Bassett Furniture Industries, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended November 25, 2017 (52 weeks). Unless stated otherwise, financial amounts below are in millions of dollars; the filing presents figures in thousands. The company designs, manufactures, sources, sells and delivers home furnishings through wholesale channels, 60 company-operated stores, 30 licensee-operated stores and its Zenith logistics subsidiary.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $452.5 | $432.0 | +4.7% |
| Operating income | $27.0 | $28.2 | -4.2% |
| Operating margin | 6.0% | 6.5% | -0.5 percentage points |
| Income before tax | $27.9 | $25.8 | +8.1% |
| Net income | $18.3 | $15.8 | +15.3% |
| Diluted EPS | $1.70 | $1.46 | +16.4% |
| Cash from operations | $36.4 | $39.1 | -$2.7 |
Fourth-quarter sales were $118.2 million, operating income $7.5 million, net income $5.0 million and diluted EPS $0.46. Compared with fourth-quarter 2016, sales rose about 3.9%, operating income declined about 16.8%, net income declined about 1.4%, and diluted EPS fell from $0.47.
- Sales and segments: Furniture and accessories revenue increased 5.5% to $398.1 million; consolidated logistics revenue was $54.4 million, down 0.8%. Wholesale segment sales rose 3.7% to $249.2 million, retail sales rose 5.3% to $268.3 million, and logistics segment revenue rose 2.0% to $97.6 million before intercompany eliminations.
- Margins and segment results: Wholesale operating margin was 7.7% versus 7.8%; its gross margin was 34.2% versus 34.7%, though FY2016 included a $1.4 million litigation settlement benefit. Retail gross margin improved to 50.6% from 49.7%, but retail operating income fell 19.5% to $3.5 million. Logistics operating income fell 15.6% to $3.0 million, with margin down to 3.0% from 3.7%.
- Cash, liquidity and debt: Year-end cash and cash equivalents were $53.9 million and short-term investments $23.1 million, totaling $77.1 million. The current ratio was 1.91. Debt principal was $3.7 million, largely due within one year; $12.8 million remained available on the $15 million credit line after standby letters of credit. The company reported compliance with facility covenants.
- Capital and shareholder returns: Capital expenditures were $15.5 million. Cash dividends paid were $7.7 million; declared dividends totaled $0.77 per share, including a $0.35 special dividend. FY2017 net cash increased $18.8 million.
Material changes and unusual items
- Sales increased, but operating income declined as SG&A and new-store costs rose. Comparable company-store sales increased 1.9% delivered and 1.8% written; the company cited improved pricing and product mix, alongside higher advertising, occupancy and legal costs.
- FY2017 included $4.2 million in gains from sales of investments and a $1.1 million impairment of retail real estate in other income/loss. Operating income included a $1.2 million gain on sale of the Las Vegas store. These items affected comparability and contributed to reported earnings.
- Cash provided by operations decreased from $39.1 million to $36.4 million, primarily due to working-capital changes. Investing outflow was $6.1 million, including $15.5 million of capital spending and proceeds from investment and property sales. Financing outflow was $11.4 million, including dividends and the annual Zenith acquisition-note payment.
- Operating lease commitments totaled $173.9 million; contingent obligations under licensee lease guarantees were $2.7 million. The company also reported $16.2 million of post-employment benefit obligations in its contractual commitments table.
Outlook, commentary and risks
- Management expected at least eight store openings in fiscal 2018 and planned further store growth and repositioning. It forecast fiscal 2018 capital expenditures of approximately $25–$30 million, primarily for stores, remodeling and logistics equipment. No earnings or revenue guidance was provided.
- The company planned investment in digital capabilities, including an order-management system, to improve its omnichannel customer experience. Management stated existing cash and operating cash flow should fund foreseeable capital and working-capital needs.
- After year-end, Bassett acquired Lane Venture operating assets for $15.6 million cash. The premium outdoor furniture business is to be included in wholesale; purchase-price allocation was preliminary.
- The December 2017 Tax Cuts and Jobs Act lowered the federal corporate tax rate from 35% to 21%. Management expected a significant fiscal 2018 tax-provision effect, including a one-time deferred-tax revaluation, but had not determined its net amount.
- Principal risks include cyclical consumer demand and housing conditions, intense and online retail competition, changing tastes, raw-material and freight costs, foreign sourcing and shipping disruption, information-security and systems risks, and driver, fuel and regulatory risks in logistics. One customer represented 33% of logistics revenue in FY2017, although no customer exceeded 10% of consolidated sales.
- The company disclosed ordinary-course claims and environmental matters and said, based on currently known facts, their resolution was not expected to materially affect financial position or results. The filing reported an unqualified audit opinion and effective internal controls.
Key facts for investors to verify
- Whether sales growth translates into improved operating income, particularly as new stores mature and retail operating costs rise.
- The recurring earnings and cash-flow picture excluding investment-sale and property-sale gains, impairments and other unusual items.
- Progress and returns from the planned store openings, digital investments and $25–$30 million fiscal 2018 capital program.
- Cash conversion, working-capital needs, near-term debt repayments, and the scale and duration of lease and licensee-guarantee obligations.
- Zenith’s customer concentration and profitability, Lane Venture integration and purchase accounting, and the actual tax impact of the Tax Cuts and Jobs Act.