BASSETT FURNITURE INDUSTRIES INC annual report, FY2016

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Bassett Furniture Industries, Inc. — FY2016 Form 10-K

Reporting period: Fiscal year ended November 26, 2016 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; it also provides fourth-quarter results. Unless stated otherwise, amounts below are in U.S. dollars.

Business context

Bassett designs, manufactures, sources, markets and retails branded home furnishings through wholesale channels, 59 company-operated Bassett Home Furnishings stores, 31 licensed stores, and its wholly owned logistics subsidiary Zenith Freight Lines. About 69% of wholesale sales were domestic products; the company reported that more than 65% of products sold were manufactured in the United States.

Financial and operating performance

  • Revenue: Consolidated net sales were $432.0 million, up 0.3% from $430.9 million. Furniture and accessories revenue declined 2.6% to $377.2 million; logistics revenue rose to $54.8 million from $43.5 million. Fiscal 2015 included only about ten months of consolidated Zenith operations, limiting comparability.
  • Profit: Operating income increased 8.5% to $28.2 million; operating margin rose to 6.5% from 6.0%. Net income fell 22.5% to $15.8 million from $20.4 million, and diluted EPS declined to $1.46 from $1.88. The prior year included a $7.2 million non-cash Zenith remeasurement gain; 2016 operating income included a $1.4 million polyurethane-foam litigation settlement benefit.
  • Segments: Wholesale sales fell 4.7% to $240.3 million, while operating income improved to $18.7 million and margin to 7.8%. Company-owned retail sales rose 2.1% to $254.7 million, but operating income declined to $4.3 million from $6.2 million. Comparable-store delivered sales increased 1.4%; comparable-store operating margin slipped to 3.0% from 3.4%. Logistics revenue was $95.7 million before intercompany eliminations; operating income was $3.5 million versus $3.5 million for the shorter post-acquisition period in 2015.
  • Fourth quarter: Revenue was $113.8 million, operating income $9.0 million, net income $5.0 million and diluted EPS $0.47. The comparable 2015 quarter reported revenue of $115.6 million, operating income of $8.7 million, net income of $5.7 million and diluted EPS of $0.52.
  • Cash flow and investment: Cash provided by operations was $39.1 million, compared with $34.4 million. Investing used $20.8 million, including $21.5 million in capital expenditures; financing used $19.4 million. Cash and cash equivalents declined $1.1 million to $35.1 million. Cash plus short-term investments totaled $58.3 million.
  • Liquidity and debt: Current assets were $140.6 million and current liabilities $77.0 million; the reported current ratio was 1.83. Notes payable had $7.2 million principal outstanding ($7.1 million net carrying value), including $3.4 million due within one year. The $15 million unsecured credit line had $13.0 million available after standby letters of credit; the company reported covenant compliance. Long-term debt on the balance sheet was $3.8 million.
  • Margins and balance sheet: Wholesale gross margin improved to 34.7% from 33.1% (34.1% excluding the litigation settlement). Retail gross margin was 49.7% versus 50.1%. Total assets were $278.3 million and stockholders’ equity $180.7 million. Inventory declined to $53.2 million from $59.9 million.
  • Shareholder returns: Fiscal 2016 dividends were $0.68 per share, comprising $0.38 regular and $0.30 special. The company repurchased 254,450 shares for $6.4 million.

Material changes and management commentary

  • Wholesale sales weakness reflected a 13% decline in open-market shipments, including the end of a significant customer relationship and exit from the HGTV Home Collection brand. Shipments to Bassett’s own store network were approximately flat.
  • Wholesale margin benefited from favorable ocean freight and less discounting; the litigation settlement also contributed. Retail margins were pressured by clearance discounting and reducing imported wood furniture floor space to make room for upholstery.
  • Company-owned retail sales growth included a 1.4% increase in comparable-store sales. Retail segment profit fell amid lower comparable-store margin and higher losses at non-comparable stores, including store closures and new-store start-up costs.
  • Wholesale year-end backlog increased to $22.1 million from $17.1 million; retail backlog rose to $32.8 million from $31.9 million. Management expected most wholesale backlog to ship in the first quarter of fiscal 2017.

Outlook, risks and contingencies

  • Management planned at least six company-owned store openings in fiscal 2017, including four locations with signed leases, and expected approximately $2 million more in new-store pre-opening costs and post-opening losses than in 2016. It forecast about $20 million of fiscal 2017 capital expenditures for stores, manufacturing facilities and logistics equipment.
  • Management said existing cash and operating cash flow should fund foreseeable capital and working-capital needs. This is an outlook, not a guarantee; no earnings or revenue guidance was provided.
  • Key risks include cyclical consumer demand and housing conditions, intense retail and online competition, imported-product exposure and shipping delays, raw-material and fuel cost volatility, licensee credit and lease guarantees, logistics operating risks, and reliance on IT systems and customer-data security.
  • Future minimum operating lease payments totaled $149.3 million. Contingent licensee lease guarantees were $1.9 million. The company reported ordinary-course legal and environmental matters, but did not expect their resolution to materially affect financial position or future results. It also noted customer concentration in logistics: one customer generated about 36% of logistics revenue.
  • Unusual items affecting comparability include the $1.4 million litigation settlement in 2016, $0.24 million of CDSOA income in 2016 versus $1.16 million in 2015, and the $7.2 million Zenith remeasurement gain in 2015. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Whether wholesale open-market sales stabilize after the customer relationship and brand exit, and whether the higher backlog converts to shipments as expected.
  • Comparable-store sales, retail margins and the profitability and ramp-up pace of planned store openings.
  • Zenith’s ability to grow third-party logistics revenue and reduce reliance on its largest customer while maintaining margins.
  • Cash generation relative to planned capital spending, debt maturities, dividends, repurchases and substantial lease commitments.
  • The extent to which reported 2016 operating improvement depends on the one-time litigation settlement and favorable freight or discounting factors.