Bassett Furniture Industries, Inc. — Q2 2021 Form 10-Q
Business context and period: The quarter and six months ended May 29, 2021. Bassett sells home furnishings through wholesale channels and company-owned and licensed stores, and provides logistics services through Zenith Freight Lines. Unless stated otherwise, dollar amounts below are in millions. The prior-year comparison was heavily affected by temporary store, factory, and warehouse closures during the COVID-19 pandemic.
Financial performance
| Metric | Quarter ended May 29, 2021 | Six months ended May 29, 2021 | Prior-year comparison |
|---|---|---|---|
| Total revenue | $124.1 | $237.7 | Up 94.4% and 35.1%, respectively |
| Operating income | $8.4 | $14.4 | Compared with operating losses of $31.2 and $29.0 |
| Net income | $6.0 | $10.0 | Compared with net losses of $20.4 and $19.1 |
| Diluted EPS | $0.60 | $1.01 | Compared with losses per share of $2.04 and $1.92 |
| Operating margin | 6.8% | 6.1% | Calculated as operating income divided by total revenue |
| Operating cash flow | $12.1 for the six months | Compared with $5.7 used in operations |
- Furniture and accessories revenue was $110.0 million for the quarter and $211.7 million for the half-year; logistical services revenue was $14.1 million and $26.1 million, respectively.
- Quarterly operating results improved across all three segments: wholesale income was $5.4 million, company-owned retail income $1.7 million, and logistics income $1.3 million.
- Cash and cash equivalents were $45.8 million and short-term investments $17.7 million at May 29, totaling $63.5 million. Current assets were $176.5 million against current liabilities of $130.4 million.
- Inventories rose to $67.3 million from $54.9 million at fiscal year-end, reflecting increased investment to fulfill the backlog. Customer deposits increased to $47.9 million from $39.8 million.
- The company reported no drawn borrowings under its $25.0 million credit facility; $3.2 million of standby letters of credit reduced available capacity to $21.8 million. The facility matures January 31, 2022, and the company reported covenant compliance.
- Operating lease obligations on the balance sheet totaled approximately $137.2 million; MD&A separately cites $143.9 million as the present value of lease obligations with terms over one year.
Changes versus prior periods
- Year-over-year revenue and profit rebounded from pandemic-related closures in 2020. For additional context, furniture and accessories revenue was up 14.8% for the quarter but only 4.2% for the half-year compared with the corresponding 2019 pre-pandemic periods.
- Management attributed improved furniture gross-cost leverage and lower SG&A as a share of revenue to higher sales, cost containment, and expense reductions. Retail gross margin improved 420 basis points for the quarter and 240 basis points for the half-year.
- The prior-year periods included $12.2 million of asset impairment charges, $2.0 million of goodwill impairment, and $1.1 million of litigation expense. The wage-and-hour claims associated with that litigation accrual were settled at no additional cost.
- First-half financing cash outflows included $5.0 million in dividends, including a $2.5 million special dividend, and $2.9 million of share repurchases. The regular dividend remained $0.125 per share per quarter.
Outlook, management commentary, and risks
- Management said incoming wholesale and retail orders remained strong, but COVID-related labor shortages and supply-chain disruption, including shortages of fabric, foam, and plywood, were delaying fulfillment and creating unusually high backlogs. Wholesale backlog was $86.7 million, versus $54.9 million at November 28, 2020; retail backlog was $73.5 million, versus $57.0 million.
- The company anticipated gradual backlog reductions over the rest of fiscal 2021 as incoming orders moderated and manufacturing and shipping increased. It expected wholesale gross margins to be slightly affected while working through the backlog. No specific full-year revenue or earnings guidance was provided.
- To expand capacity, Bassett opened an additional 123,000-square-foot upholstery facility in Newton, North Carolina; production began in early June 2021.
- Key risks include continued supply-chain and labor constraints, order cancellations if delivery delays persist, inflation in materials and freight, renewed COVID-19 restrictions, consumer demand and housing-market conditions, store performance and potential closures, and disruption to domestic manufacturing or logistics operations.
- Bassett operated 97 branded stores at quarter-end and said it would continue evaluating store performance and its optimal store count. It also described plans to improve digital shopping and emphasize its domestic manufacturing and “Made in America” offerings.
- Legal and environmental matters were described as arising in the ordinary course; management did not expect their resolution to materially adversely affect financial position or future results. Licensee lease guarantees totaled $2.1 million and were contingent obligations.
Important facts for investors to verify
- Whether order backlogs convert into deliveries and revenue, and whether continued delays lead to cancellations.
- Whether new manufacturing capacity and price increases offset labor, material, and logistics cost inflation without materially weakening margins.
- Cash generation and inventory levels as the company works through backlogs, alongside dividend and share-repurchase spending.
- Credit-facility renewal or replacement before its January 2022 maturity, and the company’s substantial lease obligations.
- Store-closure decisions and their potential effects on retail sales, owned real estate, and lease-related impairment risk.