Bassett Furniture Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 1, 2019; six months ended June 1, 2019. Fiscal 2019 first-half results cover 27 weeks versus 26 weeks in the prior-year period. Dollar amounts below are in millions unless otherwise stated.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. Its Zenith subsidiary provides furniture-related logistics services. At quarter-end, the network included 70 Company-owned and 33 licensee-owned stores. More than 70% of products sold are manufactured in the United States.
Financial results and liquidity
| Metric | Quarter ended June 1, 2019 | Quarter ended May 26, 2018 | Six months ended June 1, 2019 | Six months ended May 26, 2018 |
|---|---|---|---|---|
| Total revenue | $108.2 | $117.0 | $229.0 | $227.3 |
| Operating income | $0.7 | $5.7 | $1.7 | $7.7 |
| Net income | $0.4 | $4.3 | $1.1 | $3.4 |
| Diluted earnings per share | $0.04 | $0.40 | $0.10 | $0.31 |
| Operating cash flow | Not separately stated | Not separately stated | $(8.9) | $0.3 |
- Quarterly revenue fell 7.5%; furniture and accessories revenue declined 6.7% and logistics revenue declined 13.6%. First-half revenue rose 0.8% as reported, but included an extra week.
- Quarterly operating margin was approximately 0.6%, versus 4.8% a year earlier; first-half operating margin was approximately 0.7%, versus 3.4%. First-half net income declined despite slightly higher reported revenue.
- Wholesale gross margin improved to 34.3% for the quarter and 33.5% for the half, from 32.9% and 32.6%. Company-owned retail gross margin declined to 50.8% for the quarter and 50.3% for the half, from 52.1% and 51.3%.
- At June 1, cash and equivalents were $11.6, short-term investments were $22.6, and total current assets and liabilities were $136.5 and $67.5, respectively. Cash and equivalents were $33.5 at November 24, 2018; cash plus short-term investments totaled $34.2 at quarter-end.
- First-half capital expenditures were $8.3. Dividends paid were $2.6 and share repurchases were $2.3. The quarterly dividend was $0.125 per share.
- Real estate notes payable totaled $0.072 at quarter-end and were paid off afterward. The $25.0 million unsecured credit facility had $22.2 million available after standby letters of credit; the company reported covenant compliance.
Material changes and management commentary
- Company-owned retail sales fell 8.9% in the quarter; comparable-store sales declined 14.8%, and comparable-store written sales declined 7.4%. For the first half, comparable-store sales declined 7.5% as reported, or 10.9% on an average-week basis.
- Management attributed retail pressure to weaker comparable sales, tariff- and freight-related product cost increases, clearance activity, delivery and warehouse inefficiencies, and higher financing and health-care costs. A late-quarter price increase was implemented to mitigate cost pressure.
- Wholesale quarterly sales declined 1.0%, including a 6.6% decline in shipments to open-market customers; first-half sales increased 7.1% as reported. Domestic custom upholstery pricing helped improve wholesale margins. First-half results included a $0.390 million inventory charge related to exiting the juvenile furniture line.
- Zenith logistics revenue declined 5.4% in the quarter, principally because it discontinued home-delivery services to third-party customers. First-half revenue declined 1.9% as reported.
- Operating cash use in the first half reflected working-capital movements, including investment in inventory associated with store openings. Management cited expected lower capital expenditures as store expansion slows and said available liquidity should fund operations for the foreseeable future.
- The company plans a Princeton store opening in fourth-quarter 2019, a Thornton opening and Palm Beach relocation in first-quarter 2020, and expects to significantly reduce the pace of store-network expansion afterward. A Bassett-branded Lane Venture outdoor line was planned for stores in first-quarter 2020. No numerical earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- Twenty-three employees accepted an early-retirement offer. The income statement reports a first-half charge of $0.835 million; the related unpaid obligation was $0.733 million at June 1. The MD&A also describes the charge as $0.733 million, so the charge and liability descriptions are not fully consistent in the filing.
- Future minimum operating lease payments were $187.7 million. Bassett also guaranteed $1.886 million of licensee lease obligations; management said related risks are mitigated but noted possible losses if licensees default and recovery or sublease income is insufficient.
- Management identified risks from consumer demand and housing conditions, store profitability, tariffs and trade restrictions, raw-material and freight costs, labor, credit availability, technology systems, and logistics operations. It warned that retail real estate values could be impaired if stores close or property markets weaken.
- The company reported ongoing legal and environmental matters, but said their resolution was not expected to materially adversely affect financial position or future results. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
- Adoption of the new revenue standard had no material financial impact. The company expected adoption of lease accounting standards in fiscal 2020 to have a material effect on the balance sheet.
Important facts for investors to verify
- Whether comparable-store sales and written-sales trends improve, and whether price increases offset tariff, freight and other cost pressures.
- Whether retail margins recover and new and repositioned stores achieve expected sales and profitability.
- The drivers of negative first-half operating cash flow and the pace of inventory, capital-expenditure and store-expansion spending.
- The early-retirement charge versus liability amounts, given the differing charge figures cited in the statements and MD&A.
- The eventual balance-sheet impact of lease-accounting adoption and the exposure represented by lease commitments and licensee guarantees.