Bassett Furniture Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Second quarter and six months ended May 27, 2023. Comparative periods ended May 28, 2022. Amounts below are in millions unless noted. Bassett designs, manufactures, sources, markets and sells home furnishings through wholesale channels, company-owned stores, licensee-owned stores and online. The company reported 91 Bassett Home Furnishings stores, including 59 company-owned stores.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $100.5 | $128.7 | $208.2 | $246.6 |
| Gross profit / margin | $52.8 / 52.6% | $65.9 / 51.2% | $110.0 / 52.8% | $123.3 / 50.0% |
| Operating income / margin | $2.5 / 2.5% | $11.0 / 8.6% | $5.2 / 2.5% | $17.5 / 7.0% |
| Continuing-operations income | $2.1 | $7.7 | $3.5 | $12.0 |
| EPS from continuing operations | $0.24 | $0.81 | $0.40 | $1.25 |
| Net income, including discontinued operations | $2.1 | $47.1 | $3.5 | $52.7 |
Q2 sales fell 21.9% year over year; first-half sales fell 15.6%. Management attributed the declines mainly to weaker wholesale shipments and lower company-store sales. Gross margin improved, but lower volume reduced fixed-cost absorption: SG&A was 51.1% of sales in Q2 versus 42.7% a year earlier. The Q2 and first-half 2023 results include a $1.0 million gain from reducing contingent consideration related to Noa Home.
Wholesale sales declined 29.4% in Q2 and 23.0% year to date; wholesale operating income was $7.0 million and $16.0 million, respectively. Company-owned retail sales declined 19.6% in Q2 and 10.0% year to date; retail operating income was $0.8 million and $2.3 million. Wholesale and retail backlogs at May 27 were $19.7 million and $32.9 million, respectively, down from $60.1 million and $71.1 million a year earlier.
Cash flow, liquidity and obligations
- First-half operating cash flow was $6.4 million, compared with cash used of $8.9 million in the prior-year period. The improvement primarily reflected lower inventory investment.
- Cash and cash equivalents were $54.6 million at May 27, down from $61.6 million at fiscal year-end; short-term CD investments were $17.7 million. Cash plus short-term investments totaled $72.3 million.
- Investing cash use was $7.0 million, including $7.4 million of capital expenditures. Financing cash use was $6.4 million, including $2.8 million of dividends and $3.5 million of share repurchases.
- The company reported no drawn bank borrowings. Its unsecured $25 million credit facility had $21.3 million available after $3.7 million of standby letters of credit; it matures January 27, 2025. Bassett said it was in compliance with covenants and expected to remain so.
- Operating lease obligations totaled $108.7 million. A further $1.9 million of licensee lease obligations were guaranteed by the company. These are obligations, not reported bank debt.
Material changes, outlook and risks
- Comparisons with 2022 net income are affected by the sale of logistics subsidiary Zenith Freight Lines, completed in February 2022. Prior-year discontinued operations included a $53.3 million pretax disposal gain; the sale proceeds were $85.5 million net. Current-period results exclude Zenith, while Bassett continues to buy logistics services from J.B. Hunt under a seven-year agreement.
- Management expects full-year 2023 capital expenditures of $16 million to $19 million. It planned to launch a new e-commerce platform in the second half of 2023 and introduce Noa Home in the U.S. through a limited geographic test in Q4. No specific earnings or revenue guidance is provided.
- Management expected improved wholesale margins during the remainder of 2023, citing normalization of prior high freight costs and the outlook for Bassett Leather and Casegoods. This is an expectation, not a guarantee.
- Key risks include subdued consumer demand and retail traffic, higher interest rates affecting customer credit, competition, input and delivery costs, supply-chain disruption, store profitability, execution of digital and Noa Home initiatives, cybersecurity, foreign currency exposure and potential impairment of retail real estate or lease assets.
- Routine legal and environmental matters were disclosed; management did not expect their resolution to materially adversely affect financial position or future results. No legal proceedings were listed in Part II. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether sales and written orders stabilize after the sharp year-over-year declines, and how the substantially lower wholesale and retail backlogs convert to revenue.
- Whether gross-margin gains can offset continued fixed-cost deleverage, store delivery and warehousing costs, and promotional activity.
- Progress and spending against the $16–$19 million capital expenditure outlook, e-commerce launch plans and U.S. Noa Home test.
- Liquidity, lease obligations and covenant headroom if operating performance weakens; the filing provides covenant thresholds but not the actual ratios.
- How much reported earnings depend on unusual items and prior-year discontinued-operation comparisons; Q2 2023 included the $1.0 million contingent-consideration gain, while Q2 2022 included Zenith’s disposal gain.