Bassett Furniture Industries, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended February 27, 2021. Amounts are in thousands of dollars except per-share data. The comparison is with the quarter ended February 29, 2020.
Business context
Bassett designs, manufactures, sources, and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. Its Zenith subsidiary provides logistics services. At quarter-end, the company had 97 Bassett Home Furnishings stores. The prior-year comparison quarter preceded the significant COVID-19 operating disruptions that began in Q2 FY2020.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $113.7 million | $112.1 million | Up 1.4% |
| Furniture and accessories revenue | $101.7 million | $98.9 million | Up 2.7% |
| Logistics revenue | $12.0 million | $13.2 million | Down 8.8% |
| Operating income | $6.0 million | $2.2 million | Up $3.8 million |
| Net income | $4.0 million | $1.2 million | Up $2.8 million |
| Diluted EPS | $0.40 | $0.12 | Up $0.28 |
| Operating margin | 5.3% | 2.0% | Up 3.3 percentage points |
Wholesale segment operating income rose to $4.8 million from $2.7 million; wholesale revenue increased 8.1%, and gross margin was 32.7% versus 32.5%. Company-owned retail revenue fell 8.3% to $60.4 million, but the segment returned to operating income of $1.1 million from a $1.2 million loss; retail gross margin improved to 51.5% from 50.0%. Logistics operating income declined to $0.5 million from $0.8 million, primarily due to higher warehouse labor costs.
Operating cash flow was $5.0 million, compared with $5.2 million used in the prior-year quarter. Cash and cash equivalents were $45.0 million at quarter-end; cash plus short-term investments totaled $62.7 million. Inventories rose to $62.9 million from $54.9 million at November 28, 2020, partly reflecting efforts to meet order backlog. Current liabilities were $127.4 million and current assets were $171.0 million.
No borrowings under the bank line were reported; $3.2 million of standby letters of credit left $21.8 million of availability on the $25 million facility. The facility matures January 31, 2022, and the company reported covenant compliance. Lease obligations had a present value of $139.4 million. The company paid $3.7 million in dividends, including a special dividend of $0.25 per share; the regular dividend was $0.125 per share.
Material changes and management commentary
- Wholesale orders increased 44% year over year, and the wholesale backlog reached $67.5 million, versus $14.6 million a year earlier. Independent-dealer orders rose 98%, Bassett Home Furnishings network orders rose 14%, and Lane Venture orders rose 75%.
- Retail written sales increased 4.1% despite seven fewer stores operating year over year. Retail backlog was $64.8 million, compared with $29.8 million a year earlier. Seven unprofitable stores were closed during FY2020.
- Combined wholesale and retail backlogs were elevated amid COVID-related labor shortages and supply-chain disruptions that delayed manufacturing, shipping, and order fulfillment. Management expected backlogs to decline gradually over the remainder of 2021, citing a lower anticipated rate of incoming orders and increased manufacturing and shipping activity.
- Management reported website traffic up 53% and web orders up 55% year over year, and plans further investment in the website and products more readily purchased online. It also plans to keep evaluating store performance and the appropriate store count.
Risks, contingencies, and unusual items
Management emphasized uncertainty around the course of COVID-19, consumer demand, order delays and cancellations, labor availability, and supply-chain disruption. Other cited risks include competition, raw-material and fuel costs, import sourcing and tariffs, store performance, cybersecurity, and logistics operations. Further store closures could affect the value of owned retail real estate and leased-location assets.
The company reported $2.1 million of contingent lease guarantees for licensees and said it believed potential losses were mitigated, with guarantee fair value not material. It is involved in ordinary-course legal and environmental matters and did not expect their resolution to materially adversely affect its financial position or future results. No legal proceedings were listed in Part II. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether production and freight capacity can reduce the substantial wholesale and retail backlogs, and whether extended delays lead to cancellations.
- Whether customer deposits and cash generation remain adequate as inventory and fulfillment needs change.
- Whether labor shortages, supply-chain disruption, or input-cost inflation pressure margins, particularly in logistics and manufacturing.
- How store closures or weak commercial real-estate conditions could affect owned-property values, lease assets, and licensee lease guarantees.
- The timing and terms of the bank facility’s January 2022 maturity and the company’s liquidity needs after the special dividend and ongoing share repurchases.