amounts are USD millions. Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and company- and licensee-owned stores. It acquired the remaining 51% of logistics provider Zenith Freight Lines on February 2, 2015; Zenith has been consolidated since that date.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total sales revenue | $111.6 | $85.2 | $204.4 | $160.8 |
| Furniture and accessories revenue | $99.5 | $85.2 | $189.0 | $160.8 |
| Logistics revenue | $12.1 | — | $15.3 | — |
| Operating income | $6.7 | $3.9 | $9.6 | $5.0 |
| Net income | $4.5 | $2.6 | $10.5 | $3.4 |
| Diluted EPS | $0.42 | $0.24 | $0.98 | $0.31 |
| Operating margin | 6.0% | 4.6% | 4.7% | 3.1% |
- Furniture and accessories gross margin was 52.8% in Q2 and 53.0% in the first half, compared with 53.2% in both prior-year periods.
- Wholesale revenue increased 19% in Q2 and 17% in the first half. Company-owned retail revenue increased 20% and 21%, respectively. Comparable-store sales grew 18% in Q2 and 16% in the first half; comparable written sales increased 15% in both periods.
- Cash from operations was $9.2 for the first half, versus $13.8 a year earlier. Capital expenditures were $7.9; investing cash use was $13.7, including $7.3 net cash paid for Zenith and a $1.3 pre-acquisition capital contribution. Cash and cash equivalents ended at $22.5.
- Cash and short-term investments totaled $45.6. Debt principal was $15.6 ($15.2 net carrying amount), including $4.7 due within one year. The $15.0 credit line matures in December 2015; $14.8 was available after standby letters of credit. The company reported covenant compliance.
- Current assets were $144.7 and current liabilities $74.3. Total assets were $272.0 and stockholders’ equity $171.8. Dividends were $0.08 per share for the quarter.
Changes and unusual items
- Total revenue rose 31% in Q2 and 27% in the first half, with reported growth including Zenith revenue consolidated after its acquisition. Furniture and accessories revenue rose 17% and 18%, respectively.
- First-half net income includes a $7.2 non-cash gain from remeasuring Bassett’s pre-existing 49% Zenith interest to fair value. The gain contributed approximately $0.42 to basic and $0.41 to diluted first-half EPS, net of tax. Q2 did not include this gain.
- Q2 and first-half results include $1.1 of income from U.S. Customs distributions under the Continued Dumping and Subsidy Offset Act. The company said it cannot estimate the likelihood or amount of any future distributions.
- First-half results include $0.5 in charges for closing an underperforming Memphis store ($0.4 lease exit costs and $0.1 asset impairment) and $0.4 in severance related to a former executive. The company also recorded a $0.2 write-down on retail real estate sold in Sugar Land, Texas.
- Wholesale gross margin weakened, primarily from discounting wood products during a significant imported-wood assortment makeover. Management attributed improved operating results mainly to higher sales and fixed-cost leverage, with lower new-store costs than in the prior year.
Outlook, risks, and commitments
- No numerical earnings or revenue guidance is provided. Bassett planned a Woodland Hills company-owned store and two licensee stores during the remainder of fiscal 2015, and a Dulles company-owned store in the first half of fiscal 2016. It also planned a Newport News relocation in the first quarter of fiscal 2016.
- Management expects adequate liquidity for the foreseeable future and expects to renew the bank credit line on substantially similar terms. It expects to meet debt maturities with operating cash flow or cash on hand.
- Future results are subject to consumer demand, retail traffic, competition, store performance, raw-material and fuel costs, import supply-chain disruption, and execution of the Zenith acquisition and retail strategy. The filing notes potential impairment exposure on owned retail real estate and possible costs under $2.9 of licensee lease guarantees.
- Non-cancellable operating lease payments totaled $114.7. The company said routine legal and environmental matters were not expected to have a material adverse effect. Fiscal 2013 and 2012 tax returns were under IRS examination.
Important facts for investors to verify
- Separate underlying earnings from the $7.2 Zenith remeasurement gain and $1.1 Customs distribution; neither represents recurring operating performance.
- Assess the comparability of reported revenue growth, given Zenith’s consolidation beginning February 2, and track its margins and integration results.
- Monitor wholesale margin pressure from product discounting and whether new product launches support demand without further margin erosion.
- Review operating cash conversion, inventory growth, the December 2015 credit-line renewal, and scheduled debt payments.
- Track new-store execution, lease obligations and guarantees, and exposure to retail property values and raw-material, fuel, and import-supply risks.