Bassett Furniture Industries, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and its Bassett Home Furnishings stores; its subsidiary Zenith provides logistics services. The quarter ended August 26, 2017; comparisons are with the quarter ended August 27, 2016. Nine-month results cover the periods ended on those same dates. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $114.3 | $104.7 | $334.3 | $318.3 |
| Operating income | $7.3 | $7.5 | $19.5 | $19.2 |
| Net income | $4.6 | $4.2 | $13.3 | $10.8 |
| Diluted EPS | $0.43 | $0.38 | $1.24 | $0.99 |
| Operating margin | 6.4% | 7.2% | 5.9% | 6.0% |
- Quarterly revenue rose 9.1%; furniture and accessories revenue increased 9.5%, while logistics revenue increased 6.5%. Net income rose 9.9%, although operating income declined 3.7%.
- Nine-month revenue increased 5.0%, operating income 1.8%, and net income 23.2%. The net income comparison includes significant nonrecurring items described below.
- Gross margin on furniture and accessories was 60.3% in Q3 versus 61.7% a year earlier; for the nine months it was 60.5% versus 60.9%. SG&A was 53.7% of revenue in Q3 and 54.1% for the nine months.
- Cash from operations was $14.7 for the nine months, down from $19.0. Capital expenditures were $10.8, versus $19.0; cash dividends paid were $6.5.
- At quarter-end, cash and cash equivalents were $36.5 and short-term investments were $23.1. Current assets were $145.7 and current liabilities $70.3. Notes payable totaled $3.9, including $3.4 due within one year. The $15.0 credit facility had $13.0 available after standby letters of credit; the company reported covenant compliance.
- Total assets were $279.8 and stockholders’ equity was $190.7. The company reported $170.2 of future minimum operating lease payments and $2.9 of contingent licensee lease guarantees.
Segment and operating developments
- Wholesale: Q3 sales increased 5.9% to $61.8; operating income fell to $4.5 from $5.6. Margin was 7.2%, compared with 9.7%, but the prior-year period included a $1.4 antitrust settlement benefit. Excluding that benefit, prior-year operating income was $4.2 and margin 7.2%. Nine-month sales rose 4.6% and operating income rose to $15.1 from $14.4.
- Company-owned retail: Q3 sales rose 10.1% to $67.4. Comparable-store sales increased 1.8%, but comparable-store written sales declined 2.9%. Segment operating income was $1.4 versus $0.8; the current quarter included a $1.2 gain on the sale of a Las Vegas store. Nine-month comparable sales rose 3.2%; retail operating income was $1.4 versus $1.5.
- Logistics: Q3 revenue rose 8.4% to $24.9 and operating income increased to $1.2 from $0.7. Nine-month revenue was nearly flat at $71.9, while operating income declined to $1.7 from $2.1, partly reflecting higher depreciation and amortization.
- The company reported 91 BHF stores at quarter-end: 61 company-owned and 30 licensed. It opened three company stores during the first nine months and reported additional openings and relocations planned into 2018, subject to execution. Management expected about $2.0 of additional new-store pre-opening costs and post-opening losses in fiscal 2017 compared with fiscal 2016.
Outlook, unusual items and risks
- No specific revenue or earnings guidance was provided. Management said it had sufficient liquidity to fund operations for the foreseeable future and expected to meet debt maturities with operating cash flow or cash on hand.
- Nine-month results included a $3.3 gain from selling a longstanding investment for $3.6 cash and a $1.1 noncash impairment of a Virginia real estate asset. The Las Vegas store sale generated a $1.2 gain included in retail SG&A. The prior-year comparison included the $1.4 foam antitrust settlement benefit.
- Operating cash flow declined primarily because of working-capital changes, including higher inventories and lower customer deposits. Inventory increased to $57.7 from $53.2 at fiscal 2016 year-end.
- Management identified risks from consumer demand and retail traffic, housing and economic conditions, competition, store execution, raw-material and fuel costs, labor and sourced-product availability, supply-chain disruption, information systems, and Zenith’s freight operations. Weak commercial real estate markets could affect property values or increase the cost of fulfilling guaranteed leases.
- Legal and environmental matters arise in the ordinary course; management did not expect their resolution to materially adversely affect financial position or future results. The company disclosed a $500 cost related to settling employment claims in retail SG&A.
- New lease accounting guidance was expected to materially affect the balance sheet when adopted in fiscal 2020; the impact of revenue-recognition guidance effective in fiscal 2019 had not yet been determined. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether underlying earnings growth persists after adjusting for investment and property-sale gains, impairment, store start-up costs, and the prior-year antitrust settlement.
- Comparable-store written sales trends, retail margins, and the profitability and timing of planned store openings and relocations.
- Working-capital needs, inventory levels, operating cash generation, and the ability to fund capital spending, dividends, and near-term debt maturities.
- Lease commitments, contingent licensee guarantees, and exposure to real estate values, raw-material costs, fuel prices, and logistics operating costs.
- The eventual financial-statement effects of new accounting standards, particularly leases and revenue recognition.