Bassett Furniture Industries, Inc. — Q2 2013 Form 10-Q
Business context and period. The filing covers the unaudited quarter and six months ended June 1, 2013. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. The six-month 2013 period included 27 weeks, versus 26 weeks in the prior-year comparison; the company reports first-half sales growth of 21% on an average-weekly basis.
Financial performance
| Metric | Quarter ended June 1, 2013 | Six months ended June 1, 2013 |
|---|---|---|
| Net sales | $81.2 million; +20% year over year | $161.1 million; +25% reported, +21% average weekly |
| Gross profit / margin | $41.8 million / 51.5%, versus 52.9% | $83.2 million / 51.6%, versus 52.4% |
| Operating income / margin | $3.4 million / 4.2%, versus $1.6 million / 2.4% | $5.8 million / 3.5%, versus $1.8 million / 1.4% |
| Net income | $2.0 million, versus $8.0 million | $2.9 million, versus $7.4 million |
| Diluted earnings per share | $0.18, versus $0.71 | $0.27, versus $0.66 |
Dollar figures are rounded. Prior-year net income included $9.0 million of CDSOA income, a nonrecurring customs distribution. Operating income improved as sales rose, despite higher SG&A. The quarter’s lower gross margin reflected wood-product discounting and higher health-care costs; retail clearance activity also pressured retail margins. Wholesale first-half operating income was $5.9 million; retail reported a $0.3 million operating loss, improved from a $0.9 million loss.
Cash flow, liquidity and debt
- Six-month operating cash flow was $2.8 million, compared with $8.3 million. Excluding the prior-year CDSOA distribution, management said operating cash flow increased $3.6 million, primarily due to improved operating income.
- Cash and cash equivalents were $43.6 million at June 1, 2013, down from $45.6 million at November 24, 2012; short-term investments were $1.1 million. Current assets were $131.8 million and current liabilities $50.0 million.
- Capital expenditures were $5.2 million; investing activities used $3.0 million and financing activities used $1.8 million, primarily for dividends. Six-month dividends were $0.10 per share.
- Real-estate notes payable totaled $3.2 million, including the current portion; no bank borrowings were reported. The $15 million asset-secured credit facility had $13.0 million available after $2.0 million of standby letters of credit. The company said it complied with its covenants.
Changes, outlook and risks
- Company-owned store sales rose 20% in the quarter; comparable-store delivered sales increased 9.3%. The company attributed improvement in part to HGTV co-branded design centers and advertising, design-consultant training and a better retail environment. There were 89 Bassett-branded stores: 55 company-owned and 34 licensed.
- Management planned six new company-owned stores and five store repositionings during the nine months after June 1. Fiscal 2013 capital expenditures were expected to total $13–15 million, including $8–10 million for retail stores and about $2 million for IT. Fiscal 2014 spending was expected to be lower; no earnings or revenue guidance was provided.
- Wholesale backlog was $15.2 million and retail backlog was $20.0 million, both above prior-year levels. Management cited increased business and product-receipt timing.
- Colonial Trading’s $1.45 million judgment against Bassett was affirmed on appeal June 21, 2013. Bassett said reserves covered the judgment; Colonial’s attorney-fee motion remained pending, and Bassett was considering further review.
- The appeal over the CDSOA distribution could potentially lead Customs to seek repayment of some or all of the $9.0 million received in 2012, although Bassett considered such recovery remote. A further $2.35 million of IHFC sale proceeds remained in escrow, with release expected in fiscal 2014 if not needed for contingencies.
- Risks include consumer demand and retail traffic, store profitability and expansion, raw-material costs, import supply-chain execution, inventory obsolescence, commercial real-estate values, and potential obligations under $1.8 million of licensee lease guarantees. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control.
Important facts for investors to verify
- Whether sales growth and comparable-store momentum persist, and whether retail operations achieve sustained profitability.
- How margins respond to clearance activity, product mix, health-care costs, and wood, fabric and foam input costs.
- Execution and returns on planned store openings, repositionings and the $13–15 million fiscal 2013 capital program.
- Any further developments in the Colonial litigation, the CDSOA appeal, or release of the remaining IHFC escrow.
- Cash generation, inventory reserves and performance of the licensee network and Zenith Freight Lines investment.