Bassett Furniture Industries, Inc. — FY2011 Form 10-K
Business context and reporting period. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Bassett Home Furnishings stores. The fiscal year ended November 26, 2011 and comprised 52 weeks. Unless noted otherwise, dollar amounts below are in millions. The filing is an annual report, not a standalone fourth-quarter filing; it also provides Q4 results.
Key financial results
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $253.2 | $235.3 |
| Gross profit / gross margin | $127.6 / 50.4% | $112.7 / 47.9% |
| Operating loss / margin | $(19.9) / (7.8)% | $(4.2) / (1.8)% |
| Net income (loss) | $55.3 | $(2.0) |
| Diluted EPS | $4.79 | $(0.17) |
| Cash from (used in) operations | $(5.4) | $7.8 |
| Cash and cash equivalents, year-end | $69.6 | $11.1 |
| Total assets | $223.2 | $197.3 |
| Real estate notes payable | $3.9 | $13.8 |
| Current ratio | 2.71 | 1.48 |
FY2011 net income included an $85.5 gain on the sale of IHFC, which closed May 2, 2011. The company reported a $19.9 operating loss despite higher sales and gross margin. Interest expense was $0.9, and the income-tax provision was $4.4 (a 7.3% effective rate, influenced by tax attributes used against the IHFC gain). The company had $2.9 of marketable securities at year-end.
Fourth-quarter FY2011 sales were $63.3, gross profit was $33.3, net income was $0.6, and diluted EPS was $0.06. In Q4 FY2010, sales were $66.0, gross profit was $31.9, net income was $1.9, and diluted EPS was $0.17.
Material changes versus FY2010
- Consolidated sales increased 7.6%, mainly reflecting growth in company-owned retail stores. Wholesale sales rose 0.6%; company-owned retail sales increased 21.0%, including 4.8% comparable-store growth.
- Gross margin improved 2.5 percentage points, attributed to a higher retail sales mix and improved margins in both segments. Wholesale margin increased to 32.6%; retail margin declined to 47.2%.
- Operating loss widened substantially. Bad-debt and notes-receivable valuation charges rose to $13.5 from $6.6; unusual operating charges included $6.4 of licensee debt cancellations, $3.7 of lease exit and modification costs, and $2.5 of restructuring and impairment charges.
- Net income turned positive primarily because of the IHFC sale gain, not recurring operating profitability. The sale generated $69.2 cash proceeds, with a further $6.1 of tax and indemnification escrow receivables reported.
- Year-end cash increased by $58.5, but operating cash flow turned negative. The company attributed the decline principally to accounts-payable settlement after prior inventory build-up, tax payments and a lease-modification payment.
- The company resumed quarterly dividends and repurchased 370,800 shares for $3.0 during FY2011. A $0.50-per-share special dividend and a further quarterly dividend were paid in December 2011, after fiscal year-end.
Outlook, risks and contingencies
- Management described the home-furnishings market as difficult, citing weak housing starts, unemployment, fuel costs and consumer uncertainty. It reported some improvement, including lower bad-debt charges in the second half and slight retail-environment improvement.
- Management expected to add company-owned stores selectively in FY2012, including planned locations in New Jersey and Texas, and forecast capital expenditures of $7–$9 million, primarily for store openings and remodeling. No earnings or revenue guidance was provided.
- The company had 49 company-owned and 39 licensee-owned stores at year-end; it acquired nine licensee stores and closed seven underperforming company stores during FY2011. Further closures were possible.
- Important risks include weak consumer demand, competition and price pressure, licensee creditworthiness, store profitability, raw-material costs and availability, and imported-product supply-chain disruption. About 52% of wholesale sales were imported.
- At year-end, future minimum operating lease payments were $73.2; contingent licensee lease guarantees were $2.5 and loan guarantees were $0.2. The company also had $2.3 of standby letters of credit. It cited potential real-estate impairment and insufficient sublease income if more stores close.
- The Ward Transformer Superfund matter had cost the company about $1.0 to date; management estimated its share of total remediation liability at approximately $0.3 and intended to seek recovery of excess costs. Management stated that other known legal and environmental matters were not expected to have a material adverse effect.
- The company reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of FY2011 earnings and cash generation is repeatable without the IHFC sale gain and related tax effects.
- Whether operating cash flow recovers and whether the $69.6 year-end cash balance is sustained after dividends, repurchases and planned capital spending.
- Whether company-owned stores can reach profitability and whether comparable-store sales and margins improve without further material closure costs.
- Whether licensee credit exposure and bad-debt charges continue to decline; review receivable reserves, collateral and the concentration of remaining exposures.
- The terms and covenant compliance of the $3.0 credit facility effective December 9, 2011, and progress in collecting the $6.1 IHFC escrow receivables.