Bassett Furniture Industries, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended May 26, 2012. Amounts below are in millions of dollars unless stated otherwise. The company designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores; it operated 87 stores at quarter-end.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $67.5 | $66.3 | $128.4 | $130.5 |
| Gross profit | $35.7 | $33.2 | $67.3 | $65.0 |
| Gross margin | 52.9% | 50.1% | 52.4% | 49.8% |
| Operating income (loss) | $1.6 | ($14.3) | $1.8 | ($21.5) |
| Net income | $8.0 | $62.5 | $7.4 | $54.3 |
| Diluted EPS | $0.71 | $5.39 | $0.66 | $4.69 |
- Q2 sales increased 1.8% year over year; first-half sales declined 1.6%. Retail sales rose 12.6% in Q2 and 8.8% year to date, while wholesale sales were nearly flat in Q2 and down 3.5% for the half.
- Operating results improved markedly, particularly as bad-debt and notes-receivable valuation charges fell to $0.2 million for the first half from $13.0 million a year earlier. SG&A rose to $33.2 million in Q2 and $64.2 million for the half, reflecting the larger company-owned store base and product-development and showroom spending.
- Cash from operations was $8.3 million for the first half, versus $4.6 million used in the prior-year period. The 2012 period included a $9.0 million CDSOA distribution. Capital expenditures were $4.4 million; cash dividends paid were $6.6 million, and share repurchases were $1.3 million. Cash declined $2.5 million to $67.1 million.
- At May 26, cash and marketable securities totaled $70.2 million. Current assets were $138.8 million and current liabilities $46.3 million. Real-estate notes payable totaled $3.8 million, including $0.2 million current; no borrowings were reported under the $3.0 million bank line, which supported $2.3 million of standby letters of credit and had $0.7 million available. The company reported covenant compliance.
- Inventory was $47.9 million, up from $45.1 million at fiscal year-end. Annualized inventory turns fell to 2.6 from 3.2, and days’ supply rose to 143 from 113, reflecting new-product inventory and store expansion.
Material changes and unusual items
- The prior-year comparison is heavily affected by the $85.5 million one-time gain on the 2011 sale of IHFC; that transaction also contributed to the unusually high prior-year earnings. Current-period Q2 and first-half income included the $9.0 million CDSOA distribution, a non-recurring receipt.
- First-half 2012 included an $0.8 million impairment of the Fortress investment. Restructuring, impairment and lease-exit charges totaled $1.1 million for the half, compared with $12.1 million a year earlier; the prior-year period also included $6.4 million of licensee debt cancellation charges.
- Company-owned comparable-store sales increased 7.9% in Q2 and 6.8% for the half. Comparable-store written sales rose 11.2% and 9.1%, respectively. The retail segment remained loss-making for the half, although comparable stores recorded modest operating income.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management expected sales from the HGTV Furniture Collection to begin in Q4 2012 and said related development and marketing spending would likely continue increasing before launch.
- Management said the remaining licensee base was financially stronger and considered first-half 2012 bad-debt charges more indicative of the expected future trend, while noting that additional licensee closures or acquisitions remain possible. The company said available cash and securities should fund operations for the foreseeable future.
- Key exposures include weak housing and consumer demand, retail traffic, licensee credit quality, raw-material and sourced-product costs, import-supply-chain execution, and store profitability. Inventory obsolescence or slower turnover could require additional write-downs.
- Potential obligations include $76.9 million of future minimum operating-lease payments, $2.2 million of guaranteed licensee lease obligations and $0.04 million of guaranteed licensee loans. The company also identified commercial-real-estate weakness as a risk to property values and lease-guarantee recoveries.
- An appeal concerning the CDSOA distribution remained pending; an adverse outcome could lead Customs to seek return of some or all of the $9.0 million distribution. Management said the cessation or possible repayment was not expected to materially affect future liquidity or results. Ordinary-course legal and environmental matters were not expected to have a material adverse effect.
- Deferred-tax assets remained substantially offset by a valuation allowance: at May 26, net deferred-tax assets were $1.1 million against gross assets of $20.2 million and a $19.1 million allowance. Management expected a significant allowance to remain. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Separate recurring operating performance from the IHFC gain and the CDSOA distribution when assessing earnings and cash generation.
- Track comparable-store sales and margins alongside losses at newer and non-comparable stores and the continuing costs of store expansion.
- Monitor inventory growth, turnover and days’ supply for signs of demand weakness or future markdowns.
- Review licensee receivables, guarantees, store closures and the unresolved CDSOA appeal for potential cash or earnings impacts.
- Confirm the pace and economics of the HGTV product launch, including whether increased spending translates into sales and profitability.