Business Context and Reporting Period
Company: Bassett Furniture Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2009 (13 weeks)
Comparison Period: March 1, 2008 (14 weeks)
Business Overview: A leading retailer, manufacturer, and marketer of branded home furnishings operating through wholesale, retail, and investment segments. The company faces significant headwinds from the economic recession, declining housing starts, and deteriorating consumer credit markets.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $59,368 | $81,599 |
| Gross Profit | $24,610 (41.5% margin) | $32,627 (40.0% margin) |
| Operating Income (Loss) | $(5,564) | $412 |
| Net Income (Loss) | $(8,683) | $518 |
| Diluted EPS | $(0.76) | $0.04 |
| Cash and Equivalents | $11,604 | $3,777 (Nov 29, 2008) |
| Revolving Debt Outstanding | $18,000 | $19,000 (Nov 29, 2008) |
| Available Borrowing Capacity | $9,030 | N/A |
Cash Flow: Net cash used in operating activities was $5,056. Net cash provided by investing activities was $15,273, driven primarily by $13,758 in proceeds from sales of investments and $2,811 in dividends from an affiliate. Net cash used in financing activities was $2,390.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net sales decreased 27.2% to $59.4 million. Wholesale sales dropped 28.6% to $49.5 million, while retail sales fell 8.4% to $23.7 million.
- Profitability Reversal: The company swung from a net profit of $518,000 in Q1 2008 to a net loss of $8.7 million in Q1 2009.
- Bad Debt Provision: Provisions for losses on accounts and notes receivable increased significantly to $3.322 million (compared to $770,000 in Q1 2008) due to dealer financial distress.
- Investment Losses: The company recorded $1.255 million in "other than temporary" impairment losses on marketable securities and $1.192 million in losses from the Alternative Asset Fund.
- Dividend Suspension: The company suspended its quarterly dividend, which was $0.20 per share in the prior year.
Outlook, Risks, and Management Commentary
Management Actions: To address liquidity and cost structure, management announced a 6% reduction in payroll (approx. 50 positions), closure of a distribution facility, and reduced marketing spend. These actions are expected to yield $7.0 million to $8.0 million in annualized savings. The company expects to record severance charges of $300,000 to $500,000 in Q2 2009.
Liquidity and Debt Covenants: The company is currently in compliance with its revolving credit facility's tangible net worth covenant ($120.9 million vs. $118.0 million required). However, management believes it is probable that tangible net worth will decline below the covenant threshold in 2009 due to operating losses and investment valuation declines. Discussions to amend the credit facility have begun.
Operational Outlook: Management expects 10 to 12 underperforming licensee stores to close in 2009. The company plans to increase the number of company-owned stores through acquisitions. Dividend distributions from the International Home Furnishings Center (IHFC) are expected to decrease or be eliminated for the remainder of 2009 due to anticipated refinancing.
Controls and Procedures: Management concluded that disclosure controls and procedures were not effective as of February 28, 2009, due to insufficient processes for non-routine accounting estimates (specifically regarding investment impairments and bad debt reserves). Remediation steps are underway.
Investor Verification Checklist
- Covenant Compliance: Verify the status of negotiations to amend the tangible net worth covenant with the lender, as a default could trigger immediate debt repayment.
- Investment Valuation: Monitor the liquidation timeline and final recovery value of the Alternative Asset Fund (BIAAF) and marketable securities, which have suffered significant impairments.
- Bad Debt Exposure: Assess the adequacy of reserves for accounts receivable given the expectation of 10-12 store closures and continued economic weakness.
- Store Conversions: Track the financial impact of converting licensee stores to company-owned operations, which may increase SG&A expenses without immediate sales commensurate with the acquisition.
- Internal Controls: Review future filings for confirmation that remediation steps regarding accounting estimates and disclosure controls have been deemed effective.