Bassett Furniture Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended February 25, 2012. Unless otherwise noted, financial amounts are in millions of dollars. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Bassett Home Furnishings stores. At quarter-end it operated 50 company-owned and 39 licensee-owned stores.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $60.968 | $64.264 | Down 5.1% |
| Gross profit / margin | $31.671 / 51.9% | $31.848 / 49.6% | Margin up 2.3 percentage points |
| Operating income (loss) | $0.179 | $(7.249) | Improved |
| Net income (loss) | $(0.596) | $(8.255) | Improved |
| Basic and diluted loss per share | $(0.05) | $(0.72) | Improved |
| Cash used in operations | $1.294 | $3.760 | Cash use reduced |
- Wholesale sales fell 7.3% to $42.611 million, reflecting a smaller Bassett store network and substantially lower sales to one national account. Wholesale operating income, before restructuring and lease-exit charges, was $1.831 million versus a $3.891 million loss.
- Company-owned retail sales increased 5.0% to $38.816 million. Comparable-store sales rose $2.010 million; comparable written sales increased 9.4%. The retail segment still recorded a $0.999 million operating loss, while comparable stores generated $0.219 million of operating income.
- Consolidated SG&A was $30.996 million, up $0.488 million; SG&A rose to 50.8% of sales from 47.5%. Bad-debt and notes-receivable valuation charges declined to $0.032 million from $6.826 million.
- Total restructuring, asset-impairment and lease-exit charges were $0.464 million, down from $1.763 million. Other loss was $1.247 million, including an $0.806 million full impairment of the Fortress investment.
Cash, liquidity and obligations
- Cash and cash equivalents were $61.089 million at quarter-end, down $8.512 million from November 26, 2011. Marketable securities were $3.010 million. Current assets were $130.796 million and current liabilities $44.489 million; the resulting current ratio was approximately 2.9.
- Operating cash outflow was $1.294 million. Investing used $0.499 million, including $1.918 million of capital expenditures, partly offset by $1.410 million received from release of IHFC-sale escrow funds. Financing used $6.719 million, including $6.063 million of dividends and $0.646 million of share repurchases.
- Real-estate notes payable totaled $3.815 million. The $3.000 million bank facility primarily backs letters of credit; $2.316 million was committed to standby letters of credit, leaving $0.684 million available. The company reported compliance with covenants and no secured-asset requirement.
- Future minimum operating-lease payments were $69.257 million. Contingent licensee obligations included $2.316 million of lease guarantees and $0.095 million of loan guarantees. Deferred tax assets were $20.767 million gross, offset by a $19.612 million valuation allowance.
Changes, outlook and risks
- Compared with Q1 2011, the sharp reduction in bad-debt charges drove much of the improvement in operating results. Sales declined, but gross margin improved, particularly in company-owned retail, where prior-year store liquidation sales had weighed on margins.
- Inventory rose to $46.059 million from $45.129 million. Consolidated annualized inventory turns declined to 2.6 from 3.1, and days supply rose to 143 from 115. Management attributed the increase to preparation for new products and the larger company-owned-store share.
- Management expects increased spending on the HGTV product initiatives; sales from the product line were expected to begin in Q4 2012. No specific earnings or revenue guidance was provided. Management said cash and marketable securities were sufficient to fund operations for the foreseeable future.
- Subsequent to quarter-end, Customs indicated it expected to distribute approximately $9 million to Bassett under the CDSOA, beginning around mid-April. Timing was not legally guaranteed, and an appeals-court reversal could result in repayment of some or all of the funds. The potential taxable income could affect the effective tax rate and permit reversal of part of the deferred-tax valuation allowance.
- Management cited weak housing activity, economic uncertainty, consumer demand and credit availability, licensee financial health, inventory and import-supply-chain management, raw-material costs, and commercial-real-estate values as risks. Additional licensee closures remain possible. The company said ordinary-course legal and environmental matters were not expected to have a material adverse effect; no legal proceedings were listed. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether wholesale demand, including sales to the national account customer, stabilizes and whether retail comparable-sales gains continue.
- Whether improved licensee credit quality persists, given receivable exposure to licensees and the company’s guarantees and lease commitments.
- Whether inventory build-up converts into sales without additional markdowns or write-downs.
- Whether the expected CDSOA distribution is received, whether it is subject to repayment, and its tax and cash-flow effects.
- Whether HGTV launch spending and newer company-owned stores generate adequate returns as planned.
- How operating cash flow develops after substantial dividend and repurchase outlays, and whether liquidity remains adequate if continuing operations do not achieve sustained profitability.