Bassett Furniture Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended May 26, 2018; comparisons are to the periods ended May 27, 2017. Financial amounts below are in millions of dollars unless noted. Bassett sells furniture through Company-owned and licensed stores and wholesale channels, and provides logistics services through Zenith Freight Lines. It had 95 Bassett Home Furnishings stores: 64 Company-owned and 31 licensee-owned.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $116.980 | $114.125 | $227.252 | $220.017 |
| Operating income | $5.663 | $7.600 | $7.713 | $12.264 |
| Income before taxes | $5.430 | $9.105 | $6.853 | $13.036 |
| Net income | $4.289 | $5.842 | $3.376 | $8.703 |
| Diluted EPS | $0.40 | $0.54 | $0.31 | $0.81 |
| Operating margin | 4.8% | 6.7% | 3.5% | 5.6% |
- Revenue grew 2.5% in Q2 and 3.3% in the first half. Furniture and accessories revenue rose 2.4% and 2.5%, respectively; logistics revenue increased 3.4% and 9.3%.
- Operating income fell 25.5% in Q2 and 37.1% in the first half. SG&A rose 7.2% in Q2 and 8.5% year to date, outpacing revenue growth.
- Retail comparable-store sales decreased 1.8% in Q2 and increased 0.7% in the first half; comparable written sales declined 2.6% in both periods. Comparable-store gross margin improved to 52.0% in Q2 and 51.3% year to date.
- Wholesale operating income declined to $3.039 million in Q2 and $6.103 million year to date, from $4.783 million and $10.676 million. Segment gross margin fell to 32.9% and 32.6%, respectively.
- Zenith logistics operating income was $0.289 million in Q2, down from $0.798 million; first-half income increased slightly to $0.619 million. Higher insurance and fuel costs and final-mile inefficiencies weighed on Q2 results.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was a use of $0.170 million, versus $9.492 million provided in the prior-year period. Management attributed the decline to lower operating margins, working-capital changes and Lane Venture startup cash needs.
- Cash and cash equivalents were $22.549 million at May 26, 2018, down from $53.949 million at November 25, 2017. Short-term investments were $23.125 million; together, cash and investments totaled $45.674 million.
- Investing cash use was $20.755 million, including the $15.556 million Lane Venture acquisition and $7.662 million of capital expenditures, partly offset by $2.463 million from a real estate sale. Financing cash use was $10.475 million, including $6.124 million in dividends and the final $3.0 million payment on the Zenith acquisition note.
- Total notes payable were $0.541 million, all related to real estate mortgages; the Zenith acquisition note was paid off. The $15 million unsecured credit facility matures in December 2018. Standby letters of credit of $2.249 million used the facility, leaving $12.751 million available. The company reported compliance with covenants.
- Total assets were $281.348 million and stockholders’ equity was $192.096 million. The company reported $180.384 million of future minimum operating-lease payments and $2.360 million of contingent licensee lease guarantees.
Material changes and unusual items
- Lane Venture, acquired for $15.556 million in December 2017, added $3.344 million of wholesale revenue in Q2 and $4.004 million in the first half. Its preliminary purchase-price allocation included $4.090 million of goodwill and $7.360 million of intangible assets; valuation remains subject to adjustment.
- Prior-year comparisons included a $3.267 million gain on sale of an investment and a $1.084 million real-estate impairment charge. These items affected 2017 pretax income and make the year-over-year earnings comparison less directly comparable.
- Q2 2018 included $0.266 million of life-insurance proceeds. The six-month effective tax rate was 51.4%, including a provisional $2.032 million deferred-tax remeasurement charge related to the Tax Cuts and Jobs Act. Management said estimates could change during the remaining measurement period.
- The company sold the land and building used by its Spring, Texas store for net proceeds of $2.463 million and recognized a $0.165 million gain; it plans to relocate the store.
Outlook, management commentary and risks
- Management cited higher upholstery material costs and lower fixed-cost absorption as pressures on wholesale margins. Targeted price increases for custom upholstery were implemented in June 2018 to mitigate costs.
- The company expected approximately $1.0 million more in 2018 new-store pre-opening costs and post-opening losses than in 2017. It listed planned store openings and relocations through late 2018 and early 2019, and planned a clearance center in Middletown, New York.
- Management said available cash and short-term investments were sufficient to fund operations for the foreseeable future. It also plans investment in digital capabilities, including an order-management system and digital talent.
- Key risks include consumer demand and housing conditions, retail traffic, store profitability, raw-material, fuel and labor costs, transportation operating costs, technology and cybersecurity, import-supply interruptions, and potential impairment of retail real estate. The company also noted that weakness in commercial real estate could affect its property values and licensee lease guarantees.
- Legal and environmental matters arise in the ordinary course; management did not expect their resolution to materially adversely affect financial position or future results. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether the June upholstery price increases offset continued materials inflation and weak wholesale volume and margins.
- Assess Lane Venture’s operating contribution and cash needs, and the final purchase-price allocation and goodwill valuation.
- Monitor comparable-store written sales, delivered sales, new-store ramp-up losses and the planned store expansion program.
- Review operating cash generation, working-capital movements, and liquidity as the credit facility approaches its December 2018 maturity.
- Follow final tax-law accounting adjustments and the impact of the 2019 tax provisions; also evaluate lease commitments, real-estate exposure and licensee guarantees.