Bassett Furniture Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended August 31, 2019. Fiscal 2019 is a 53-week year; the first nine months include 40 weeks, compared with 39 weeks in the prior-year period. Financial amounts below are in millions of dollars unless noted.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels, company-owned and licensed Bassett Home Furnishings stores, and its Zenith logistics subsidiary. At quarter-end, the network included 71 company-owned and 33 licensed stores. More than 75% of products sold are manufactured in the United States.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $109.4 | $113.0 | $338.5 | $340.2 |
| Operating income | $3.4 | $4.3 | $5.1 | $12.0 |
| Income before taxes | $3.1 | $3.8 | $4.5 | $10.7 |
| Net income | $2.2 | $2.9 | $3.2 | $6.3 |
| Diluted EPS | $0.21 | $0.28 | $0.31 | $0.59 |
- Quarterly revenue declined 3.1%; operating income fell 21.4% and net income fell 26.8%. Operating margin was 3.1%, versus 3.8%.
- Nine-month revenue was down 0.5%, but operating income declined 58.0% and net income 49.2%. Operating margin was 1.5%, versus 3.5%. The 2019 period contains one additional week.
- Quarterly furniture and accessories revenue was $98.4 million, down 1.4%; logistics revenue was $11.1 million, down 16.0%. Nine-month furniture and accessories revenue rose 1.0%, while logistics revenue fell 11.3%.
- Wholesale segment operating income was $3.0 million for the quarter and $10.4 million year to date. Retail operations recorded losses of $0.4 million and $6.4 million, respectively; logistics operating income was $0.6 million and $1.6 million.
- Wholesale gross margin improved to 34.5% in Q3 from 33.3%, helped by lower raw-material costs, manufacturing efficiencies and freight savings. Retail gross margin was 52.1% in Q3, unchanged, but was 50.9% for nine months versus 51.6%.
- Cash from operations was negative $2.1 million for the first nine months, versus positive $11.6 million a year earlier; Q3 operating cash flow was positive $6.9 million. Capital expenditures were $10.7 million.
- Cash and cash equivalents were $14.6 million and short-term investments $17.6 million at August 31, totaling $32.3 million. Current assets were $131.8 million and current liabilities $65.7 million.
- No material notes payable remained: $0.3 million of real-estate mortgages were paid in Q3. The $25 million unsecured credit facility matures December 2021; $22.2 million remained available after standby letters of credit. The company said it was in compliance with covenants.
- Dividends were $0.125 per share for Q3. Nine-month share repurchases totaled $6.8 million; $11.1 million remained authorized under the repurchase plan.
Material changes, outlook and risks
- Comparable company-store sales fell 6.5% in Q3 and 7.2% for the first nine months; comparable written sales declined 8.7% and 6.3%, respectively. Year-to-date comparable-store sales fell 9.5% on an average-week basis.
- Management attributed retail pressure to lower store traffic and sales, fixed-cost deleveraging, warehouse and delivery inefficiencies, higher healthcare expenses, financing costs, tariffs affecting some upholstery fabric, and clearance activity. Q3 website visits increased 16% year over year.
- Wholesale Q3 shipments declined 1.8%, partly reflecting the continued exit from juvenile furniture and the transfer of accessory sourcing directly to stores and dealers. Management reported stronger custom upholstery shipments and increased Lane Venture shipments.
- Zenith revenue decreased following the discontinuation of third-party home-delivery services, partly offset by growth in third-party warehousing.
- The company recorded an $0.8 million early-retirement charge for 23 employees; $0.6 million remained unpaid at quarter-end. It also recorded a $0.4 million inventory valuation charge related to exiting the juvenile furniture line.
- Management expected sufficient liquidity for the foreseeable future, citing cash and investments, anticipated operating cash flows, reduced capital spending as store openings wind down, and credit availability. No specific earnings or revenue guidance was provided. Planned activity included a licensee store in Thornton, Colorado, and a company-store repositioning in Palm Beach, Florida; management said no further openings were planned after these, subject to future opportunities.
- Key risks identified include consumer demand and retail traffic, competition, housing and economic conditions, customer access to credit, tariffs and input costs, supply-chain and manufacturing interruptions, logistics operations, technology and information security, and potential impairment of retail real estate. Future minimum operating lease payments totaled $183.3 million; lease guarantees for licensees were $1.8 million. The company said pending legal and environmental matters were not expected to have a material adverse effect based on information then available.
- Adoption of the revenue standard had no material financial impact. The company expected the lease accounting standard, effective at the start of fiscal 2020, to materially affect the balance sheet.
Important facts for investors to verify
- Whether weak comparable-store sales and written orders improve, and whether retail segment losses narrow.
- Whether reported cash generation recovers after working-capital outflows and store-related investment.
- Whether wholesale margin gains persist and offset ongoing freight, labor, tariff and marketing costs.
- How the end of the store-expansion program affects capital spending, start-up losses and operating results.
- The eventual balance-sheet effect of lease accounting and the company’s exposure under lease commitments and licensee guarantees.