Bassett Furniture Industries, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended November 29, 2014. Amounts below are in USD millions unless otherwise noted. Fiscal 2013 included 53 weeks; fiscal 2014 included 52 weeks.
Business context and reporting period
Bassett designs, sources, manufactures, wholesales and retails mid-priced home furnishings. Its 94 Bassett Home Furnishings stores comprised 60 company-owned and 34 licensee-owned locations. Operations are reported in Wholesale, Retail and Investments and Real Estate segments. Products are sold through Bassett stores and other furniture retailers; approximately 42% of wholesale sales were imported in 2014.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $340.7 | $321.3 |
| Gross profit / gross margin | $182.4 / 53.5% | $166.0 / 51.7% |
| Operating income / operating margin | $15.1 / 4.4% | $10.0 / 3.2% |
| Net income | $9.3 | $5.1 |
| Diluted EPS | $0.87 | $0.47 |
| Cash from operations | $30.0 | $10.6 |
| Capital expenditures | $18.4 | $14.7 |
- Sales rose 6.1% as reported and 8.1% on an average-week basis, reflecting additional company stores and higher wholesale shipments outside the Bassett store network. The 2014 fourth quarter produced sales of $94.7 million, net income of $3.6 million and diluted EPS of $0.35.
- Wholesale operating income was $14.1 million, up from $10.9 million; company-owned retail stores recorded an operating loss of $0.5 million, improved from a $1.5 million loss. Comparable-store delivered sales increased 3.7% as reported, or 5.7% on an average-week basis.
- Cash and cash equivalents were $26.7 million, with $23.1 million in short-term investments, for combined liquidity of $49.8 million. The current ratio was 2.03.
- Total real estate notes payable were $2.2 million. A $15 million revolving credit facility had $14.8 million available after standby letters of credit; the company reported covenant compliance. Future minimum operating lease payments were $92.6 million.
- Total assets were $240.7 million and stockholders’ equity was $156.8 million. Cash dividends declared were $0.48 per share, including a $0.20 special dividend; the company repurchased approximately 404,300 shares for $5.6 million.
Material changes versus the prior comparable period
- Gross margin increased 1.8 percentage points and operating margin increased 1.2 points. Management attributed operating improvement primarily to better wholesale margins and retail pricing, partly offset by costs of new and relocated stores.
- Operating cash flow increased to $30.0 million from $10.6 million, which management attributed mainly to improved operating performance and working-capital management.
- Retail sales growth included six new company-owned stores opened during the year. Comparable-store sales grew more slowly than in 2013 on a reported basis; weekly comparable growth was broadly similar year over year.
- Net income increased from $5.1 million to $9.3 million. Fiscal 2014 included $0.8 million in life-insurance death benefits and $0.3 million in gains from partial Fortress liquidation. The 2013 comparison included a $0.4 million real-estate impairment; 2012 results included a $9.0 million CDSOA distribution and a substantial deferred-tax valuation-allowance reversal, making those earlier earnings less comparable.
Outlook, commentary, risks and unusual items
- Management expected three to five new stores in 2015 and approximately $18 million of capital expenditures, primarily for new and remodeled stores. It also planned Bassett Baby and Kids, Bench Made dining furniture and an imported wood assortment refresh; related product-development start-up costs were expected to affect 2015 results.
- Year-end wholesale backlog was $13.6 million and retail orders awaiting delivery were $30.2 million. Management expected to fulfill the wholesale backlog during fiscal 2015, mostly in the first quarter.
- On January 21, 2015, Bassett announced its intention to acquire the remaining 51% of Zenith Freight Lines for a stated value of $20 million, payable in cash and Bassett common stock over three years; closing was expected in fiscal 2015’s first quarter.
- Key risks include sensitivity to housing conditions and consumer demand, intense retail competition, raw-material and freight-cost volatility, overseas sourcing and shipping delays, and the performance and creditworthiness of licensees. Two licensees accounted for approximately 24% of customer-related credit exposure after reserves.
- Bassett had $3.2 million of contingent exposure under licensee lease guarantees, in addition to substantial operating lease commitments. It also described the Ward Transformer Superfund matter; it had spent approximately $1.0 million on remediation and intended to seek recovery of amounts it believed exceeded its share. Management did not expect known legal or environmental matters to materially harm financial position or results.
- The company’s fiscal 2012 and 2013 tax returns were under IRS examination. Its financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store momentum and wholesale margin gains continue, and whether company-owned stores reach sustained profitability.
- Whether planned 2015 openings, product launches and approximately $18 million of capital spending meet expected returns without materially increasing start-up costs.
- The terms, funding and completed closing of the announced Zenith acquisition, including its effect on liquidity and share count.
- Licensee credit quality, lease guarantees and the company’s lease burden; the filing gives different guarantee figures in different disclosures ($3.164 million in the lease note and $3.296 million in the commitments table).
- The sustainability of earnings and cash generation, including the effects of unusual income items, taxes, working capital, dividends and repurchases.