Bassett Furniture Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Quarter ended March 2, 2019. The quarter comprised 14 weeks, versus 13 weeks in the prior-year comparison; reported growth rates therefore include an extra week. Amounts below are in millions of dollars unless stated otherwise.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Bassett Home Furnishings stores. It also provides furniture-industry logistics services through Zenith Freight Lines. At quarter-end, the network included 102 stores: 69 company-owned and 33 licensee-owned.
Financial results and liquidity
- Revenue: $120.8, up 9.6% reported. Furniture and accessories revenue was $107.4, up 11.7%; logistics revenue was $13.5, down 4.7%.
- Profit: Operating income was $0.9 (0.8% of revenue), versus $2.1 (1.9%). Net income was $0.6, or $0.06 per diluted share, compared with a $0.9 loss, or $0.09 per share. The prior-year result included a $2.2 discrete deferred-tax remeasurement charge.
- Margins: Wholesale gross margin improved to 32.9% from 32.4%; retail gross margin declined to 49.8% from 50.5%. Retail reported an operating loss of $3.0, versus $1.5.
- Cash flow and investment: Operating cash outflow was $15.7, compared with $1.0 in the prior-year quarter. Capital expenditures were $5.6, versus $4.0. Cash and cash equivalents fell $23.5 to $10.0; short-term investments were $22.6. Combined cash and short-term investments were $32.6 at quarter-end.
- Debt and liquidity: Real-estate mortgage principal was $0.2, due within one year. The $25.0 unsecured credit facility matures in December 2021; $22.2 remained available after standby letters of credit. The company reported compliance with its covenants.
- Other balance-sheet items: Current assets were $137.1 and current liabilities $73.3. Inventory was $66.7, up from $64.2 at fiscal year-end.
Material changes versus the prior comparable period
- Reported revenue rose, but weekly wholesale sales growth was 7.1% after adjusting for the extra week. Wholesale operating income increased to $4.2 from $3.1; higher volume and domestic upholstery margins contributed, partly offset by higher health-care costs and a $0.4 inventory charge related to exiting juvenile furniture.
- Retail revenue increased 7.7% reported, largely from recently opened stores. Comparable-store sales rose 0.2% reported but fell 6.9% on an average-week basis; comparable-store written sales fell 11.6% on an average-week basis. Retail’s operating loss widened, with higher health-care, delivery and warehousing costs among the cited factors.
- Logistics operating income rose to $0.7 from $0.3. On an average-week basis, revenue declined 5.7%, primarily following the discontinuation of home delivery services to third-party customers.
- Operating cash use increased materially. Management cited inventory purchases made in anticipation of potential tariffs, working-capital timing associated partly with the extra week, and lower comparable-store sales on an average-week basis.
Outlook, commentary and risks
- Management expects to open the stores with executed leases in Sarasota and Princeton in 2019 and Thornton in 2020, then significantly reduce the pace of store expansion and focus on profitable sales from existing stores.
- Management said available liquidity, expected operating cash flows and reduced capital spending as store openings slow should be sufficient to fund operations for the foreseeable future. No specific earnings or revenue guidance was provided.
- Unusual costs included an $0.8 early-retirement charge after 23 employees accepted the program; the obligation was expected to be substantially paid within one year. Other loss improved year over year, including $0.4 in life-insurance death benefits and higher investment interest income.
- Future minimum operating lease payments totaled $184.1. Bassett also guaranteed $2.0 of licensee lease obligations. The filing identifies potential risks from consumer demand, retail traffic, housing conditions, competition, tariffs and trade restrictions, raw-material, fuel and labor costs, supply-chain disruption, logistics operations, and the value of retail real estate.
- The company said pending legal and environmental matters were not expected, based on currently known facts, to have a material adverse effect. Adoption of the revenue-recognition standard had no material financial-statement impact; adoption of the lease standard in fiscal 2020 was expected to materially affect the balance sheet.
Important facts for investors to verify
- How much reported revenue growth reflects the extra fiscal week, and whether weekly wholesale trends persist.
- Whether comparable-store sales and written sales stabilize, and whether retail losses improve as new stores mature.
- Whether operating cash flow recovers after the inventory and working-capital outflows, and how tariff-related purchasing affects inventory and margins.
- Whether the planned reduction in store openings lowers capital spending and improves retail profitability.
- The eventual balance-sheet impact of lease accounting and the company’s exposure to lease commitments and licensee guarantees.
- The sustainability of earnings given the early-retirement charge, juvenile-line exit costs and prior-year tax comparison.