Bassett Furniture Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended August 28, 2021. Unless stated otherwise, dollar amounts below are in millions; financial statements are unaudited.
Business context and reporting period
Bassett designs, manufactures, sources, sells and distributes home furnishings through company-owned and licensed Bassett Home Furnishings stores and other wholesale channels. Its Zenith subsidiary provides freight and warehousing services. The company reported 97 Bassett Home Furnishings stores at quarter-end.
Comparisons with 2020 are affected by the pandemic-related shutdown of stores, manufacturing and warehouses in the prior-year period. Management also compares results with 2019 to provide a pre-pandemic reference.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $118.9 | $91.6 | $356.6 | $267.5 |
| Operating income (loss) | $4.5 | $2.7 | $18.9 | $(26.3) |
| Net income (loss) | $3.0 | $2.2 | $13.0 | $(17.0) |
| Diluted EPS | $0.31 | $0.22 | $1.32 | $(1.70) |
| Operating margin | 3.8% | 3.0% | 5.4% | (9.8)% |
- Q3 revenue increased 29.9% year over year; nine-month revenue increased 33.3%. Furniture and accessories revenue rose 30.5% and 36.3%, respectively. Logistical services revenue rose 25.1% and 14.0%.
- Q3 furniture gross margin was approximately 50.2%, versus 52.1% a year earlier; management attributed the decline mainly to higher raw-material and inbound freight costs. Retail segment gross margin rose 290 basis points in Q3 and 250 basis points year to date, reflecting lower promotions and improved clearance margins.
- Q3 segment operating results: wholesale income $4.5 million, company-owned retail income $0.9 million, and logistical services loss $0.5 million. Nine-month results were $14.6 million, $3.7 million and $1.3 million, respectively.
- Nine-month operating cash flow was $13.7 million, compared with $17.5 million in 2020. Investing activities used $8.2 million, principally reflecting $7.1 million of capital expenditures. Financing activities used $12.7 million, including $6.3 million of dividends and $5.6 million of share repurchases. Cash declined $7.2 million to $38.6 million.
- Cash and short-term investments totaled $56.3 million at quarter-end. Current assets were $176.8 million and current liabilities were $134.3 million.
- The company reported no drawn borrowings under its $25 million credit line; $3.9 million of standby letters of credit encumbered the line, leaving $21.1 million available. The facility matures January 31, 2022. Lease obligations totaled $139.1 million, including current and long-term operating lease obligations.
Material changes and capital allocation
- The nine-month return to profitability contrasts with the prior-year loss, which included $12.2 million of asset impairment charges, $2.0 million of goodwill impairment and $1.1 million of litigation expense. The wage-and-hour claims underlying the prior-year accrual were subsequently settled at no additional cost.
- Compared with 2019, nine-month furniture and accessories sales were up 5.0%. Wholesale sales were up 10.5%, while company-owned retail sales were down 8.7%, partly reflecting seven store closures since 2019.
- The company declared regular dividends of $0.14 per share in Q3 and a $0.25-per-share special dividend during the first nine months. It repurchased $5.6 million of shares year to date and had $19.3 million authorized for further repurchases at August 28, 2021.
Outlook, management commentary and risks
- Wholesale orders for the first nine months were up 51% from the prior-year period and 38% from 2019 levels. Wholesale backlog was $92.8 million at quarter-end, versus $54.9 million at fiscal 2020 year-end; retail backlog was $81.0 million, versus $57.0 million.
- Management expected gradual reductions in wholesale and retail backlogs over the remainder of fiscal 2021 and into fiscal 2022, citing anticipated lower incoming orders and increased manufacturing and shipping activity. It expected wholesale gross margins to be slightly affected during the remainder of fiscal 2021 as the backlog was fulfilled. The filing provides no numerical earnings or revenue guidance.
- To address demand and backlog, Bassett began production in June at an additional 123,000-square-foot upholstery facility in Newton, North Carolina. Management also described continued digital and product initiatives and ongoing evaluation of store-by-store performance, noting that fewer stores may be appropriate in the future.
- Key risks include continuing supply-chain disruption and labor shortages, higher material, freight and labor costs, order cancellations if delivery delays persist, and possible renewed COVID-related restrictions. Other disclosed exposures include consumer demand and housing-market conditions, competition, fuel and raw-material prices, cybersecurity, store performance, and potential impairment of owned or leased retail properties. The company said it had sufficient liquidity for the foreseeable future and expected to remain in compliance with credit-facility covenants through fiscal 2021.
- Legal and environmental matters arising in the normal course of business were not expected by management to have a material adverse effect, based on facts then known. Lease guarantees for licensees were $2.0 million; management described the estimated fair value of the guarantees as not material.
Important facts for investors to verify
- Whether manufacturing, freight capacity and labor availability are reducing the sizable wholesale and retail backlogs, and whether delays are prompting cancellations.
- Whether price increases offset inflation in materials, inbound freight and labor, particularly given the Q3 decline in wholesale gross margin.
- Whether Zenith can recover Q3 profitability amid elevated warehouse labor costs.
- Availability and renewal terms of the credit facility, which matures January 31, 2022, and the company’s lease-related obligations.
- How store rationalization, digital initiatives and sales relative to pre-pandemic levels affect ongoing retail performance and property values.