Bassett Furniture Industries, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended August 25, 2018; comparisons are with periods ended August 26, 2017. Dollar amounts below are in millions unless stated otherwise. Bassett operates wholesale furniture, company-owned retail stores, and Zenith logistics services. It had 96 Bassett Home Furnishings stores: 64 company-owned and 32 licensee-owned.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $113.0 | $114.3 | $340.2 | $334.3 |
| Operating income | $4.3 | $7.3 | $12.0 | $19.5 |
| Operating margin | 3.8% | 6.4% | 3.6% | 5.8% |
| Net income | $2.9 | $4.6 | $6.3 | $13.3 |
| Diluted EPS | $0.28 | $0.43 | $0.59 | $1.24 |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $11.0 | $14.7 |
- Q3 revenue fell 1.1%; nine-month revenue rose 1.8%. Furniture and accessories revenue was $99.8 million in Q3, down 0.3%, while logistics revenue was $13.1 million, down 6.8%.
- Profitability weakened: Q3 operating income fell 40.4% and nine-month operating income fell 38.3%. Nine-month net income also included a $2.0 million provisional deferred-tax remeasurement charge associated with U.S. tax reform.
- Wholesale operating margin was 5.2% for Q3 versus 7.2% a year earlier and 4.9% for the nine months versus 8.1%. Retail operating income was $0.9 million for Q3 and $1.0 million year to date; comparable-store sales declined 1.7% in Q3 and 0.3% year to date. Comparable-store written sales rose 0.2% in Q3 but fell 1.7% year to date.
- Cash and cash equivalents were $25.8 million, with $22.6 million of short-term investments, totaling $48.4 million at period end. Current assets were $140.3 million and current liabilities $72.3 million.
- Nine-month investing cash use was $25.2 million, including $15.6 million for the Lane Venture acquisition and $12.6 million of capital expenditures. Financing cash use was $14.0 million, including $7.5 million of dividends and repayment of the final $3.0 million Zenith acquisition-note installment. Cash declined $28.2 million to $25.8 million.
- Interest-bearing notes payable were $0.4 million, all current. The $15 million unsecured credit facility had $13.6 million available after standby letters of credit; it was due to mature in December 2018. Bassett reported compliance with its covenants and expected to replace the facility on substantially similar terms.
Material changes versus the prior comparable periods
- SG&A rose 3.1% in Q3 and 6.6% year to date, outpacing revenue; it increased to 56.0% of revenue in Q3 from 53.7% and to 56.7% year to date from 54.1%. Management cited planned digital marketing and brand-development spending, as well as Lane Venture start-up and acquisition costs.
- Lane Venture, acquired in December 2017 for $15.6 million, contributed $3.2 million of Q3 wholesale revenue and $7.2 million year to date. It adds premium outdoor furniture and increased goodwill and intangible assets.
- Wholesale revenue growth included Lane Venture, while shipments to the Bassett store network declined 2.7% in Q3 and 3.1% year to date. Nine-month wholesale margin fell to 32.9% from 34.2%, reflecting higher materials costs and lower fixed-cost absorption in Custom Upholstery, as well as Lane Venture’s lower margins. Targeted upholstery price increases began in June, with management reporting margin benefits from July.
- Zenith’s Q3 operating income fell to $0.1 million from $1.2 million, primarily due to higher fuel costs and lower fixed-cost leverage. The company planned to discontinue Zenith’s final-mile service and transfer related assets and employees to Bassett retail deliveries; management expected this to reduce logistics-segment revenue by about 20%, but consolidated revenue by less than 1%.
Outlook, risks, and unusual items
- No consolidated earnings or revenue guidance is provided. The company described plans for store openings and relocations through 2019, and continued investment in digital capabilities and an order-management system. Future store locations and timing are plans, not assured outcomes.
- A 10% U.S. tariff on certain China-origin goods took effect September 24, 2018, after the reporting period, with a potential increase to 25% on January 1, 2019. Bassett said most products sold are U.S.-made or sourced from countries not subject to the tariffs, but planned targeted price increases to mitigate affected costs.
- Key risks include consumer demand and retail traffic, housing and economic conditions, competition, raw-material and fuel costs, tariffs and supply-chain disruption, store execution, technology and cybersecurity, and logistics operations. The company also cited potential impairment exposure in owned retail real estate and possible losses on $2.2 million of guaranteed licensee leases.
- Operating lease minimum payments totaled $185.8 million; these are commitments rather than reported debt. Legal and environmental matters were described as arising in the ordinary course, with no expected material adverse effect based on information then available.
- Other notable items: the company recorded $0.3 million of life-insurance proceeds during the first half and a $0.2 million gain on the sale of a retail property. In the prior-year nine-month period, results included a $3.3 million gain on sale of an investment, a $1.2 million retail-property gain, and a $1.1 million real-estate impairment.
- Management said the 2018 tax accounting remained provisional, including the $2.0 million deferred-tax remeasurement charge, and could be revised as the Tax Cuts and Jobs Act assessment was finalized.
Most important facts for investors to verify
- Whether upholstery price increases offset materials inflation and restore wholesale margins.
- Lane Venture’s post-acquisition revenue, margins, start-up cash needs, and final purchase-price allocation.
- Comparable-store sales and written-sales trends, including the profitability and ramp-up of recently opened stores.
- The effect of China tariffs and any resulting price changes, sourcing shifts, or demand response.
- Renewal of the credit facility due in December 2018 and ongoing covenant compliance.
- Final tax-reform accounting, cash-flow trends, and the company’s ability to fund planned store, technology, and capital investments while paying dividends.