Business Context and Reporting Period
Company: Bassett Furniture Industries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: November 28, 2009 (Fiscal Year 2009)
Business Overview: A vertically integrated manufacturer, importer, and retailer of mid-priced home furnishings. Operations are divided into three segments: Wholesale (manufacturing and sourcing), Retail (36 company-owned stores), and Investments/Real Estate. The company operates a network of approximately 104 stores (company-owned and licensee-owned).
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
|---|---|---|---|
| Net Sales | $232.7 million | $288.3 million | $295.4 million |
| Gross Profit | $102.8 million (44.2% margin) | $114.9 million (39.9% margin) | $100.4 million (34.0% margin) |
| Operating Loss | $(19.9 million) | $(16.5 million) | $(19.9 million) |
| Net Loss | $(22.7 million) | $(40.4 million) | $(9.9 million) |
| Loss Per Share (Diluted) | $(1.99) | $(3.46) | $(0.84) |
| Cash Flow from Operations | $4.2 million | $(19.0 million) | $(8.5 million) |
| Total Assets | $216.2 million | $245.0 million | $310.7 million |
| Long-Term Debt | $32.0 million | $40.3 million | $28.9 million |
| Current Ratio | 2.42 to 1 | 2.34 to 1 | 1.96 to 1 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 19.3% to $232.7 million, driven by a 25.8% drop in wholesale sales due to the recessionary environment and soft retail demand. Retail sales increased 8.4% due to store acquisitions, offsetting a 4.9% decline in comparable store sales.
- Margin Improvement: Gross margin improved to 44.2% from 39.9% in 2008, attributed to a higher mix of retail sales and improved wholesale margins on custom upholstery.
- Bad Debt Charges: Bad debt and notes receivable valuation charges increased to $15.2 million (6.5% of sales) from $11.8 million in 2008, reflecting liquidity issues among licensee stores.
- Restructuring and Impairments: The company recorded $3.8 million in unusual charges, including $1.1 million for leasehold impairment, $2.4 million for lease exit costs, and $0.5 million for goodwill impairment. This compares to $3.0 million in 2008.
- Dividend Suspension: The company suspended its quarterly dividend starting in the second quarter of 2009 to preserve cash.
Guidance, Outlook, and Risks
- Outlook: Management anticipates further store closures in 2010 and potential additional bad debt charges ($1.0–$1.5 million) related to a specific licensee acquired in early 2010. The company plans to increase company-owned stores through acquisitions of underperforming licensee operations.
- Liquidity Strategy: The company is aggressively reducing inventory levels and right-sizing expenses. It maintains a strong balance sheet with $23.2 million in cash and $14.9 million in investments. A revolving credit facility of $30 million (reduced from $45 million) has $4.2 million available.
- Key Risks:
- Credit Market Disruptions: Potential inability of customers, licensees, or consumers to obtain credit.
- Licensee Solvency: Significant exposure to accounts receivable and lease guarantees from licensee stores; failure of licensees could lead to additional bad debt and real estate losses.
- Investment Volatility: Continued losses in the Alternative Asset Fund and potential reduction in dividends from the International Home Furnishings Center (IHFC) as IHFC conserves cash for debt refinancing.
- Raw Material Costs: Fluctuations in the price of wood, foam, and fabrics.
Investor Verification Checklist
- Receivables Quality: Verify the aging of accounts receivable, noting that 26% were over 90 days past due as of November 28, 2009 (up from 15% in 2008).
- Licensee Guarantees: Review the $9.8 million in lease guarantees and $5.0 million in loan guarantees provided to licensees and the adequacy of reserves.
- Inventory Levels: Confirm the success of inventory reduction efforts, as wholesale finished goods inventory dropped from $29.1 million to $19.5 million.
- Debt Covenants: Monitor compliance with the Tangible Net Worth covenant (minimum $95 million for 2009; actual was $110.2 million).
- Investment Liquidation: Track the liquidation status of the Alternative Asset Fund and the timing of cash distributions from the remaining DB Zwirn Special Opportunities Fund investment.