Bassett Furniture Industries, Inc. — Q1 2014 Form 10-Q
Reporting period: Quarter ended March 1, 2014. Unless stated otherwise, dollar amounts below are in millions. The quarter contained 13 weeks, compared with 14 weeks in the prior-year quarter, so reported year-over-year comparisons are affected by the extra prior-year week.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $75.647 | $79.849 |
| Gross profit / gross margin | $40.253 / 53.2% | $41.360 / 51.8% |
| Operating income | $1.086 | $2.364 |
| Other income (loss), net | $0.285 | $(0.668) |
| Net income | $0.843 | $0.980 |
| Diluted earnings per share | $0.08 | $0.09 |
| Operating cash flow | $5.338 | $1.968 |
| Capital expenditures | $6.899 | $2.621 |
- On an average-week basis, consolidated sales increased 2.0%; reported sales fell 5.3% due in part to the shorter quarter. Operating income declined $1.278, with management citing higher new-store costs, lower wholesale margins, and reduced fixed-cost leverage.
- Wholesale sales were $51.086 million, with a 32.4% gross margin and $2.348 million operating income. Average weekly sales rose 2.0%, while wholesale gross margin fell from 33.4%, mainly due to wood product mix and discounting discontinued products.
- Company-owned retail sales were $47.124 million; the segment recorded a $1.772 million operating loss versus a $0.571 million loss. Average-week comparable delivered sales rose 0.6%, while written comparable sales declined 1.6%. Retail gross margin improved to 50.2%, but new-store and ongoing overhead costs weighed on results.
- Other income included $0.662 million of life-insurance death benefits and a $0.140 million gain from partial liquidation of the Fortress investment. Zenith equity income was $0.065 million, down from $0.114 million.
Balance sheet, liquidity and capital allocation
- At March 1, cash and cash equivalents were $14.526 million and short-term investments were $23.125 million, totaling $37.651 million. Cash increased $1.793 million during the quarter.
- Current assets were $121.823 million and current liabilities were $51.743 million. Total assets were $226.037 million; stockholders’ equity was $157.679 million.
- Real-estate notes payable totaled $2.678 million. The $15 million bank credit facility had $13.634 million available after $1.366 million of standby letters of credit; no other line borrowing is reported. The company said it was compliant with covenants and expected to remain so.
- Operating cash flow improved by $3.370 million, which management attributed primarily to working-capital management. Investing activities used $0.444 million and financing activities used $3.101 million, principally for dividends and share repurchases.
- Cash dividends paid were $2.828 million; the declared dividend was $0.06 per share. Share repurchases were $0.287 million, with $11.340 million remaining authorized.
Changes, outlook and risks
- The company had 93 Bassett Home Furnishings stores at quarter-end: 59 company-owned and 34 licensee-owned. Four company-owned stores opened during the quarter. Management planned approximately $5.5 million of additional capital expenditures for store openings and relocations during the remainder of 2014, and expected a slower pace of openings and relocations after 2014.
- Management said new stores typically incur $0.3–$0.4 million in start-up losses and generally are expected to reach retail break-even within 12 months. Store openings, pre-opening costs and early operating losses contributed to this quarter’s weaker operating income.
- Management cited severe weather, particularly in the Mid-Atlantic and Northeast, as a possible drag on store deliveries, written sales and shipments to the Bassett store network. Retail backlog was $26.515 million, up from $23.788 million a year earlier; wholesale backlog was $13.785 million, down from $14.193 million.
- Risks include competition and consumer demand, raw-material and sourced-product costs, import supply-chain disruption, store performance, and possible impairment of retail real estate. The company also has $100.947 million of future minimum operating lease payments and $3.578 million of contingent licensee lease guarantees.
- Legal and environmental matters were described as ordinary-course items not expected to materially affect financial position or future results. A potential challenge to the company’s $9.010 million prior CDSOA duty distribution remained possible, though management considered repayment risk remote. The IRS notified the company after quarter-end that its fiscal 2012 tax return was selected for review.
- The filing provides no numerical full-year earnings or revenue guidance. The company said its cash and short-term investments were sufficient to fund operations for the foreseeable future. Disclosure controls were judged effective at a reasonable assurance level, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Compare sales and margins on a consistent weekly basis, given the 13-week versus 14-week quarters, and monitor whether retail comparable written sales recover.
- Track whether new stores reach the stated break-even timeframe and whether planned expansion spending remains near the disclosed amount.
- Assess sustainability of operating cash flow and liquidity after capital expenditures, dividends, and repurchases.
- Monitor wholesale margin trends, inventory reserves, weather-related demand, and exposure to raw-material and import costs.
- Follow the IRS review, CDSOA distribution matter, lease commitments and guarantees, and potential retail real-estate impairment exposure.