Bassett Furniture Industries, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. The quarter ended March 2, 2013 included 14 weeks, versus 13 weeks in the prior-year quarter ended February 25, 2012. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2013 | Prior comparable quarter |
|---|---|---|
| Net sales | $79.8 | $61.0 |
| Gross profit / margin | $41.4 / 51.8% | $31.7 / 51.9% |
| SG&A | $39.0 | $31.0 |
| Operating income / margin | $2.4 / 3.0% | $0.2 / 0.3% |
| Other loss, net | $0.7 | $1.2 |
| Net income (loss) | $1.0 | $(0.6) |
| Diluted earnings (loss) per share | $0.09 | $(0.05) |
| Operating cash flow | $2.0 | $(1.3) |
Sales and margins. Reported sales increased 31%; management said sales rose 22% on an average-weekly basis, adjusting for the extra week. Wholesale average-weekly sales increased 18%, and Company-owned comparable-store sales increased 7.6% on an average-weekly basis. Wholesale gross margin improved to 33.4% from 31.8%; retail gross margin eased to 47.8% from 48.1%. Consolidated gross margin was nearly flat. The operating improvement reflected increased wholesale and retail sales and the absence of prior-year restructuring and lease-exit charges ($0.5 million combined); higher SG&A partly offset the gains.
Cash, liquidity, and debt. Cash was $47.2 million at quarter-end, up $1.6 million from November 24, 2012. Operating cash flow was $2.0 million; investing activities provided $0.7 million and financing activities used $1.1 million, including dividends. Current assets were $132.0 million and current liabilities $52.2 million. Real estate notes payable totaled $3.2 million, including a $0.2 million current portion. The new $15 million bank line is secured by receivables and inventory; $2.0 million was outstanding under standby letters of credit, leaving $13.0 million available. The company reported compliance with facility covenants.
Other financial details. Capital expenditures were $2.6 million. Inventory was $57.8 million, broadly unchanged from fiscal year-end; the excess and obsolete inventory reserve increased to $1.4 million from $1.1 million. Dividends were $0.05 per share. The company received $2.3 million from release of an IHFC-sale escrow, with another $2.3 million remaining in escrow, expected to be released in fiscal 2014 if not used for contingencies.
Material changes and management commentary
- Company-owned store sales rose 29% as reported, including comparable-store growth and higher sales from non-comparable stores. Comparable written sales rose 11.6% on an average-weekly basis. The company operated 54 stores and had 33 licensee-owned stores at quarter-end.
- Wholesale shipments outside the Bassett store network increased 47% as reported, while shipments to the network rose 17%. Wholesale backlog increased to $14.2 million from $10.5 million a year earlier; management attributed the increase to business growth and timing of imported-product receipts.
- Retail backlog rose to $23.8 million from $16.3 million a year earlier. Management cited stronger business and timing of product receipts.
- Management said HGTV co-branded store design centers and targeted advertising contributed to improved comparable-store sales. The HGTV Home Collection represented about 3.5% of quarterly wholesale shipments, primarily for floor samples; 25 retailers with more than 80 floors carried the line.
- SG&A rose due to more Company-owned stores, planned higher marketing and advertising, and increased health-care costs. Management plans store repositioning and relocation work, including a Raleigh opening and a multi-year program to relocate many first-generation stores.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management described a positive long-term outlook but noted that consumer spending remained below pre-recession levels amid weak housing starts and economic uncertainty. It said the quarter’s results are not necessarily indicative of full-year results.
- Key risks include consumer demand and retail traffic, competition, customer access to credit, store-opening and profitability execution, sourcing and import-supply-chain performance, and fluctuations in raw-material, labor, and sourced-product costs.
- The company held $41.5 million of retail real estate, including Company-store properties and investment real estate. It warned that additional store closures or a weak commercial-property market could impair property values. It had guaranteed $1.9 million of licensee lease obligations.
- Colonial Trading litigation: a $1.4 million judgment was entered against Bassett; both sides appealed, and Colonial’s attorney-fee motion remained pending. Bassett said it had reserves sufficient for the existing judgment.
- A challenge to the CDSOA distribution remained on appeal. Customs could seek repayment of some or all of Bassett’s $9.0 million distribution if the court reverses the prior decisions.
- Future minimum operating-lease payments under non-cancelable leases totaled $74.7 million. The company also cited possible inventory write-downs if demand or market conditions deteriorate.
Important facts for investors to verify
- Assess growth on a comparable-week basis: the reported quarter had one more week than the prior-year quarter.
- Track whether wholesale and retail backlog converts into shipments and delivered sales, and whether growth supports sustained operating profitability.
- Monitor retail-store economics, store relocation and expansion costs, and the impact of continued marketing and health-care expense.
- Review inventory levels, reserve adequacy, and wholesale inventory turnover, which declined year over year.
- Follow outcomes of the Colonial appeal and CDSOA litigation, release of the remaining IHFC escrow, and any exposure under licensee lease guarantees.