Bassett Furniture Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Quarter ended February 24, 2018; comparative quarter ended February 25, 2017. Amounts are in thousands of dollars except per-share data.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company- and licensee-owned Bassett Home Furnishings stores. Its Zenith subsidiary provides logistics services. At quarter-end, the network included 93 stores: 63 company-owned and 30 licensee-owned. On December 21, 2017, Bassett acquired Lane Venture, a premium outdoor-furniture business, for $15.556 million in cash.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $110.272 million | $105.892 million | +4.1% |
| Furniture and accessories revenue | $96.123 million | $93.698 million | +2.6% |
| Logistics revenue | $14.149 million | $12.194 million | +16.0% |
| Operating income | $2.050 million | $4.664 million | −56.0% |
| Operating margin | 1.9% | 4.4% | −2.5 percentage points |
| Income (loss) before taxes | $1.423 million | $3.931 million | — |
| Net income (loss) | $(0.913) million | $2.861 million | — |
| Basic and diluted EPS | $(0.09) | $0.27 | — |
| Cash from (used in) operations | $(1.399) million | $2.077 million | — |
Gross margin on furniture and accessories was 60.8% of consolidated revenue, compared with 60.4% a year earlier (calculated from reported revenue and cost of furniture sold). SG&A rose 9.8% to $64.251 million, outpacing revenue growth. Segment operating results: wholesale income fell to $3.064 million from $5.893 million; company-owned retail reported a $1.513 million loss versus a $1.343 million loss; logistics improved to $0.330 million income from a $0.226 million loss.
Liquidity, debt and cash flow
- Cash and cash equivalents were $24.310 million at February 24, down from $53.949 million at November 25, 2017; short-term investments were $23.125 million. Cash plus short-term investments totaled $47.435 million.
- Current assets were $142.257 million and current liabilities $78.245 million, for working capital of $64.012 million and a current ratio of approximately 1.82.
- Cash declined by $29.639 million: operating use of $1.399 million, investing use of $19.514 million and financing use of $8.726 million. Investing included the $15.556 million Lane Venture purchase and $3.958 million of capital expenditures. Financing included $4.942 million of dividends and repayment of the final $3.0 million Zenith acquisition-note installment.
- Notes payable totaled $645, including $425 due within one year. The $15 million unsecured credit line matures in December 2018; $2.249 million was committed to standby letters of credit, leaving $12.751 million available. Bassett reported compliance with its covenants.
- Future minimum operating lease payments were $181.880 million. Contingent liabilities under licensee lease guarantees were $2.552 million.
Material changes, outlook and risks
- Revenue increased, but operating income declined as wholesale margins narrowed and SG&A increased. Wholesale gross margin fell to 32.4% from 35.2%, with management citing higher upholstery material costs and lower fixed-cost absorption, discounted casegoods, higher container freight costs, and Lane Venture startup and acquisition costs.
- Company-owned comparable-store sales rose 3.3%, and comparable-store operating income was $0.775 million versus a $0.086 million loss. However, written sales at comparable stores fell 2.5%. Company-owned retail overall remained loss-making, including $0.740 million of post-opening losses associated with recently opened stores.
- Zenith revenue rose 13.1%; improved middle-mile load efficiency and revenue per mile helped it return to operating profit, partly offset by higher fuel costs.
- The Tax Cuts and Jobs Act caused a $2.157 million discrete charge to remeasure deferred tax assets. Bassett reported a 164.2% effective tax rate and a $2.336 million tax expense despite pretax income of $1.423 million. The deferred-tax charge was provisional and subject to refinement; fiscal 2018’s blended federal statutory rate was stated as 22.2%.
- Management said available cash and investments were sufficient to fund operations for the foreseeable future. Store plans included openings in 2018; the company expected approximately $1 million more in new-store pre-opening costs and post-opening losses in 2018 than in 2017. It also planned technology, order-management and digital investments. These are stated plans, not earnings guidance.
- Risks cited include competition, economic and housing-market conditions, consumer demand and credit access, store execution, raw-material and fuel costs, technology and cybersecurity, import-supply-chain disruption, domestic manufacturing concentration, logistics operations, and possible impairment of real estate or costs under lease guarantees. Legal and environmental matters were described as ordinary-course matters not expected to materially harm financial position or future results.
Important facts for investors to verify
- Whether the provisional $2.157 million tax charge or other Tax Act effects change as Bassett finalizes its estimates.
- Whether wholesale margins recover from 32.4%, particularly given input, freight and fixed-cost pressures.
- Whether comparable-store written sales stabilize and new stores progress toward break-even amid planned expansion costs.
- Whether operating cash flow improves after the inventory-driven working-capital outflow and following the Lane Venture acquisition.
- Lane Venture’s final purchase-price allocation, performance and integration progress; its reported post-acquisition operating loss was $426, including acquisition costs.
- The December 2018 credit-facility maturity, lease commitments, and potential exposure from $2.552 million of licensee lease guarantees.