Bassett Furniture Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Third quarter and nine months ended August 27, 2016; comparisons are with the periods ended August 29, 2015. Unaudited figures below are in millions of dollars unless stated otherwise. Bassett designs, manufactures, sources, sells and distributes home furnishings through wholesale channels and company-owned and licensed stores. It also operates Zenith Freight Lines, a logistics business acquired in 2015.
Financial performance
| Metric | Quarter 2016 | Quarter 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $104.7 | $111.0 | $318.3 | $315.4 |
| Operating income | $7.5 | $7.7 | $19.2 | $17.3 |
| Income before taxes | $6.9 | $7.2 | $17.3 | $23.9 |
| Net income | $4.2 | $4.3 | $10.8 | $14.8 |
| Diluted EPS | $0.38 | $0.39 | $0.99 | $1.36 |
| Operating margin | 7.2% | 6.9% | 6.1% | 5.5% |
- Quarter revenue decreased 5.7%, as furniture and accessories revenue fell 5.8% and logistics revenue fell 4.7%. Nine-month revenue increased 0.9%, largely reflecting a longer period of consolidated Zenith results in 2016.
- Quarter net income was nearly flat; nine-month net income declined 26.9%. The 2015 comparison included a $7.2 million noncash Zenith remeasurement gain and $1.1 million of CDSOA distributions. These prior-period items help explain the year-to-date earnings decline.
- Wholesale operating income rose to $5.6 million in the quarter and $14.4 million year to date. The quarter’s 35.4% wholesale gross margin included a $1.4 million antitrust settlement benefit; excluding it, management reported a 33.0% margin. Retail operating income fell to $0.8 million for the quarter and $1.5 million year to date. Logistics operating income was $0.7 million for the quarter and $2.1 million year to date.
- Comparable company-store sales declined 0.9% in the quarter and increased 0.3% year to date. Comparable-store written sales, which precede delivery and revenue recognition, increased 7.9% in the quarter but declined 0.5% year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $19.0 million, versus $13.3 million a year earlier. Capital expenditures were $19.0 million, up from $11.3 million; operating cash flow less capital expenditures was approximately break-even.
- Cash and cash equivalents were $28.1 million at August 27, 2016, down from $36.3 million at fiscal year-end. Cash plus short-term investments totaled $51.2 million. Current assets were $135.4 million and current liabilities $67.7 million.
- Debt principal was $14.2 million, including $5.1 million due within one year. The company had a $15 million unsecured credit facility maturing in December 2018, with $13.0 million available after standby letters of credit; Bassett reported covenant compliance.
- Dividends paid were $5.2 million and share repurchases were $4.0 million during the nine months. The repurchase plan had $13.9 million remaining authorization at quarter-end.
- Future minimum operating lease payments totaled $152.9 million. Contingent obligations for licensee lease guarantees were $2.1 million.
Management outlook, risks and unusual items
- Management said available cash and investments were sufficient to fund operations for the foreseeable future and expected to meet debt maturities using operating cash flow or cash on hand. No specific earnings or revenue guidance was provided.
- Bassett had 91 branded stores at quarter-end: 59 company-owned and 32 licensee-owned. It opened two stores and closed three during the first nine months; it expected three additional openings and one relocation in fiscal 2017, subject to lease completion. Management noted new stores can generate start-up losses, typically $0.3–$0.5 million each.
- Wholesale sales were pressured by weaker open-market shipments, the loss of a significant customer and discontinuation of the HGTV Home Collection wood line. Management cited soft furniture retail demand and warned that the Hanjin Shipping bankruptcy could contribute to higher ocean-container rates and pressure imported-product margins.
- Other risks include consumer demand and retail traffic, competition, raw-material and fuel costs, store profitability, import supply-chain disruption, and potential impairment of retail real estate. Management said legal and environmental matters were not expected to have a material adverse effect, based on information then available.
- The $1.4 million antitrust settlement was recognized in current-period wholesale cost of sales. The company adopted ASU 2016-09 early, including recognition of excess stock-compensation tax benefits in income tax expense; management said the effects were not significant, but could add future effective-tax-rate volatility.
- Disclosure controls were judged effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of the improvement in wholesale margins and operating income persists after excluding the one-time $1.4 million settlement.
- Whether retail comparable-store sales, written sales and store-level profitability improve, and how new-store costs affect results.
- Zenith’s demand, margins and operating costs, and the impact of freight-rate changes on imported-product economics.
- Capital expenditure needs, cash generation, scheduled debt repayments and the company’s ability to sustain dividends and repurchases.
- The filing gives different totals for standby letters of credit with another bank: $0.381 million in a note and $0.356 million in MD&A. Verify the correct amount.