Bassett Furniture Industries, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Quarter ended February 28, 2015. Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the quarter ended March 1, 2014; balance-sheet comparisons are with November 29, 2014.
Business context and reporting period
Bassett designs, manufactures, sources, markets, and retails home furnishings through wholesale channels and Company-owned and licensed Bassett Home Furnishings stores. It had 94 stores at quarter-end: 60 Company-owned and 34 licensee-owned. On February 2, 2015, Bassett acquired the remaining 51% of Zenith Freight Lines, making it a wholly owned subsidiary and adding a logistical services segment. Zenith’s results were consolidated from the acquisition date.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Total revenue | $92.807 | $75.647 |
| Furniture and accessories revenue | $89.548 | $75.647 |
| Operating income | $2.877 | $1.086 |
| Income before taxes | $9.467 | $1.371 |
| Net income | $5.956 | $0.843 |
| Diluted EPS | $0.56 | $0.08 |
| Cash from operating activities | $(0.905) | $5.338 |
Revenue rose 23% overall; furniture and accessories revenue increased 18%. The furniture gross margin was 53.2%, unchanged year over year. Operating margin was 3.1%, versus 1.4%. Net income included a $7.212 million noncash gain from remeasuring Bassett’s previously held Zenith interest; the filing estimates its after-tax EPS impact at approximately $0.42.
Cash used in investing activities was $12.637, including $7.374 for the Zenith acquisition, a $1.345 capital contribution to Zenith before acquisition, and $3.918 of capital expenditures. Financing activities used $0.875. Cash and cash equivalents were $12.256 at quarter-end, down from $26.673; cash plus short-term investments totaled $35.381. Current assets were $133.477 and current liabilities $68.851.
At February 28, total debt was $15.835 at principal value ($15.294 net carrying amount after discount), compared with $2.218 in notes payable at November 29, 2014. The bank credit line is $15.0 million, matures in December 2015, and had $14.784 million available after standby letters of credit. Bassett reported compliance with its financial covenants. Future minimum operating lease payments were $113.740 million; guaranteed licensee lease obligations were $3.020 million.
Material changes versus the prior comparable period
- Wholesale sales increased 15%; shipments to Bassett stores rose 15% and open-market shipments rose 10%. Wholesale operating income increased to $2.927 million from $2.348 million.
- Company-owned retail sales increased 21%, including 15% comparable-store sales growth. Comparable-store written sales increased 14%. The retail operating loss narrowed to $0.042 million from $1.772 million; comparable stores moved to $0.264 million operating income from a $0.628 million loss.
- Zenith contributed $3.259 million of consolidated logistics revenue from February 2 through quarter-end. Its segment reported $5.999 million of revenue, $6.007 million of operating expenses, and an $0.008 million operating loss; intercompany amounts are eliminated in consolidated results.
- Operating cash flow declined by $6.243 million year over year, primarily reflecting inventory growth for new products and higher orders, and payment of trade payables related to a prior-quarter inventory build.
Outlook, commentary, risks, and unusual items
- Management expected to open three to five Company-owned stores in 2015 and one additional licensee store, and planned a Newport News store relocation later in the year. No earnings or revenue guidance was provided.
- Planned product initiatives included Bassett Baby and Kids, Bench Made dining furniture, and a significant refresh of imported wood products. Management said first-quarter results reflected associated product-development start-up costs.
- Management expected west-coast port slowdowns and a dockworker labor dispute to increase marine cargo costs, with a modest margin impact expected in Q2. Other exposures include wood, fabric, foam, fuel, consumer demand, retail traffic, and import-supply disruption.
- The quarter included a $0.419 million lease-exit accrual and $0.106 million asset impairment charge for the announced closure of a Memphis Company-owned store. A $0.182 million write-down was recorded on Sugarland, Texas retail property held for sale; the sale closed March 12, 2015.
- Zenith’s acquisition valuation and purchase-price allocation were preliminary and subject to adjustment during the measurement period. Bassett expected approximately $0.100 million of additional acquisition costs during the rest of 2015.
- The company said it had sufficient liquidity for the foreseeable future and expected to renew its credit line on substantially similar terms. It reported no material expected adverse effect from ordinary-course legal and environmental matters; fiscal 2013 and 2012 tax returns were under IRS examination.
- Management identified risks including competition, economic and consumer conditions, store profitability and execution, input costs, import logistics, domestic manufacturing concentration, and failure to realize strategic benefits from Zenith. Disclosure controls were deemed effective at a reasonable assurance level.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring operations versus the $7.212 million Zenith remeasurement gain.
- Whether retail comparable-store momentum and wholesale backlog growth—$17.715 million, up from $13.785 million—persist, and whether retail backlog of $33.836 million converts to delivered sales.
- Whether inventory growth, operating cash use, and planned product launches translate into sales without margin or working-capital pressure.
- Final Zenith purchase accounting, integration costs, debt maturities, and renewal of the credit facility before its December 2015 expiration.
- Exposure to lease obligations, store closures, real estate values, port disruptions, input costs, and the pending tax examinations.