Bassett Furniture Industries, Inc. — Form 10-Q
Reporting period: Quarter and six months ended May 31, 2014. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise. The six-month comparison is affected by a 26-week current period versus 27 weeks in the prior year.
Business context and results
Bassett designs, sources, manufactures, and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. At quarter-end it operated 60 Company-owned and 34 licensed stores.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $85.2m | $81.2m | $160.8m | $161.1m |
| Gross profit | $45.3m | $41.8m | $85.6m | $83.2m |
| Gross margin | 53.2% | 51.5% | 53.2% | 51.6% |
| Operating income | $3.9m | $3.4m | $5.0m | $5.8m |
| Net income | $2.6m | $2.0m | $3.4m | $2.9m |
| Diluted EPS | $0.24 | $0.18 | $0.31 | $0.27 |
Q2 revenue rose about 4.9% and operating income about 14.1% year over year. For the first half, reported sales were nearly flat; on an average-week basis, management reported consolidated sales growth of 3.7%. First-half operating income declined about 13.8%.
Segments and material changes
- Wholesale: Q2 sales increased to $56.2m from $53.9m; operating income rose to $4.3m from $2.8m. Management cited stronger upholstery margins, less discounting of discontinued wood products, and expense control. Shipments outside the Bassett store network increased 17% in Q2, while shipments to that network declined 4%.
- Company-owned retail: Q2 sales increased to $53.3m from $51.5m, primarily reflecting new stores; comparable-store sales were flat and written comparable-store sales declined 1.8%. The segment recorded a $0.7m operating loss versus $0.3m income. First-half retail operating loss widened to $2.4m from $0.3m, reflecting new-store startup costs, overlapping rent during relocations, and early operating losses.
- Consolidated Q2 operating improvement reflected wholesale performance, partly offset by higher retail expenses. First-half results also reflect five new store openings in 2014 versus two in the prior-year first half. Comparable-store gross margins improved, but higher store SG&A weighed on retail profitability.
- Q2 consolidated gross margin rose to 53.2% from 51.5%; first-half gross margin rose to 53.2% from 51.6%. SG&A and pre-opening costs increased, notably in retail.
Cash flow, liquidity, and debt
- First-half operating cash flow was $13.8m, versus $2.8m a year earlier; management attributed the improvement mainly to working-capital management and $1.3m of tenant-improvement funds.
- Cash and cash equivalents were $16.9m and short-term investments $23.1m at May 31, 2014, totaling $40.0m. Cash increased $4.1m during the half.
- Capital expenditures were $12.2m, primarily for store expansion, remodeling, and relocations. The company spent $2.9m on share repurchases and paid $3.5m in dividends during the half.
- Real-estate notes payable totaled $2.6m, including $0.3m current; the company reported no drawn bank borrowings. Its $15m secured credit line had $13.6m available after $1.4m of standby letters of credit. The company said it was covenant-compliant and expected to remain so.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. The company expected about $2m of additional capital spending during the remainder of fiscal 2014 and planned further store openings or relocations over the following six to nine months, with a slower pace after 2014. Management believes new stores generally reach retail break-even within 12 months, while noting typical startup losses of $0.3m–$0.5m per store.
- Q2 included a $0.2m tax benefit from removing a valuation allowance on New York net operating loss deferred tax assets. First-half other income included $0.7m in life-insurance death benefits and $0.2m from partial recovery of the previously impaired Fortress investment; future Fortress receipts remain uncertain.
- Risks highlighted include consumer demand and retail traffic, competition, store performance, raw-material costs (including wood, fabric, and petroleum-linked foam), imported-product supply chain execution, and potential impairment of retail real estate. Imported products were about 42% of wholesale sales in the first half, down from 47%.
- Future minimum operating lease payments were $97.7m; lease guarantees for licensees were $3.5m. Management said the guarantees’ fair value was not material and described mitigation measures. The company is involved in ordinary-course legal and environmental matters, which it believes will not materially adversely affect results. A Supreme Court petition seeks review of litigation concerning CDSOA distributions; Bassett considers repayment of its 2012 distribution remote but says a reversal could result in return of some or all of its share.
- The IRS was examining the federal tax return for fiscal 2012. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new and relocated stores improve sales and profitability enough to offset startup, occupancy, and ongoing SG&A costs.
- Comparable-store trends: Q2 delivered sales were flat, written sales declined 1.8%, and first-half normalized comparable sales were approximately flat.
- Whether strong operating cash flow is sustained, given the contribution from working-capital movements and tenant-improvement funds.
- Exposure to $97.7m of future lease payments, $3.5m of guaranteed licensee leases, and the carrying value of retail real estate.
- Developments in the CDSOA distribution litigation, the IRS examination, and recovery prospects for the Fortress investment.