Bassett Furniture Industries, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended May 28, 2022; unaudited. Amounts below are in millions of dollars unless stated otherwise. Comparisons are with the corresponding 2021 periods.
Business context and results
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. It reported 96 branded stores across the network and 62 company-owned stores at the period end. The quarter’s continuing results reflect furniture and accessories; Zenith Freight Lines is reported as discontinued operations following its sale.
- Q2 continuing sales: $128.7 million, up 17.0%. Wholesale open-market shipments rose 10%; retail sales increased 21%.
- Q2 continuing profitability: Gross profit was $65.9 million, with gross margin of 51.2% versus 51.9% a year earlier. Operating income was $11.0 million, or 8.6% of sales, versus $7.1 million, or 6.4%. Continuing income was $7.7 million, or $0.81 diluted EPS, compared with $5.1 million, or $0.51.
- Six-month continuing results: Sales of $246.6 million, up 16.5%; gross profit of $123.3 million and gross margin of 50.0%, down from 52.2%. Operating income was $17.5 million, or 7.1% of sales, versus $12.6 million, or 6.0%. Continuing income was $12.0 million, or $1.25 diluted EPS, versus $8.8 million, or $0.89.
- Reported net income: $47.1 million in Q2 and $52.7 million for six months, including the after-tax gain on the Zenith sale. Diluted EPS was $4.94 and $5.47, respectively; these totals are not representative of continuing operations alone.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was negative $8.9 million, compared with positive $12.1 million in the prior-year period. Investing cash flow was positive $72.4 million, including $85.5 million of net Zenith sale proceeds; capital expenditures were $12.6 million. Financing cash use was $26.2 million, including $17.2 million of dividends and $8.6 million of share repurchases.
- Cash and cash equivalents were $71.6 million at May 28, 2022, up from $34.4 million at November 27, 2021. Short-term investments were $17.7 million, for combined cash and investments of $89.3 million.
- Total assets were $413.8 million; stockholders’ equity was $190.1 million. The balance sheet reported $110.0 million of operating lease obligations. No drawn bank borrowing was reported; the $25.0 million credit line had $3.9 million of standby letters of credit and $21.1 million available. The company reported covenant compliance.
- Inventory increased to $92.9 million from $78.0 million at fiscal year-end. Customer deposits were $46.4 million, down from $51.5 million.
Material changes and unusual items
- Zenith divestiture: Sold substantially all Zenith assets to J.B. Hunt on February 28, 2022. Net proceeds were $85.5 million; Bassett recorded a $53.3 million pretax gain. A $1.0 million amount was held in escrow, and a post-closing working-capital adjustment was pending. Bassett retained $1.4 million of certain liabilities and entered a seven-year logistics-services agreement with J.B. Hunt.
- Operating costs and margins: Management attributed lower consolidated gross margin to higher raw-material, inbound freight and fuel costs, with order backlogs and longer fulfillment times delaying the benefit of pricing changes. Q2 wholesale segment operating income declined to $3.4 million from $5.4 million; retail segment operating income rose to $7.9 million from $1.7 million. Retail margin benefited from pricing, lower promotions and clearance activity.
- Backlogs and demand: Wholesale backlog fell to $60.1 million from $78.1 million in February 2022; retail backlog fell to $71.1 million from $84.7 million. Both remained well above February 2020 levels. Retail written sales declined 13% year over year in Q2 and 7.9% for the first half.
- Capital returns and properties: The company declared a special dividend of $14.5 million during Q2 and repurchased $8.6 million of stock in the first half. It bought a Tampa property for $7.7 million and subsequently sold a Houston store property for about $8.2 million, expecting a gain of approximately $4.6 million in Q3 and to defer most taxable gain through a like-kind exchange.
Outlook, risks and contingencies
No quantified earnings or sales guidance was provided. Management expected backlogs to continue decreasing as production and shipping improved and new-order growth slowed. It planned additional regional fulfillment centers, including one in New Jersey in early fall, and a new e-commerce platform in 2023; it expected to spend $3–4 million on digital initiatives in fiscal 2022. Management expected to end fiscal 2022 with 58 company-owned stores.
Key risks cited include inflation and availability of materials, fuel, labor and freight; supply-chain disruption and import duties; consumer demand and retail traffic; store profitability; and operational, cybersecurity, pandemic and housing-market risks. The company also noted potential impairment exposure on owned and leased retail properties and possible obligations under $1.9 million of licensee lease guarantees. It stated that pending legal and environmental matters were not expected to have a material adverse effect, based on facts then known.
Most important facts for investors to verify
- Separate continuing-operations performance from the one-time Zenith disposal gain when assessing earnings and EPS.
- Track whether price increases offset input, freight and fuel inflation, particularly as backlogs decline and written sales soften.
- Monitor operating cash generation, inventory levels, customer deposits and cash needs after sale proceeds and capital returns.
- Review execution and spending on fulfillment, digital-commerce and store plans, as well as store closures and relocations.
- Confirm the final Zenith working-capital adjustment and escrow release; the filing describes an estimated adjustment due to J.B. Hunt.
- Verify the Houston property carrying value: the filing gives differing amounts in separate sections ($3.623 million in the balance sheet and note versus $3.146 million in MD&A).