Business Context and Reporting Period
Company: Bassett Furniture Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 29, 2009 (Third Quarter of Fiscal 2009)
Business Overview: A leading retailer, manufacturer, and marketer of branded home furnishings operating through a network of company-owned stores, licensee-owned stores, and wholesale distribution. The company operates three reportable segments: Wholesale, Retail, and Investments/Real Estate.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $57,670 | $70,159 | $173,199 | $226,620 |
| Gross Profit | $25,986 | $28,054 | $75,162 | $90,199 |
| Gross Margin % | 45.1% | 40.0% | 43.4% | 39.8% |
| Loss from Operations | $(2,986) | $(5,073) | $(20,191) | $(6,650) |
| Net Loss | $(3,446) | $(2,652) | $(25,265) | $(2,528) |
| Loss Per Share (Diluted) | $(0.30) | $(0.23) | $(2.21) | $(0.22) |
| Cash and Equivalents | $17,146 | $5,572 (End of Period) | $17,146 (End of Period) | $5,572 (End of Period) |
| Bank Debt | $18,000 | $19,000 | $18,000 | $19,000 |
| Real Estate Notes Payable | $21,559 | $22,158 | $21,559 | $22,158 |
Note: Cash flow from operating activities for the nine months ended August 29, 2009, was a net use of $1,816, compared to a net use of $12,517 in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 17.8% in Q3 2009 and 23.6% for the nine-month period compared to 2008, driven by a severe recession and housing slump. Wholesale sales dropped 29.8% in Q3, while Retail sales increased 18.7% due to store acquisitions, though comparable store sales declined 2.8%.
- Significant Charges: The nine-month net loss was heavily impacted by $12,971 in bad debt and notes receivable valuation charges, compared to $6,059 in the prior year. This reflects deteriorating credit quality among licensees. Additionally, the company recorded $2,062 in lease exit costs and $1,388 in restructuring/impairment charges for the nine months.
- Dividend Suspension: The company suspended its quarterly dividend in 2009 to preserve cash. In the prior year, regular and special dividends totaled $11,331 for the nine-month period.
- Investment Liquidation: The company liquidated a significant portion of its Alternative Asset Fund (BIAAF) and marketable securities, generating $22,310 in proceeds from sales of investments during the nine months to bolster liquidity.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to have between 100 and 105 stores by the end of 2009. Further store closures are possible, which could result in additional lease exit charges or increases in lease guarantee reserves. Capital expenditures for the remainder of fiscal 2009 are anticipated to be approximately $500.
- Liquidity and Debt Covenants: The company was in default of its Tangible Net Worth covenant as of August 29, 2009. On October 6, 2009, the company obtained a waiver and amendment to its credit facility. The facility size was reduced from $45,000 to $30,000, and the Tangible Net Worth requirement was reset to $95,000 for the remainder of fiscal 2009. Availability under the facility was approximately $1,200 at period end.
- Receivables Risk: Accounts receivable over 90 days past due increased from 15% (Nov 2008) to 25% (Aug 2009). The company has placed certain licensees on a "cash before delivery" program.
- Accounting Adjustments: Following an SEC review, the company recorded an additional $3,280 in net charges in Q1 2009 related to the valuation of notes receivable and revenue recognition on a cost recovery basis for certain customers.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of August 29, 2009, due to insufficient processes for non-routine accounting estimates.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to maintain the amended Tangible Net Worth covenant ($95,000) given the ongoing operating losses.
- Receivable Quality: Monitor the aging of accounts receivable and the adequacy of the allowance for doubtful accounts, which increased significantly to $10,358.
- Licensee Solvency: Assess the financial health of the licensee network, as 67% of notes receivable represent conversions of past due accounts receivable.
- Real Estate Refinancing: Track the refinancing status of three commercial mortgages totaling $8,162 maturing in early 2010.
- Investment Redemption: Confirm the timeline and value recovery for the remaining BIAAF investments, particularly the DB Zwirn Special Opportunities Fund, which may take 3-4 years to fully redeem.