Bassett Furniture Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended February 25, 2023; unaudited. Financial amounts below are in millions of dollars unless otherwise stated. Comparisons are with the quarter ended February 26, 2022, except balance-sheet comparisons, which are with November 26, 2022.
Business context
Bassett designs, manufactures, sources and sells home furnishings through wholesale channels and company-owned and licensed Bassett Home Furnishings stores. It reported 92 branded stores, including 59 company-owned stores. The quarter reflects the addition of Noa Home, acquired in September 2022. Zenith Freight Lines was sold in February 2022, so its prior-year results are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2023 | Prior-year quarter |
|---|---|---|
| Furniture and accessories sales | $107.7 | $117.9 |
| Gross profit / margin | $57.2 / 53.1% | $57.4 / 48.7% |
| Operating income / margin | $2.7 / 2.5% | $6.5 / 5.5% |
| Continuing-operations income | $1.4 | $4.3 |
| Net income | $1.4 | $5.6, including $1.3 from discontinued operations |
| Diluted EPS | $0.16 | $0.57, including $0.13 from discontinued operations |
| Operating cash flow | $0.6 | $2.9 |
Gross margin improved 440 basis points, but SG&A rose to $54.5 million from $50.9 million, increasing to 50.6% of sales from 43.2%. The effective tax rate was 36.8%, compared with 26.3%; the company cited Noa Home deferred-tax-asset valuation allowances, state taxes and permanent differences.
At February 25, cash and cash equivalents were $54.9 million, short-term investments were $17.7 million, and total current assets and liabilities were $183.7 million and $90.6 million, respectively. Cash plus short-term investments totaled $72.6 million. The company reported no drawn borrowing under its $25 million unsecured credit line; $3.7 million was used for standby letters of credit, leaving $21.3 million available. It was in compliance with its credit covenants. Operating lease obligations totaled $113.1 million.
Investing cash outflow was $3.9 million, including $3.3 million of capital expenditures; financing cash outflow was $3.4 million, including $1.4 million of dividends and $1.8 million of share repurchases. Cash declined $6.7 million during the quarter.
Material changes and operating trends
- Consolidated sales fell 8.6%. Wholesale sales decreased 16.3%, while company-owned retail sales increased 1.3%; Noa Home contributed $3.0 million of reported corporate-and-other sales.
- Wholesale operating income fell to $9.0 million from $10.2 million. Management cited weaker shipments, including a 29% decline in open-market shipments and a 20% decline in Lane Venture shipments.
- Retail operating income decreased to $1.5 million from $2.6 million despite slightly higher sales, as SG&A grew faster than revenue.
- Wholesale backlog was $24.9 million, versus $35.3 million at the prior fiscal year-end and $78.1 million a year earlier. Retail backlog was $41.8 million, versus $51.0 million and $84.6 million, respectively.
- Prior-year comparisons are affected by the Zenith divestiture and a revised segment presentation; prior-period segment information was recast. The prior-year quarter included $16.8 million of third-party logistics revenue and $1.3 million of after-tax discontinued-operations income.
Outlook, management commentary and risks
- Management expects $17–$20 million of capital expenditures for fiscal 2023, including store projects and digital transformation. It expects to spend about $2 million on digital initiatives and plans to introduce a new e-commerce platform in the second half of 2023.
- The company plans to evaluate its five regional fulfillment centers before considering additional locations. It also expects to introduce the Noa Home brand in the United States during 2023.
- Management expects reduced margins in Bassett Leather to continue through Q3 2023 as elevated-cost inventory is worked down. It expects retail backlog to reach a more normalized, sustainable level by the end of Q2 2023.
- The company said available cash, expected operating cash flow and credit-line availability should fund operations for the foreseeable future. It also stated it expected to remain compliant with credit covenants.
- Risks include consumer demand and store traffic, competition, input and freight costs, supply-chain disruption, sourced-product tariffs, store profitability, execution of digital and Noa Home strategies, cybersecurity, foreign exchange, and potential impairment of owned or leased retail real estate. Bassett also has a five-year guarantee of a licensee lease totaling $1.9 million.
- Management reported that ordinary-course legal and environmental matters were not expected to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether wholesale and retail order trends and backlogs stabilize, and how they translate into future sales.
- Whether improved wholesale pricing and gross margins offset ongoing leather discounting, freight, fulfillment and fixed-cost pressures.
- Progress and returns from the five fulfillment centers, digital investment, planned e-commerce launch and Noa Home U.S. expansion.
- Capital-spending and shareholder-return plans relative to operating cash generation and the $72.6 million cash-and-investment balance.
- Lease obligations, covenant headroom and exposure to real-estate impairment or the licensee lease guarantee.
- The filing’s revenue-recognition note appears to give Noa Home’s acquisition date as September 2, 2023, while other sections state September 2, 2022; verify the intended date in the underlying filing.