Business Context and Reporting Period
Company: Bassett Furniture Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 28, 2010 (Third Quarter of Fiscal 2010)
Business Overview: A vertically integrated manufacturer, importer, and retailer of mid-priced home furnishings. The company operates through three segments: Wholesale (manufacturing and distribution), Retail (company-owned stores), and Investments/Real Estate. As of the reporting date, the network included 55 licensee-owned stores and 47 company-owned stores.
Key Financial Metrics
| Metric (in thousands) | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Net Sales | $58,527 | $57,670 | $169,263 | $173,199 |
| Gross Profit | $26,613 | $25,986 | $80,794 | $75,162 |
| Gross Margin % | 45.5% | 45.1% | 47.7% | 43.4% |
| Operating Loss | $(2,311) | $(2,986) | $(5,490) | $(20,191) |
| Net Loss | $(2,368) | $(3,446) | $(3,943) | $(25,265) |
| Loss Per Share (Basic/Diluted) | $(0.21) | $(0.30) | $(0.34) | $(2.21) |
| Cash and Equivalents | $5,599 | $23,221 (Nov 2009) | $5,599 | $17,146 (Aug 2009) |
| Operating Cash Flow (9 Mo) | $1,697 | $(1,568) | $1,697 | $(1,568) |
| Total Debt (Current + Long Term) | $14,037 | $30,343 (Nov 2009) | $14,037 | $30,343 |
Note: Debt figures exclude lease guarantees. Current portion of real estate notes payable is $9,698; long-term real estate notes payable is $4,339. Revolving credit facility balance is $0.
Material Changes vs. Prior Period
- Revenue: Consolidated net sales increased 1.5% in Q3 2010 compared to Q3 2009, driven by a 5.0% increase in retail sales and a 4.9% increase in wholesale sales. However, year-to-date sales decreased 2.3% due to a softer retail environment in early 2010 and supply chain delays.
- Profitability: Operating loss improved significantly year-over-year. The nine-month operating loss decreased from $(20.2) million in 2009 to $(5.5) million in 2010. This improvement is largely due to a reduction in bad debt and notes receivable valuation charges (down from $12.97 million to $5.18 million) and the absence of significant restructuring charges present in the prior year.
- Segment Performance:
- Wholesale: Turned profitable for the quarter ($385k income) and nine months ($873k income), compared to losses in the prior year, aided by improved margins on imported products and cost containment.
- Retail: Continued to report operating losses, though the loss narrowed on a comparable store basis. The segment added 12 stores since Q3 2009, contributing to sales growth but also increasing SG&A expenses.
- Liquidity: Cash and cash equivalents decreased by $17.6 million over the nine-month period, primarily due to the repayment of the entire $15 million revolving credit facility and $7.3 million in real estate note repayments.
Guidance, Outlook, and Risks
- Outlook: Management expects inventory investment to increase modestly for the remainder of 2010 to improve service levels following stock outages caused by import delays. The company anticipates improved cash collections in the fourth quarter as shipments normalize.
- Store Strategy: The company continues to acquire underperforming licensee stores to mitigate receivable risks. Ten licensee stores were acquired in the first nine months of 2010. Two additional company-owned stores were opened, while one was closed due to eminent domain.
- Dividends: The quarterly dividend remains suspended, a measure taken in 2009 to preserve cash.
- Key Risks:
- Receivables: Continued economic uncertainty impacts licensee ability to pay. Approximately 21% of accounts receivable were over 90 days past due as of August 28, 2010.
- Debt Maturity: The revolving credit facility matures on November 30, 2010. Management is in discussions to amend and extend the facility but noted no assurance of a favorable outcome.
- Real Estate: Significant exposure to commercial real estate values; potential impairment risks if additional store closures are required.
- Supply Chain: Reliance on imported goods (approx. 52% of wholesale sales) creates vulnerability to shipping delays and raw material cost fluctuations.
Investor Verification Checklist
- Credit Facility Extension: Verify the status of negotiations to extend the $30 million revolving credit facility maturing November 30, 2010.
- Receivable Quality: Monitor the percentage of accounts receivable over 90 days past due and the adequacy of the $14.2 million total allowance for doubtful accounts (receivables and notes).
- Inventory Levels: Assess the impact of the $7.3 million inventory build-up in Q3 on future working capital and cash flow.
- Store Turnaround: Evaluate the operating performance of the 10 licensee stores acquired in the first nine months of 2010, which currently contribute to operating losses.
- Real Estate Valuation: Review the fair value of retail real estate holdings ($27.9 million for licensee stores) given the weak commercial real estate market.