Bassett Furniture Industries, Inc. — Q3 FY2022 Form 10-Q
Business context and period. The quarter ended August 27, 2022; year-to-date figures cover the nine months ended that date. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. The former Zenith logistics segment is reported as discontinued operations following its sale to J.B. Hunt in February 2022. Amounts below are in millions unless stated otherwise.
Financial performance
- Quarter: Furniture and accessories sales were $118.0 million, up 12.5% year over year. Gross profit was $60.8 million and gross margin was 51.5%, up 130 basis points. Operating income was $10.7 million, including a $4.6 million real-estate sale gain; operating margin was 9.0%. Continuing-operations income was $7.8 million, or $0.84 per diluted share, versus $3.4 million, or $0.35, a year earlier. Net income was $7.6 million, or $0.82 per diluted share.
- Nine months: Sales were $364.6 million, up 15.2%. Gross profit was $184.1 million; gross margin was 50.5%, down 100 basis points. Operating income was $28.2 million, including the $4.6 million real-estate gain. Continuing-operations income was $19.8 million, or $2.08 per diluted share. Net income of $60.3 million, or $6.34 per diluted share, included a $53.1 million pretax gain on the Zenith sale; discontinued operations contributed $40.5 million after tax.
- Segment trends: Q3 wholesale sales rose 8.1%, but wholesale operating income fell to $1.6 million from $4.5 million as SG&A increased and margins remained pressured. Company-owned retail sales rose 21.0%; retail operating income increased to $4.5 million from $0.9 million. Retail gains reflected greater fixed-cost leverage, despite clearance activity.
- Cash flow and liquidity: Nine-month operating cash flow was negative $12.3 million versus positive $13.7 million in the prior year. Capital expenditures were $17.3 million. Cash increased $32.5 million to $66.9 million; short-term investments were $17.7 million, for combined cash and investments of $84.6 million. Investing cash flow of $74.1 million included $84.5 million of net Zenith-sale proceeds.
- Debt and obligations: The company reported no funded borrowings under its $25 million unsecured credit line; $3.9 million of standby letters of credit used the facility, leaving $21.1 million available. It was in compliance with covenants. The facility matures January 27, 2025. Disclosed lease obligations were approximately $104.9 million; lease guarantees for licensees totaled $1.9 million.
Material changes and management commentary
- Demand and order intake softened from the pandemic-era surge. Q3 wholesale orders declined 22% year over year; retail written sales fell 9.4%. At quarter-end, wholesale backlog was $41.7 million and retail backlog $60.0 million, both down from earlier 2022 levels but above pre-pandemic levels.
- Year-to-date gross margin pressure reflected higher raw-material, production and inbound freight costs, including fuel. Price increases partly offset costs, but order backlogs and fulfillment delays slowed the match between revised prices and manufacturing costs. Management said it was not then contemplating further price increases but would continue monitoring costs.
- Management expects reduced margins in Bassett Leather for the next two quarters while it reduces excess inventory received amid weakening demand. It also cited increased SG&A, including sales and marketing, compensation, logistics and warehouse costs.
- Cash from operations was pressured by $20.7 million of income-tax payments, largely associated with the Zenith sale, and lower customer-deposit collections as order pace slowed and retail backlog declined. Management believes liquidity is sufficient for the foreseeable future.
- Strategic plans include a multi-year digital transformation, a new e-commerce platform planned for 2023 and $3–$4 million of fiscal 2022 spending on digital initiatives. Bassett also planned additional regional fulfillment centers and new or relocated stores. In September 2022, it acquired Noa Home for an initial approximately $5.9 million, with potential additional payments tied to revenue and EBITDA goals.
- Key risks include weaker furniture demand and store traffic, inflation and supply-chain costs, sourcing and manufacturing disruptions, cybersecurity, possible store closures, and potential impairment of owned or leased real estate. Legal and environmental matters were described as ordinary-course matters not expected to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating performance from the $4.6 million real-estate gain and the $53.1 million pretax Zenith disposal gain when assessing earnings.
- Track order trends, backlog conversion and customer deposits as indicators of demand and future cash generation.
- Monitor wholesale margin recovery, especially Bassett Leather inventory and the effect of input, freight and logistics costs.
- Confirm cash generation after taxes, capital spending, dividends and repurchases; nine-month operating cash flow was negative despite the increase in cash.
- Review the terms and performance of the seven-year logistics services agreement with J.B. Hunt, Noa’s contingent payments, and lease and real-estate exposure.