Bassett Furniture Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended May 27, 2017; comparable periods ended May 28, 2016. Unaudited. Unless noted otherwise, dollar amounts below are in millions.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and its Bassett Home Furnishings (BHF) stores; its Zenith subsidiary provides logistics services. At quarter-end, the network had 62 company-owned and 29 licensee-owned stores. More than 70% of products sold were manufactured or assembled and finished in the U.S., according to the company.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $114.1 | $106.7 | $220.0 | $213.5 |
| Operating income | $7.6 | $5.9 | $12.3 | $11.6 |
| Operating margin | 6.7% | 5.5% | 5.7% | 5.5% |
| Net income | $5.8 | $3.4 | $8.7 | $6.6 |
| Diluted EPS | $0.54 | $0.31 | $0.81 | $0.61 |
| Operating cash flow | — | $9.5 | $11.0 |
- Quarterly furniture and accessories revenue grew 7.9% to $100.3 million; logistics revenue increased 1.1% to $13.8 million. For the first half, furniture and accessories revenue rose 4.6% to $194.0 million, while logistics revenue fell 7.5% to $26.0 million.
- Wholesale segment sales increased 4.0% in both periods. Its operating margin improved to 7.7% for Q2 from 7.2%, and to 8.6% for the first half from 7.3%, reflecting higher sales, fixed-cost leverage and improved first-half product margins.
- Company-owned retail sales rose 8.4% in Q2 and 4.2% in the first half. Comparable-store sales increased 6.3% and 3.7%, respectively. Retail operating income was $1.4 million in Q2 versus $0.4 million, but just $0.02 million for the first half versus $0.7 million, reflecting losses from newer stores and pre-opening costs.
- Logistics operating income rose to $0.8 million in Q2 from $0.7 million, but fell to $0.6 million for the first half from $1.4 million. First-half segment revenue declined 3.2%; lower freight and warehouse revenue and higher fleet-related costs affected performance.
Financial position and cash
- At May 27, cash and cash equivalents were $29.8 million and short-term investments were $23.1 million, together $52.9 million, versus $58.3 million at November 26, 2016. Current assets were $139.1 million and current liabilities $71.6 million.
- Total debt carrying value was $4.0 million, including $3.3 million current; principal outstanding, before discount, was $4.0 million. The company repaid the annual $3.0 million Zenith acquisition-note installment during the first half.
- Operating cash flow was $9.5 million, investing cash outflow $5.9 million, and financing cash outflow $8.9 million. Capital expenditures were $9.2 million and cash dividends paid were $5.4 million. Cash decreased $5.3 million from the start of the fiscal year.
- The unsecured $15 million credit line matures in December 2018. Letters of credit used $1.972 million of the line, leaving $13.028 million available; another $0.511 million of standby letters of credit was outstanding. The company reported compliance with credit covenants.
- Future minimum operating lease payments were $160.9 million; contingent licensee lease guarantees totaled $1.4 million. These commitments are significant relative to reported debt.
Material changes, outlook and risks
- Reported earnings included a $3.267 million gain from selling a long-held investment for $3.592 million cash, and a noncash $1.084 million impairment charge on a leased real-estate property. These items increased pretax income by a net $2.183 million; reported profit growth therefore includes a material non-operating benefit.
- The company acquired a former licensee’s Columbus, Ohio store for $0.655 million; the acquisition’s reported impact was not material. It opened stores in Garden City, Culver City and King of Prussia during the first half and closed an underperforming company store in Danbury.
- Management expected approximately $2.0 million of additional new-store pre-opening costs and post-opening losses in fiscal 2017 compared with 2016. Planned openings and a repositioning were listed through 2018; management also planned to close three additional stores by the end of Q1 2018. No full-year revenue or earnings guidance was disclosed in the provided filing text.
- Management attributed lower first-half operating cash flow mainly to increased inventory and lower customer deposits, and said available cash and investments were sufficient to fund operations for the foreseeable future.
- Risks identified include consumer demand and housing-market conditions, retail traffic, competition, store profitability, raw-material and fuel costs, supply-chain disruption, domestic manufacturing concentration, logistics operations, and possible impairment of retail real estate. The company noted that a recovery in home construction could raise wood and fabric costs; fuel exposure is partly managed through customer surcharges.
- Legal and environmental matters arise in the ordinary course; management did not expect their resolution to materially adversely affect financial position or future results. Disclosure controls were deemed effective at a reasonable-assurance level, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the Q2 and first-half earnings improvement is repeatable apart from the investment-sale gain and real-estate impairment.
- Whether retail openings can reach profitability as planned, given the first-half retail segment’s near break-even result and disclosed startup losses.
- Whether logistics revenue and margins recover after the first-half decline, and how fleet costs and third-party customer demand develop.
- Working-capital trends, particularly inventory growth and customer deposits, alongside capital spending, dividends and near-term debt maturities.
- The implications of the $160.9 million operating-lease commitment and licensee lease guarantees, including the scheduled adoption of lease accounting guidance that the company expected to materially affect its balance sheet.