BASSETT FURNITURE INDUSTRIES INC quarterly report, Q2 FY2013

Bassett Furniture Industries, Inc. — Q2 2013 Form 10-Q

Business context and period. The filing covers the unaudited quarter and six months ended June 1, 2013. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. The six-month 2013 period included 27 weeks, versus 26 weeks in the prior-year comparison; the company reports first-half sales growth of 21% on an average-weekly basis.

Financial performance

MetricQuarter ended June 1, 2013Six months ended June 1, 2013
Net sales$81.2 million; +20% year over year$161.1 million; +25% reported, +21% average weekly
Gross profit / margin$41.8 million / 51.5%, versus 52.9%$83.2 million / 51.6%, versus 52.4%
Operating income / margin$3.4 million / 4.2%, versus $1.6 million / 2.4%$5.8 million / 3.5%, versus $1.8 million / 1.4%
Net income$2.0 million, versus $8.0 million$2.9 million, versus $7.4 million
Diluted earnings per share$0.18, versus $0.71$0.27, versus $0.66

Dollar figures are rounded. Prior-year net income included $9.0 million of CDSOA income, a nonrecurring customs distribution. Operating income improved as sales rose, despite higher SG&A. The quarter’s lower gross margin reflected wood-product discounting and higher health-care costs; retail clearance activity also pressured retail margins. Wholesale first-half operating income was $5.9 million; retail reported a $0.3 million operating loss, improved from a $0.9 million loss.

Cash flow, liquidity and debt

  • Six-month operating cash flow was $2.8 million, compared with $8.3 million. Excluding the prior-year CDSOA distribution, management said operating cash flow increased $3.6 million, primarily due to improved operating income.
  • Cash and cash equivalents were $43.6 million at June 1, 2013, down from $45.6 million at November 24, 2012; short-term investments were $1.1 million. Current assets were $131.8 million and current liabilities $50.0 million.
  • Capital expenditures were $5.2 million; investing activities used $3.0 million and financing activities used $1.8 million, primarily for dividends. Six-month dividends were $0.10 per share.
  • Real-estate notes payable totaled $3.2 million, including the current portion; no bank borrowings were reported. The $15 million asset-secured credit facility had $13.0 million available after $2.0 million of standby letters of credit. The company said it complied with its covenants.

Changes, outlook and risks

  • Company-owned store sales rose 20% in the quarter; comparable-store delivered sales increased 9.3%. The company attributed improvement in part to HGTV co-branded design centers and advertising, design-consultant training and a better retail environment. There were 89 Bassett-branded stores: 55 company-owned and 34 licensed.
  • Management planned six new company-owned stores and five store repositionings during the nine months after June 1. Fiscal 2013 capital expenditures were expected to total $13–15 million, including $8–10 million for retail stores and about $2 million for IT. Fiscal 2014 spending was expected to be lower; no earnings or revenue guidance was provided.
  • Wholesale backlog was $15.2 million and retail backlog was $20.0 million, both above prior-year levels. Management cited increased business and product-receipt timing.
  • Colonial Trading’s $1.45 million judgment against Bassett was affirmed on appeal June 21, 2013. Bassett said reserves covered the judgment; Colonial’s attorney-fee motion remained pending, and Bassett was considering further review.
  • The appeal over the CDSOA distribution could potentially lead Customs to seek repayment of some or all of the $9.0 million received in 2012, although Bassett considered such recovery remote. A further $2.35 million of IHFC sale proceeds remained in escrow, with release expected in fiscal 2014 if not needed for contingencies.
  • Risks include consumer demand and retail traffic, store profitability and expansion, raw-material costs, import supply-chain execution, inventory obsolescence, commercial real-estate values, and potential obligations under $1.8 million of licensee lease guarantees. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control.

Important facts for investors to verify

  • Whether sales growth and comparable-store momentum persist, and whether retail operations achieve sustained profitability.
  • How margins respond to clearance activity, product mix, health-care costs, and wood, fabric and foam input costs.
  • Execution and returns on planned store openings, repositionings and the $13–15 million fiscal 2013 capital program.
  • Any further developments in the Colonial litigation, the CDSOA appeal, or release of the remaining IHFC escrow.
  • Cash generation, inventory reserves and performance of the licensee network and Zenith Freight Lines investment.