Bassett Furniture Industries, Inc. — Q2 2016 Form 10-Q
Business and period. The filing covers the quarter and six months ended May 28, 2016; financial statements are unaudited and amounts below are in U.S. dollars. Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. Its wholly owned Zenith subsidiary provides logistics services. At quarter-end, the network had 58 company-owned and 32 licensee-owned stores.
Key financial results
| Metric | Quarter ended May 28, 2016 | Six months ended May 28, 2016 |
|---|---|---|
| Total revenue | $106.7 million, down 4.4% year over year | $213.5 million, up 4.5% |
| Furniture and accessories revenue | $93.0 million, down 6.5% | $185.4 million, down 1.9% |
| Net income / diluted EPS | $3.4 million / $0.31 | $6.6 million / $0.61 |
| Operating income / margin | $5.9 million / 5.5%, versus $6.7 million / 6.0% | $11.6 million / 5.5%, versus $9.6 million / 4.7% |
| Furniture and accessories gross margin | 54.4%, versus 52.8% | 54.5%, versus 53.0% |
| Operating cash flow | $11.0 million for the first half, versus $10.2 million |
For the first half, investing activities used $13.5 million, including $14.1 million in capital expenditures; financing activities used $4.0 million. Cash and cash equivalents were $29.7 million at May 28, and short-term investments were $23.1 million. Current assets were $134.9 million and current liabilities $69.3 million. Debt was $15.7 million net carrying value ($15.9 million principal), including $6.6 million principal due within a year. The company had $13.0 million available under its $15 million unsecured credit line, after standby letters of credit.
Changes and operating drivers
- Quarterly furniture and accessories sales declined, led by wholesale shipments down 10% and comparable company-store sales down 3.6%. Management cited general retail softness and lower open-market sales, including the discontinuation of the HGTV Home Collection brand.
- Furniture gross margin improved overall, driven by wholesale pricing, favorable ocean freight and raw-material costs, and reduced discounting in wholesale. Retail margins weakened amid clearance discounting for a Memorial Day product rollout and store closures.
- Quarterly retail operating income fell to $0.4 million from $2.0 million; comparable-store operating income was $1.2 million versus $2.3 million. First-half retail operating income was $0.7 million versus $1.9 million.
- Logistics revenue from external customers rose 13.2% in the quarter to $13.7 million, but the segment’s operating income declined to $0.7 million from $1.0 million as costs grew faster than revenue. First-half logistics comparisons are affected by Zenith being consolidated for only four months in 2015 versus six months in 2016.
- First-half net income was down from $10.5 million a year earlier. The 2015 period included a $7.2 million pre-tax remeasurement gain on Bassett’s previously held Zenith interest; it also included $1.1 million of CDSOA income. First-half 2015 operating results included $0.5 million of store closure and impairment charges and $0.4 million of executive restructuring expense.
Outlook, risks and other matters
- No specific revenue or earnings guidance was provided. Management plans to average three to five net new stores annually over the next five years, primarily in underpenetrated markets, and expected to open a Hunt Valley, Maryland store late in 2016. It reported opening a Sterling, Virginia store in the quarter and closing three underperforming stores in the first half.
- Management said cash and short-term investments were sufficient to fund operations for the foreseeable future, and expected to meet debt maturities from operating cash flow or available cash. The company was in compliance with credit-facility covenants.
- Management expected new-tractor and trailer spending to average significantly less over the remaining quarters of fiscal 2016. First-half capital expenditures were elevated, particularly for logistics equipment and manufacturing upgrades.
- Risks cited include consumer demand and retail traffic, competition, store performance and expansion, raw-material, fuel and labor costs, sourced-product availability and supply-chain disruption, and operational risks in freight and domestic manufacturing. Management also noted potential impairment exposure in owned retail real estate and possible payments under licensee lease guarantees.
- Future minimum operating-lease payments totaled $159.2 million; licensee lease guarantees were $2.3 million. The company reported routine legal and environmental matters and did not expect their resolution to materially adversely affect financial position or results. A lease-exit-cost liability of $0.4 million remained at quarter-end.
- The company adopted ASU 2016-09 early; the reported impact was not material. It expects the forthcoming lease-accounting standard to materially affect the balance sheet. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether the decline in quarterly furniture sales and comparable-store written sales reverses; written sales fell 3.9% for comparable stores in the quarter, although they rose 24% during the 12-day Memorial Day promotion.
- Whether wholesale margin gains can persist while shipment volumes and backlog weaken; wholesale backlog was $10.1 million versus $16.0 million a year earlier.
- Whether logistics revenue growth translates into improved segment profitability as labor, building and equipment lease costs rise.
- How store openings, closures and clearance activity affect retail margins, cash needs and owned real-estate values.
- Debt maturities, capital spending, lease commitments and potential exposure under licensee guarantees; also distinguish the prior-year Zenith remeasurement gain and CDSOA distribution from recurring earnings.