Bassett Furniture Industries, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended February 26, 2022; compared with the three months ended February 27, 2021. Financial statement amounts below are in millions of dollars unless noted. Bassett operates wholesale and company-owned retail home-furnishings businesses. Its logistics subsidiary, Zenith Freight Lines, is reported as discontinued operations following the agreement to sell it.
Financial results and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change / context |
|---|---|---|---|
| Furniture and accessories revenue | $117.864 | $101.655 | Up 15.9% |
| Gross profit / margin | $57.393 / 48.7% | $53.403 / 52.5% | Margin down 3.8 percentage points |
| Operating income / margin | $6.478 / 5.5% | $5.561 / 5.5% | Operating income up 16.5% |
| Income from continuing operations | $4.291 | $3.698 | Continuing EPS $0.44 vs. $0.37 |
| Income from discontinued operations | $1.282 | $0.313 | EPS $0.13 vs. $0.03 |
| Net income / diluted EPS | $5.573 / $0.57 | $4.011 / $0.40 | Includes discontinued operations |
| Operating cash flow | $2.866 | $4.984 | Down $2.118 |
| Cash and cash equivalents | $31.880 | $34.374 at Nov. 27, 2021 | Short-term investments were $17.715; combined cash and investments $49.595 |
Wholesale revenue was $83.485 million, up 18.8%; segment operating income fell to $3.385 million from $4.797 million. Retail revenue was $64.107 million, up 6.1%; retail operating income increased to $3.350 million from $1.094 million. The consolidated gross-margin decline reflected higher material and inbound freight costs, including fuel, and delays in matching updated pricing to manufacturing costs. Retail margin improved with pricing, lower promotions, and improved clearance margins.
Capital expenditures were $2.424 million. Investing activities used $2.880 million, while financing activities used $2.480 million, including $1.374 million in dividends and $0.765 million in share repurchases. Total assets were $424.057 million and stockholders’ equity was $166.423 million at quarter-end. The $25 million unsecured credit facility had $21.069 million available after standby letters of credit; the company reported covenant compliance. Operating lease obligations are also significant; the balance sheet reported $20.051 million current and $93.333 million long-term for continuing operations.
Material changes and significant events
- Sales growth was driven primarily by a 28% increase in wholesale shipments to the open market and a 6.1% increase in retail sales. Wholesale gross margin declined 4.2 percentage points year over year; retail gross margin rose 1.8 points.
- Wholesale backlog was $78.135 million at quarter-end, down from $90.057 million at November 27, 2021, but above $67.469 million a year earlier. Retail backlog was $84.685 million, compared with $82.894 million at fiscal year-end and $64.806 million a year earlier. Retail written sales declined 2.4% year over year.
- On February 28, 2022, Bassett completed the sale of substantially all Zenith assets to J.B. Hunt for approximately $86.9 million, subject to a working-capital adjustment. Bassett received approximately $85.5 million after transaction costs and funding escrow. Management expected to recognize a substantial gain in Q2 FY2022. Bassett entered into a seven-year agreement for J.B. Hunt to continue providing logistics services.
- Management cited expected sale proceeds before a $1.50-per-share special dividend. The board also increased the share repurchase authorization to $40 million on March 9, 2022. The filing does not provide a precise payment date for the special dividend in the supplied text.
Outlook, risks, and contingencies
- Management said it was making progress reducing order backlogs, but COVID-related labor shortages and supply-chain disruption continued to delay fulfillment. Continued delays could lead to customer cancellations.
- Inflation in materials, freight, fuel, and labor remains a pressure. Bassett implemented wholesale price increases and planned another in Q2; management expected wholesale gross margins to be slightly affected in the first half of FY2022 as the backlog was fulfilled.
- The company cited sufficient liquidity for the foreseeable future, based on cash and investments, expected operating cash flow, Zenith sale proceeds, and credit-line availability. It also planned to spend $3 million to $4 million in FY2022 on digital transformation, including a new e-commerce platform planned for 2023.
- Key risks include consumer demand and retail traffic, supply-chain and labor constraints, raw-material and delivery costs, competition, store profitability, cybersecurity and technology disruptions, and potential impairment of owned or leased retail properties. The company also disclosed $1.854 million of contingent licensee lease guarantees.
- Bassett reported routine legal and environmental matters, but said their resolution was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. No annual earnings or revenue guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Whether backlog conversion improves without further cancellations and whether wholesale pricing catches up with elevated input and freight costs.
- The final Zenith sale proceeds after the working-capital adjustment, the gain recognized in Q2, and ongoing logistics-service costs under the seven-year agreement.
- The special dividend’s declaration and payment details, and the effects of the dividend and repurchases on cash and share count.
- Operating cash generation and working-capital needs, particularly receivables and inventory, alongside planned capital and digital-transformation spending.
- Credit-facility covenant compliance and exposure to lease obligations, lease guarantees, and potential store-related property impairment.