Business Context and Reporting Period
Company: Bassett Furniture Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2008 (27 weeks for the six-month period; 13 weeks for the quarter)
Business Overview: A leading retailer, manufacturer, and marketer of branded home furnishings operating through a network of company-owned and licensee stores. The company is currently navigating a difficult retail environment characterized by declining housing starts and a deteriorating consumer credit market.
Key Financial Metrics
| Metric (in thousands) | Quarter Ended May 31, 2008 | Six Months Ended May 31, 2008 |
|---|---|---|
| Net Sales | $74,862 | $156,460 |
| Gross Profit | $29,518 (39.4% margin) | $62,144 (39.7% margin) |
| Operating Loss | $(1,985) | $(1,574) |
| Net Income (Loss) | $(391) | $126 |
| Cash and Cash Equivalents | $6,280 | $6,280 (Ending Balance) |
| Revolving Credit Facility Borrowed | $16,000 | $16,000 |
| Available Credit Capacity | $13,584 | $13,584 |
Material Changes vs. Prior Period
- Revenue: Consolidated net sales decreased 1% in the quarter ($74.9M vs. $75.4M) but increased 5% for the six months ($156.5M vs. $148.9M). Reported sales were positively impacted by a change in invoicing practices (fully landed basis) which added approximately $4.1M in the quarter and $8.7M for the six months.
- Profitability: Gross margins improved significantly to 39.4% in the quarter (from 31.7% in 2007) and 39.7% for the six months (from 31.1% in 2007). This improvement is attributed to a higher mix of imported products and the wind-down of domestic manufacturing costs from the previous year.
- Operating Expenses: Selling, General, and Administrative (SG&A) expenses increased to $31.0M in the quarter (from $26.1M) and $63.3M for the six months (from $51.9M). Excluding the invoicing change, SG&A as a percentage of sales decreased due to cost reduction programs.
- Unusual Items: The current period included $1.4M in proxy defense costs related to a contest with Costa Brava Partnership III L.P. This was offset by a $1.3M gain on the sale of the company airplane. The prior year included significant restructuring and lease exit charges totaling over $7.4M for the six-month period.
- Segment Performance: The Wholesale segment returned to profitability with operating income of $670k for the quarter. The Retail segment (company-owned stores) reduced its operating loss by 14% to $2.4M for the quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects the remainder of 2008 to remain difficult. The primary focus is improving retail store performance and reducing wholesale cost structures. A financial plan aims to reduce retail segment losses to a breakeven level by 2010.
- Capital Allocation: The company announced a special dividend of $1.25 per share (first installment of $0.75 paid August 1, 2008) and is actively liquidating its Alternative Asset Fund (BIAAF) to fund this dividend and a share repurchase program. Approximately $12M was received from the fund in June 2008.
- Store Strategy: The company plans to remodel several corporate locations and expects nine to ten underperforming licensee stores to close during the remainder of 2008.
- Liquidity: The company maintains a strong balance sheet with $13.6M available on its revolving credit facility. Discussions are underway to amend covenants and increase the facility limit.
- Risks: Key risks include the realization of receivables (bad debt provision increased to $2.0M for the six months), contingent liabilities from lease and loan guarantees for licensees ($19.7M total), and the timing of liquidity from the Alternative Asset Fund due to redemption restrictions.
Investor Verification Checklist
- Proxy Defense Costs: Verify the ongoing status and potential future costs associated with the proxy contest with Costa Brava Partnership III L.P.
- Investment Liquidity: Confirm the timeline and actual proceeds from the liquidation of the Bassett Industries Alternative Asset Fund (BIAAF), noting that some funds may be locked up for 2-3 years.
- Bad Debt Exposure: Monitor the provision for losses on trade accounts receivable, which rose to $2.0M for the six months, reflecting slower collections from licensees.
- Store Closures: Track the execution of the plan to close 9-10 underperforming licensee stores and the associated impact on future revenue and lease obligations.
- Debt Covenants: Verify the successful amendment of the revolving credit facility covenants expected by the end of the third quarter of 2008.