Bassett Furniture Industries, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended November 30, 2013 (53 weeks); prior fiscal year ended November 24, 2012 (52 weeks). Unless noted, financial amounts are in thousands of dollars.
Business context and reporting period
Bassett designs, manufactures, sources, wholesales and retails branded home furnishings. Its 89 Bassett Home Furnishings stores comprised 55 company-owned and 34 licensee-operated locations. Results are reported across Wholesale, Retail and Investments and Real Estate. Fiscal 2013 growth reflected expansion of company-owned stores and higher open-market wholesale shipments. The company’s HGTV partnership supports store design centers and a separately branded product line.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $321,286 | $269,672 |
| Gross profit / gross margin | $165,994 / 51.7% | $141,322 / 52.4% |
| Operating income / margin | $10,005 / 3.1% | $5,080 / 2.0% |
| Income before taxes | $8,187 | $12,014 |
| Net income | $5,096 | $26,713 |
| Diluted EPS | $0.47 | $2.41 |
| Operating cash flow | $10,640 | $7,956 |
| Cash and cash equivalents | $12,733 | $45,566 |
| Short-term investments | $28,125 | — |
| Total assets | $225,849 | $227,180 |
| Long-term debt | $2,467 | $3,053 |
| Current ratio | 2.46:1 | 2.52:1 |
Cash plus short-term investments totaled $40,858 at year-end. The company had a $15,000 asset-secured credit line, with $13,634 available after $1,366 in standby letters of credit. Real estate mortgage debt totaled $2,746, including the current portion. Operating lease commitments were $96,421.
Material changes and quarterly results
- Annual sales rose 19%; on an average-week basis, sales increased 17%. Wholesale sales increased 16% (14% on an average-week basis), while company-owned retail sales increased 16.2%.
- Comparable-store delivered sales rose 7.6% as reported, or 5.6% on an average-week basis; comparable written sales rose 9.0%, or 7.0% on an average-week basis.
- Wholesale operating income improved to $10,883 from $7,500. The company-owned retail segment remained loss-making, but its operating loss narrowed to $1,452 from $2,067. Retail comparable stores generated $807 of operating income versus an $850 loss.
- Consolidated gross margin declined 0.7 percentage points, mainly because open-market sales grew relative to higher-margin sales through company-owned stores. Wholesale margin improved to 32.9% from 32.3%; company-owned retail margin was 48.4%.
- Net income fell sharply from FY2012 despite higher operating income. FY2012 included a $14,699 income tax benefit, largely from releasing deferred-tax valuation allowances; FY2013 recorded $3,091 of tax expense. FY2013 also included a $416 real-estate impairment charge.
- Fourth-quarter 2013 net sales were $83,062 and net income was $1,607, or $0.15 diluted EPS, compared with $76,812, $16,896 and $1.55 in fourth-quarter 2012. The prior-year quarter included a substantial deferred-tax valuation-allowance release.
- Operating cash flow increased to $10,640. Investing activities used $39,032, mainly for certificates of deposit and capital expenditures; financing activities used $4,441, mainly for dividends and share repurchases. Cash and cash equivalents declined by $32,833.
Outlook, commentary, risks and contingencies
- Management expected approximately $13 million of FY2014 capital expenditures, primarily for new-store build-outs and remodeling. It planned additional openings and relocations in 2014 and said expansion would proceed at a slower pace thereafter. Management believed available cash and operating cash flow would fund foreseeable capital and working-capital needs.
- Management cited improved comparable-store sales and HGTV co-branding as contributors to recent retail performance. The company aimed for company-owned stores to reach modest profitability, but acknowledged the segment still operated at a loss. New stores typically incur $300–$400 of start-up losses and are expected to reach retail break-even within about 12 months.
- Key risks include economic and housing-market weakness, competitive pricing and consumer demand, execution and profitability of store expansion, licensee creditworthiness, raw-material costs, and overseas sourcing and shipping disruption. About 46% of FY2013 wholesale sales were imported.
- Customer credit exposure, net of reserves, was $20,235; two licensees accounted for approximately 27% of that exposure. Licensee lease guarantees were $3,698. The company also disclosed $96,421 of future operating lease payments and $15,205 of post-employment benefit obligations.
- The company reported environmental matters and other ordinary-course claims, including its participation in remediation at the Ward Transformer Superfund site; it had spent approximately $1,000 and planned to seek recovery of excess payments from other potentially responsible parties. Management did not expect known legal or environmental matters to materially affect financial position or future results. A possible challenge to the final $9,010 CDSOA distribution could theoretically require repayment, though management considered recovery by Customs remote.
- The IHFC investment sale produced a large, nonrecurring $85,542 gain in FY2011; FY2012 also included $9,010 of final CDSOA income. These items make historical net income less comparable with FY2013. The company had $2,348 of IHFC sale proceeds remaining in escrow, expected to be released in FY2014 if not applied to contingencies.
Important facts for investors to verify
- Whether comparable-store sales growth and written orders convert into delivered sales and sustained profitability, particularly at company-owned stores.
- Whether FY2014 store expansion and approximately $13 million of planned capital spending generate expected returns without pressuring liquidity.
- Trends in gross margin, open-market sales mix, raw-material costs and imported-product supply-chain performance.
- Licensee concentration, receivable collectability and potential exposure under lease guarantees.
- The sustainability of operating cash flow and dividends; FY2013 dividends declared totaled $0.42 per share, including a $0.20 special dividend.
- The filing reports audited financial statements with an unqualified audit opinion; management and the auditor also concluded internal control over financial reporting was effective as of November 30, 2013.