Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks. The current fiscal year ending November 30, 201
9
is a 53-week year, with the additional week being included in our first fiscal quarter. Accordingly, the information presented below includes 14 weeks of operations for the quarter ended March 2, 201
9
as compared
to
13 weeks included in the quarter ended February 2
4
, 201
8
.
Overview
Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 117-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.
With 102 BHF stores at March 2, 2019 we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories. Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service. In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 30 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.
The BHF stores feature custom order furniture, free in-home design visits (“home makeovers”), and coordinated decorating accessories. Our philosophy is based on building strong long-term relationships with each customer. Sales people are referred to as “Design Consultants” and are trained to evaluate customer needs and provide comprehensive solutions for their home decor. Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.
We have factories in Newton, North Carolina and Grand Prairie, Texas that manufacture custom upholstered furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made” line of custom, solid hardwood furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores. Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees. In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture (casegoods) and certain leather upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 70% of the products we currently sell are manufactured in the United States.
We also own Zenith Freight Lines, LLC (“Zenith”) which provides logistical services to Bassett along with other furniture manufacturers and retailers. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry. Over 60% of Zenith’s revenue is generated from services provided to non-Bassett customers.
On December 21, 2017, we purchased certain assets and assumed certain liabilities of Lane Venture from Heritage Home Group, LLC for $15,556 in cash. Lane Venture is a manufacturer and distributor of premium outdoor furniture, and is now being operated as a component of our wholesale segment. This acquisition marked our entry into the market for outdoor furniture and we believe that Lane Venture has provided a foundation for us to become a significant participant in this category. We plan to distribute this brand outside of our Bassett store network with plans to introduce a Bassett-branded line in the stores in the first quarter of fiscal 2020. See Note 3 to our consolidated financial statements for additional details regarding this acquisition.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
At March 2, 2019, our BHF store network included 69 Company-owned stores and 33 licensee-owned stores. During the first quarter of fiscal 2019, we opened new stores in Coral Gables, Florida, Columbus, Ohio, Tucson, Arizona and Estero, Florida, and a new licensee store was opened in Boise, Idaho. We also completed the repositioning of our store in Friendswood, Texas to a new location in the Baybrook Mall area of Friendswood.
We continue to execute our strategy of growing the Company through opening new stores, repositioning stores to improved locations within a market and closing underperforming stores. The following table shows planned store openings where leases have been executed:
|
|
|
Size
|
|
Planned
|
Location
|
Type
|
|
Sq. Ft.
|
|
Opening
|
New Stores:
|
|
|
|
|
|
|
Sarasota, FL
|
Corporate
|
|
|
8,000
|
|
Q2 2019
|
Princeton, NJ
|
Corporate
|
|
|
13,000
|
|
Q4 2019
|
Thornton, CO
|
Licensee
|
|
|
23,000
|
|
Q1 2020
|
Following the planned openings shown above, we expect to significantly reduce the pace of the BHF network expansion and focus on maximizing profitable sales volume through our existing stores.
As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $200 to $400 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model generally does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $400 to $600 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business.
We continue to invest in our digital effort to improve our customers’ journey from the time they begin on our website to the final step of delivering the goods to their homes. Today’s customers expect their digital experiences and communications to be personalized, highly-relevant and catered to match their specific needs and preferences. We are in the process of establishing a centralized customer care center that will track each customer's path from initial engagement through point of sale and ultimately to their post-delivery experience with the furniture using customer relationship management (CRM) software. We believe that the data captured during the customer's journey will provide valuable insights and result in driving operational best practices in the months and years ahead.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Results of Operations –
Three months
ended
March 2, 2019
compared with
the three months
ended
February 24, 2018
:
Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the three months ended March 2, 2019 and February 24, 2018:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and accessories
|
|
$
|
107,357
|
|
|
|
88.8
|
%
|
|
$
|
96,123
|
|
|
|
87.2
|
%
|
|
$
|
11,234
|
|
|
|
11.7
|
%
|
Logistics revenue
|
|
|
13,484
|
|
|
|
11.2
|
%
|
|
|
14,149
|
|
|
|
12.8
|
%
|
|
|
(665
|
)
|
|
|
-4.7
|
%
|
Total sales revenue
|
|
|
120,841
|
|
|
|
100.0
|
%
|
|
|
110,272
|
|
|
|
100.0
|
%
|
|
|
10,569
|
|
|
|
9.6
|
%
|
Cost of furniture and accessories sold
|
|
|
49,177
|
|
|
|
40.7
|
%
|
|
|
43,269
|
|
|
|
39.2
|
%
|
|
|
5,908
|
|
|
|
13.7
|
%
|
SG&A expenses
|
|
|
69,386
|
|
|
|
57.4
|
%
|
|
|
64,251
|
|
|
|
58.3
|
%
|
|
|
5,135
|
|
|
|
8.0
|
%
|
New store pre-opening costs
|
|
|
494
|
|
|
|
0.4
|
%
|
|
|
702
|
|
|
|
0.6
|
%
|
|
|
(208
|
)
|
|
|
-29.6
|
%
|
Other charges
|
|
|
835
|
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
835
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
949
|
|
|
|
0.8
|
%
|
|
$
|
2,050
|
|
|
|
1.9
|
%
|
|
$
|
(1,101
|
)
|
|
|
-53.7
|
%
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three months ended March 2, 2019 as compared with the prior year period.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Segment Information
We have strategically aligned our business into three reportable segments as described below:
Wholesale.
The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which now include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.
Retail – Company-owned
s
tores.
Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.
Logistical services
.
Our logistical services segment reflects the operations of Zenith. In addition to providing shipping and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statements of operations. Zenith’s operating costs are included in selling, general and administrative expenses.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
The following tables illustrate the effects of various intercompany eliminations on income from operations in the consolidation of our segment results:
|
|
Quarter Ended March 2, 2019*
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
72,781
|
|
|
$
|
69,629
|
|
|
$
|
-
|
|
|
$
|
(35,053
|
)
|
(1)
|
|
$
|
107,357
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
21,751
|
|
|
|
(8,267
|
)
|
(2)
|
|
|
13,484
|
|
Total sales revenue
|
|
|
72,781
|
|
|
|
69,629
|
|
|
|
21,751
|
|
|
|
(43,320
|
)
|
|
|
|
120,841
|
|
Cost of furniture and accessories sold
|
|
|
48,850
|
|
|
|
34,951
|
|
|
|
-
|
|
|
|
(34,624
|
)
|
(3)
|
|
|
49,177
|
|
SG&A expense
|
|
|
19,749
|
|
|
|
37,230
|
|
|
|
21,039
|
|
|
|
(8,632
|
)
|
(4)
|
|
|
69,386
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
494
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
494
|
|
Income (loss) from operations (5)
|
|
$
|
4,182
|
|
|
$
|
(3,046
|
)
|
|
$
|
712
|
|
|
$
|
(64
|
)
|
|
|
$
|
1,784
|
|
|
|
Quarter Ended February 24, 2018*
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
63,100
|
|
|
$
|
64,661
|
|
|
$
|
-
|
|
|
$
|
(31,638
|
)
|
(1)
|
|
$
|
96,123
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
21,422
|
|
|
|
(7,273
|
)
|
(2)
|
|
|
14,149
|
|
Total sales revenue
|
|
|
63,100
|
|
|
|
64,661
|
|
|
|
21,422
|
|
|
|
(38,911
|
)
|
|
|
|
110,272
|
|
Cost of furniture and accessories sold
|
|
|
42,644
|
|
|
|
31,994
|
|
|
|
-
|
|
|
|
(31,369
|
)
|
(3)
|
|
|
43,269
|
|
SG&A expense
|
|
|
17,392
|
|
|
|
33,478
|
|
|
|
21,092
|
|
|
|
(7,711
|
)
|
(4)
|
|
|
64,251
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
702
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
702
|
|
Income (loss) from operations
|
|
$
|
3,064
|
|
|
$
|
(1,513
|
)
|
|
$
|
330
|
|
|
$
|
169
|
|
|
|
$
|
2,050
|
|
(1)
|
Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.
|
(2)
|
Represents the elimination of logistical services billed to our wholesale segment.
|
(3)
|
Represents the elimination of purchases by our Company-owned BHF stores from our wholesale segment, as well as the change for the period in the elimination of intercompany profit in ending retail inventory.
|
(4)
|
Represents the elimination of rent paid by our retail stores occupying Company-owned real estate, and the elimination of logisitcal services charged by Zenith to Bassett's wholesale segment as follows:
|
|
|
Quarter Ended*
|
|
|
|
March 2,
2019
|
|
|
February 24,
2018
|
|
|
|
|
|
|
|
|
|
|
Intercompany logistical services
|
|
$
|
(8,267
|
)
|
|
$
|
(7,273
|
)
|
Intercompany rents
|
|
|
(365
|
)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
Total SG&A expense elimination
|
|
$
|
(8,632
|
)
|
|
$
|
(7,711
|
)
|
(5)
|
Excludes the effects of the early retirement program, which is not allocated to our segments.
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Wholesale
S
egment
Results for the wholesale segment for the three months ended March 2, 2019 and February 24, 2018 are as follows:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
72,781
|
|
|
|
100.0
|
%
|
|
$
|
63,100
|
|
|
|
100.0
|
%
|
|
$
|
9,681
|
|
|
|
15.3
|
%
|
Gross profit
|
|
|
23,931
|
|
|
|
32.9
|
%
|
|
|
20,456
|
|
|
|
32.4
|
%
|
|
|
3,475
|
|
|
|
17.0
|
%
|
SG&A expenses
|
|
|
19,749
|
|
|
|
27.1
|
%
|
|
|
17,392
|
|
|
|
27.6
|
%
|
|
|
2,357
|
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
4,182
|
|
|
|
5.7
|
%
|
|
$
|
3,064
|
|
|
|
4.9
|
%
|
|
$
|
1,118
|
|
|
|
36.5
|
%
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
Quarterly Analysis of Results - Wholesale
On an average weekly basis (normalizing for 14 weeks compared to 13 weeks), net sales increased $4,482 or 7.1%. This increase was driven by a $2,063 increase in Lane Venture shipments over the prior year period when we were then in the process of integrating the newly acquired operations into the Company, along with a 3.0% increase in shipments to the BHF network and a 4.6% increase in furniture shipments to the open market (outside the BHF network). Gross margin for the wholesale segment was 32.9% for the first quarter of 2019 as compared to 32.4% for the prior year quarter. This increase was primarily driven by higher margins in domestic custom upholstery operations as price increases implemented during the third quarter of 2018 offset the increased raw material costs experienced late in 2017 and early 2018. This margin improvement was partially offset by lower margins in the imported casegoods operation due to a $390 inventory valuation charge associated with our exit from the juvenile line of business. In addition, both the upholstery and wood operations were negatively impacted by higher labor costs due to higher employee health care expenses from unfavorable claim experience. The decrease in SG&A as a percentage of sales was primarily driven by greater leverage of fixed costs due to higher sales volumes partially offset by higher marketing and other brand development costs and higher employee health care expenses from unfavorable claim experience.
Wholesale shipments by type:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bassett Custom Upholstery
|
|
$
|
41,538
|
|
|
|
57.1
|
%
|
|
$
|
33,568
|
|
|
|
53.2
|
%
|
|
$
|
7,970
|
|
|
|
23.7
|
%
|
Bassett Leather
|
|
|
5,771
|
|
|
|
7.9
|
%
|
|
|
6,524
|
|
|
|
10.3
|
%
|
|
|
(753
|
)
|
|
|
-11.5
|
%
|
Bassett Custom Wood
|
|
|
11,675
|
|
|
|
16.0
|
%
|
|
|
10,987
|
|
|
|
17.4
|
%
|
|
|
688
|
|
|
|
6.3
|
%
|
Bassett Casegoods
|
|
|
12,640
|
|
|
|
17.4
|
%
|
|
|
10,797
|
|
|
|
17.1
|
%
|
|
|
1,843
|
|
|
|
17.1
|
%
|
Accessories
|
|
|
1,157
|
|
|
|
1.6
|
%
|
|
|
1,224
|
|
|
|
1.9
|
%
|
|
|
(67
|
)
|
|
|
-5.5
|
%
|
Total
|
|
$
|
72,781
|
|
|
|
100.0
|
%
|
|
$
|
63,100
|
|
|
|
100.0
|
%
|
|
$
|
9,681
|
|
|
|
15.3
|
%
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
Wholesale Backlog
The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $13,657 at March 2, 2019 as compared with $17,098 at February 24, 2018.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Retail – Company-
o
wned
S
tores
Segment
Results for the retail segment for the three months ended March 2, 2019 and February 24, 2018 are as follows:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
69,629
|
|
|
|
100.0
|
%
|
|
$
|
64,661
|
|
|
|
100.0
|
%
|
|
$
|
4,968
|
|
|
|
7.7
|
%
|
Gross profit
|
|
|
34,678
|
|
|
|
49.8
|
%
|
|
|
32,667
|
|
|
|
50.5
|
%
|
|
|
2,011
|
|
|
|
6.2
|
%
|
SG&A expenses
|
|
|
37,230
|
|
|
|
53.5
|
%
|
|
|
33,478
|
|
|
|
51.8
|
%
|
|
|
3,752
|
|
|
|
11.2
|
%
|
New store pre-opening costs
|
|
|
494
|
|
|
|
0.7
|
%
|
|
|
702
|
|
|
|
1.1
|
%
|
|
|
(208
|
)
|
|
|
-29.6
|
%
|
Loss from operations
|
|
$
|
(3,046
|
)
|
|
|
-4.4
|
%
|
|
$
|
(1,513
|
)
|
|
|
-2.3
|
%
|
|
$
|
(1,533
|
)
|
|
|
101.3
|
%
|
Results for comparable stores
†
(57 stores) are as follows:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
63,131
|
|
|
|
100.0
|
%
|
|
$
|
62,988
|
|
|
|
100.0
|
%
|
|
$
|
143
|
|
|
|
0.2
|
%
|
Gross profit
|
|
|
31,537
|
|
|
|
50.0
|
%
|
|
|
31,922
|
|
|
|
50.7
|
%
|
|
|
(385
|
)
|
|
|
-1.2
|
%
|
SG&A expenses
|
|
|
32,618
|
|
|
|
51.7
|
%
|
|
|
31,574
|
|
|
|
50.1
|
%
|
|
|
1,044
|
|
|
|
3.3
|
%
|
Loss from operations
|
|
$
|
(1,081
|
)
|
|
|
-1.7
|
%
|
|
$
|
348
|
|
|
|
0.6
|
%
|
|
$
|
(1,429
|
)
|
|
|
-410.6
|
%
|
†
“Comparable” stores include only those locations that have been open and operated by the Company for all of each respective comparable period.
Results for all other stores are as follows:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,498
|
|
|
|
100.0
|
%
|
|
$
|
1,673
|
|
|
|
100.0
|
%
|
|
$
|
4,825
|
|
|
|
288.4
|
%
|
Gross profit
|
|
|
3,141
|
|
|
|
48.3
|
%
|
|
|
745
|
|
|
|
44.5
|
%
|
|
|
2,396
|
|
|
|
321.6
|
%
|
SG&A expenses
|
|
|
4,612
|
|
|
|
71.0
|
%
|
|
|
1,904
|
|
|
|
113.8
|
%
|
|
|
2,708
|
|
|
|
142.2
|
%
|
New store pre-opening costs
|
|
|
494
|
|
|
|
7.6
|
%
|
|
|
702
|
|
|
|
42.0
|
%
|
|
|
(208
|
)
|
|
|
-29.6
|
%
|
Loss from operations
|
|
$
|
(1,965
|
)
|
|
|
-30.2
|
%
|
|
$
|
(1,861
|
)
|
|
|
-111.2
|
%
|
|
$
|
(104
|
)
|
|
|
5.6
|
%
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
Quarterly Analysis of Results - Retail
The increase in net sales for the 69 Company-owned BHF stores included a $4,825 increase in non-comparable store sales as we have opened 12 stores over the last 18 months, along with a 0.2% increase for the 57 comparable stores over the first quarter of fiscal 2018. On an average weekly basis (normalizing for the extra week in the first quarter of 2019), comparable store sales decreased 6.9%.
While we do not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores decreased by 4.8% for the first quarter of 2019 as compared to the first quarter of 2018. On an average weekly basis, comparable store written sales decreased 11.6%.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
The decrease in comparable store gross margins was primarily due to increased clearance activity due to the launch of the new custom upholstery program and the selloff of existing floor samples and other clearance product as a result of the repositioning of two stores in the Houston market late in 2018. The increase in SG&A expenses for comparable stores as a percentage of sales to 51.7% was primarily due to higher employee health care expenses from unfavorable claim experience and increased warehousing and delivery costs due to the previously announced transition of the Bassett final mile service from Zenith to the corporate retail operation.
The $104 increase in the operating loss from non-comparable stores for the first quarter of 2019 includes new store pre-opening costs of $494 compared to $702 for the prior year period. We incur losses in the first two to three months of operation following a store opening as sales are not recognized in the income statement until the furniture is delivered to its customers resulting in operating expenses without the normal sales volume. Because we do not maintain a stock of retail inventory that would result in quick delivery, and because of the custom nature of the furniture offerings, such deliveries are generally not made until after 30 days from when the furniture is ordered by the customer. Coupled with the pre-opening costs, total start-up losses typically amount to $400 to $600 per store. During the first quarter of 2019 we incurred $828 of post-opening losses associated with the four new stores opened during the first quarter of 2019 compared to $740 of post-opening losses associated with other locations during the first quarter of 2018.
Each addition to our Company-owned store network results in incremental fixed overhead costs, primarily associated with local store personnel, occupancy costs and warehousing expenses. The incremental SG&A expenses associated with each new store will be ongoing.
Retail Backlog
The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was $31,295, or an average of $454 per open store, at March 2, 2019 as compared with a retail backlog of $34,343, or an average of $545 per open store, at February 24, 2018.
Logistical
Services Segment
Results for our logistical services segment for the three months ended March 2, 2019 and February 24, 2018 are as follows:
|
|
Quarter Ended*
|
|
|
Change
|
|
|
|
March 2, 2019
|
|
|
February 24, 2018
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistical services revenue
|
|
$
|
21,751
|
|
|
|
100.0
|
%
|
|
$
|
21,422
|
|
|
|
100.0
|
%
|
|
$
|
329
|
|
|
|
1.5
|
%
|
Operating expenses
|
|
|
21,039
|
|
|
|
96.7
|
%
|
|
|
21,092
|
|
|
|
98.5
|
%
|
|
|
(53
|
)
|
|
|
-0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
712
|
|
|
|
3.3
|
%
|
|
$
|
330
|
|
|
|
1.5
|
%
|
|
$
|
382
|
|
|
|
115.8
|
%
|
*14 weeks for fiscal 2019 as compared with 13 weeks for fiscal 2018.
Quarterly Analysis of Operations – Logistical Services
On an average weekly basis (normalizing for the extra week in the first quarter of fiscal 2019), revenues for Zenith decreased $1,225 or 5.7%. This decrease was primarily due to the previously announced discontinuation of home delivery services to third-party customers. The decrease in Zenith’s operating expenses as a percent of sales was primarily due to reduced expenses in the home delivery operation.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Other
I
tems
A
ffecting
N
et
Income
Early Retirement Program
During the first quarter of fiscal 2019, we offered an early retirement package to certain eligible employees of the Company. Twenty-three employees accepted the offer, which expired on February 28, 2019. These employees are to receive pay equal to one-half their current salary plus benefits over a period of one year from the final day of each individual’s active employment. Accordingly, we recognized a charge of $835 during the three months ended March 2, 2019. The unpaid obligation of $835 at March 2, 2019 will substantially be paid out within one year.
Other
L
oss,
N
et
Other loss, net, for the three months ended March 2, 2019 was $123 as compared to $627 for the three months ended February 24, 2018. The decreased net loss is primarily attributable to $378 in death benefits received from life insurance policies covering a former executive, increased interest income due to rising yields on our short-term investments compared to the prior year period and lower interest expense due to overall lower levels of debt.
Income
T
axes
and Impact of Tax Cuts and Jobs Act
We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter.
On December 22, 2017, The Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act reduced the federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018 for all corporate taxpayers. Our effective tax rate for the three months ended March 2, 2019 differs from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences.
Because the Act specified the new 21% tax rate beginning on January 1, 2018, we were only subject to the reduced rate for 11 months of 2018. Therefore, we computed our income tax expense for fiscal 2018 using a blended federal statutory rate of 22.2%. However, our effective tax rate for the three months ended February 24, 2018 was 164.2% primarily due to a $2,157 discrete charge to re-measure our deferred tax assets at the lower statutory rate. Other items impacting our effective tax rate for the three months ended February 24, 2018 included the effects of state income taxes and various permanent differences including the favorable impacts of excess tax benefits on stock-based compensation of $181 and the Section 199: Domestic Production Activities Deduction, which was eliminated by the Act for our fiscal 2019 tax return.
Liquidity and Capital Resources
Cash Flows
Cash used in operations for the first quarter of 2019 was $15,734 compared to $996 used for the first quarter of 2018, representing an increase of $14,738. This increase in cash used is primarily due to increased investment in inventory in anticipation of potential tariff increases originally scheduled to go into effect December 31, 2018, other changes in working capital due in part to the timing impact of the shift in our fiscal quarter end resulting from the additional week in the first quarter of fiscal 2019 and lower comparable store sales on an average weekly basis resulting in reduced cash flows.
Our overall cash position decreased by $23,482 during the first quarter of 2019. In addition to the cash used in operations, we used $5,435 of cash in investing activities, primarily consisting of capital expenditures associated with retail store expansion and relocations. Net cash used in financing activities was $2,313, including dividend payments of $1,291 and stock repurchases of $1,012 under our existing share repurchase plan, of which $16,973 remains authorized at March 2, 2019. With cash and cash equivalents and short-term investments totaling $32,629 on hand at March 2, 2019, expected future operating cash flows and expected reduced capital expenditures from fewer store openings, we believe we have sufficient liquidity to fund operations for the foreseeable future.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Debt and Other Obligations
Our credit facility with our bank provides for a line of credit of up to $25,000. This credit facility is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future. The credit facility will mature in December 2021. At March 2, 2019, we had $2,798 outstanding under standby letters of credit against our line, leaving availability under our credit line of $22,202. In addition, we have outstanding standby letters of credit with another bank totaling $325.
At March 2, 2019 we have outstanding principal totaling $183 under real estate notes payable, all of which matures within one year of the balance sheet date. See Note 8 to our condensed consolidated financial statements for additional details regarding these notes. We expect to satisfy these obligations as they mature using cash flow from operations or our available cash on hand.
We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services and retail segments. We had obligations of $184,109 at March 2, 2019 for future minimum lease payments under non-cancelable operating leases having remaining terms in excess of one year. We also have guaranteed certain lease obligations of licensee operators. Remaining terms under these lease guarantees range from approximately one to five years. We were contingently liable under licensee lease obligation guarantees in the amount of $1,953 at March 2, 2019. See Note 11 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.
Investment in Retail Real Estate
We have a substantial investment in real estate acquired for use as retail locations. To the extent such real estate is occupied by Company-owned retail stores, it is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and is considered part of our retail segment. The net book value of such retail real estate occupied by Company-owned stores was $19,844 at March 2, 2019. All other retail real estate that we own, consisting of locations formerly leased to our licensees and now leased to others, is included in other assets in the accompanying condensed consolidated balance sheets. The net book value of such real estate, which is considered part of our wholesale segment, was $1,629 at March 2, 2019.
The following table summarizes our total investment in retail real estate owned at March 2, 2019:
|
|
Number of
|
|
|
Aggregate
|
|
|
Net Book
|
|
|
|
Locations
|
|
|
Square Footage
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate occupied by Company-owned and operated stores, included in property and equipment, net (1)
|
|
|
9
|
|
|
|
223,570
|
|
|
$
|
19,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment real estate leased to others, included in other assets
|
|
|
2
|
|
|
|
41,021
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company investment in retail real estate
|
|
|
11
|
|
|
|
264,591
|
|
|
$
|
21,473
|
|
(1) Includes two properties encumbered under mortgages totalling $183 at March 2, 2019.
|
Critical Accounting Policies
and Estimates
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended November 24, 2018.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
MARCH 2, 2019
(Dollars in thousands except share and per share data)
Off-Balance Sheet Arrangements
We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. We lease land and buildings that are primarily used in the operation of both Company-owned and licensee stores as well as land and buildings used in our logistical services segment. We also lease transportation equipment used in our retail and logistical services segments. We have guaranteed certain lease obligations of licensee operators of the stores as part of our retail expansion strategy. See Note 11 to our condensed consolidated financial statements for further discussion of operating leases and lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.
Contingencies
We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations. See Note 11 to our condensed consolidated financial statements for further information regarding certain contingencies as of March 2, 2019.