Bassett Furniture Industries, Inc. — Q3 2013 Form 10-Q
Business context and period. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Bassett Home Furnishings stores. The quarter ended August 31, 2013; the nine-month comparison covers 40 weeks in 2013 versus 39 weeks in 2012. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $77.2 | $64.4 | $238.2 | $192.9 |
| Gross profit | $38.7 | $33.8 | $121.9 | $101.2 |
| Gross margin | 50.2% | 52.5% | 51.2% | 52.4% |
| Operating income | $0.8 | $0.8 | $6.6 | $2.6 |
| Net income | $0.6 | $2.4 | $3.5 | $9.8 |
| Diluted EPS | $0.05 | $0.21 | $0.32 | $0.88 |
- Revenue and segments: Q3 sales grew 20%. Wholesale sales increased 18%, including a 57% increase in open-market shipments; company-owned retail sales rose 12%. Nine-month sales increased 24% as reported and 20% on an average-weekly basis. Comparable-store delivered sales increased 3.9% in Q3 and 6.8% on an average-weekly basis for the nine months.
- Profitability: Q3 operating income was nearly flat despite higher sales. For the first nine months, operating income improved by $4.0 million. Wholesale operating income rose to $8.2 million from $5.6 million; retail operating loss narrowed to $1.8 million from $2.4 million. Consolidated SG&A rose with store growth, pre-opening costs, marketing and higher health-care claims. Q3 included a $0.251 million charge related to the Colonial Trading settlement.
- Cash flow and investment: Nine-month operating cash flow was $0.1 million versus $6.9 million in 2012. Investing cash outflow was $34.3 million, mainly from purchasing $28.1 million of short-term certificates of deposit and $9.5 million of capital expenditures. Financing cash outflow was $2.5 million, primarily dividends. Cash was $8.9 million at period-end, down from $45.6 million at fiscal year-end, while short-term investments were $28.1 million; cash plus short-term investments totaled $37.0 million.
- Liquidity and debt: Current assets were $128.7 million and current liabilities $50.0 million. Real-estate notes totaled $3.1 million, bearing 6.73% interest. The $15 million secured credit line had $13.6 million available after $1.4 million of standby letters of credit; no facility borrowing balance was reported. The company said it was in covenant compliance and expected to remain so.
- Other metrics: Inventory was $58.5 million, compared with $57.9 million at November 24, 2012. Nine-month dividends were $0.16 per share. Annualized consolidated inventory turns were 2.7, versus 2.5 a year earlier.
Material changes and management commentary
- The prior-year nine-month results included $9.0 million of CDSOA income and a $0.806 million impairment of an investment; neither item recurred in 2013. The prior-year tax provision also benefited from a partial release of deferred-tax valuation allowances. These items materially affect year-over-year net income comparisons.
- Management attributed sales gains to higher wholesale demand, improved retail performance, design-consultant training, and the HGTV co-branded design centers and advertising. It cited the shift toward open-market wholesale sales as a reason consolidated gross margin declined, since company-owned store sales generally capture both wholesale and retail margins.
- The company operated 55 company-owned and 34 licensee-owned stores at quarter-end. It planned to open up to six company-owned stores and reposition up to four over the 12 months following August 31, 2013; two openings were expected in Q4 2013. Fiscal 2013 capital expenditures were projected at approximately $13–$15 million, with fiscal 2014 spending expected to be lower. No specific earnings guidance was provided.
- Management reported $18.9 million of retail backlog and $13.0 million of wholesale backlog. It noted that imported-product timing affected wholesale backlog and that store expansion and repositioning would continue to add costs.
Risks, contingencies and unusual items
- The Colonial Trading litigation was settled for $1.7 million in Q3, $0.251 million above the prior reserve. The appeals court had affirmed the judgment.
- The company received a $9.0 million CDSOA distribution in 2012. Further legal appeals were possible and could lead Customs to seek repayment of some or all of the distribution; management assessed the likelihood of a repayment claim succeeding as remote.
- Future minimum operating-lease payments were $98.7 million. Bassett also guaranteed $3.8 million of licensee lease obligations; default, property-market weakness or difficulty obtaining replacement tenants could create losses.
- Other risks include consumer demand and retail traffic, competition, raw-material costs, inventory obsolescence, import supply-chain disruption, store profitability, and the potential impairment of retail real estate. Management said ordinary-course legal and environmental matters were not expected to materially affect financial position or future results.
- Controls and procedures were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales momentum, especially the sharp increase in open-market wholesale shipments, is sustainable and how channel mix affects gross margins.
- Whether comparable-store written sales, which grew only 0.3% in Q3, translate into future delivered sales and improved retail profitability.
- How cash generation develops after elevated store, remodeling and technology investment; distinguish cash balances from short-term investments.
- The outcome of remaining CDSOA appeals and release of the $2.348 million IHFC escrow balance expected during fiscal 2014, subject to contingencies.
- Progress and costs of planned store openings and repositionings, alongside lease commitments and licensee lease guarantees.