Bassett Furniture Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended August 25, 2012. Unless noted otherwise, financial amounts are in millions of dollars; per-share amounts are in dollars.
Business context and reporting period
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and Bassett Home Furnishings stores. At quarter-end, it had 86 branded stores: 51 company-owned and 35 licensee-owned. The filing compares results with the quarter and nine months ended August 27, 2011.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $64.438 | $59.417 | $192.860 | $189.942 |
| Gross profit | $33.818 | $29.251 | $101.150 | $94.296 |
| Gross margin | 52.5% | 49.2% | 52.4% | 49.6% |
| Operating income (loss) | $0.766 | $(0.229) | $2.565 | $(21.730) |
| Net income | $2.371 | $0.417 | $9.817 | $54.709 |
| Diluted EPS | $0.21 | $0.04 | $0.88 | $4.72 |
Third-quarter sales increased 8.5%; nine-month sales rose 1.5%. Company-owned retail sales grew 22.5% in the quarter and 13.1% year to date; comparable-store sales increased 9.9% and 7.4%, respectively. Wholesale sales increased 6.9% in the quarter but declined 0.2% year to date. The company reported nine-month operating cash flow of $6.931, versus cash used of $12.334 in the prior-year period. Cash and equivalents were $57.967 at August 25, down from $69.601 at November 26, 2011; marketable securities were $3.206.
Inventory rose to $54.544 from $45.129, while annualized inventory turns fell to 2.5 from 3.0 and days supply increased to 162 from 124. Capital expenditures were $6.858 for the nine months. Total liabilities were $66.343; real-estate notes payable totaled $3.714. The $3.0 credit line primarily backed letters of credit, with $1.034 available at quarter-end. A subsequent bank commitment would increase the line to $15.0, secured by accounts receivable and inventory.
Material changes versus the prior period
- Quarterly operating results improved to income of $0.766 from a loss of $0.229; nine-month operating results improved to income of $2.565 from a loss of $21.730. Lower bad-debt charges and fewer restructuring and lease-exit costs contributed to the year-to-date improvement.
- Bad-debt and notes-receivable valuation charges fell to $0.416 for nine months from $13.116. Management said recent charges had averaged about $0.180 per quarter and considered that more indicative of future charges.
- Nine-month net income fell sharply from $54.709, reflecting the prior-year $85.542 gain from the IHFC sale. Current-year results included a $9.010 CDSOA distribution; neither item is representative of ordinary recurring operations.
- Retail growth and improved gross margin were accompanied by higher SG&A, mainly from additional company-owned stores and HGTV collection and showroom spending. Company-owned retail operations continued to report an operating loss.
Outlook, commentary, risks and unusual items
- Management cited weak housing starts, unemployment, fuel-price volatility and consumer uncertainty as ongoing pressures on furniture demand. It stated that the remaining licensee fleet was financially stronger and expected store closures or acquisitions to be less frequent than during the prior period of licensee distress. No specific earnings or revenue guidance was provided.
- Management said available cash and marketable securities were sufficient to fund operations for the foreseeable future. However, inventory investment, store growth, and cash returned to shareholders reduced cash during the period.
- After quarter-end, the board declared a special dividend of $1.25 per share, approximately $13.6 million, payable October 26, 2012. The company also repurchased $5.572 million of stock during the nine months.
- The $9.010 million CDSOA distribution could potentially be subject to repayment if a pending appeal is decided adversely. Management did not expect cessation or potential return of the funds to materially affect future liquidity or results.
- A jury returned a $1.354 million verdict for former vendor Colonial Trading. Motions to treble damages and recover attorney fees remained pending; no judgment had been entered. The company had reserves covering substantially all of the verdict amount.
- Other exposures include $74.911 million of future minimum operating-lease payments, $2.214 million of guaranteed licensee lease obligations, and a risk of retail real-estate impairment if store closures increase. Licensee concentration is also relevant: licensees accounted for 69% of gross accounts receivable, and 88% of the doubtful-account allowance was attributable to licensees.
- The company fully impaired its $0.806 million Fortress investment during the period. Tax benefits included releases of portions of deferred-tax valuation allowances and uncertain-tax-position reserves; the company still carried an $18.886 million valuation allowance against gross deferred-tax assets of $20.193 million.
Most important facts for investors to verify
- Whether retail sales growth can translate into sustained profitability, particularly as company-owned stores continued to generate operating losses.
- Whether inventory growth and slower turnover reflect planned product launches and store expansion or developing demand and obsolescence risks.
- The final outcome of the Colonial litigation, including any treble damages and attorney fees, and the CDSOA appeal and possible repayment exposure.
- The final terms and timing of the proposed $15 million credit facility, and the liquidity effect of the declared $13.6 million special dividend.
- Whether improved licensee credit quality and management’s estimated future bad-debt trend persist, given the concentration of receivables and notes receivable in licensees.