Bassett Furniture Industries Inc. announced today its results of operations for its fiscal quarter and 40 week period ended August 30, 2008.
Sales for the quarter ended August 30, 2008 were $70.2 million as compared to $70.5 million for the quarter ended August 25, 2007. The 2008 and 2007 reported sales were increased by reported revenue of $4.0 million and $1.0 million, respectively, due to a change in the Company’s business practices with respect to freight for the delivery of wholesale furniture to its retail stores. In July of 2007, the Company began invoicing these customers on a fully landed basis such that the invoice price includes freight. Excluding the effects of the business change, sales would have been $66.2 million for the quarter ended August 30, 2008 as compared to $69.5 million for the quarter ended August 25, 2007, a 5% decrease due primarily to a further softening in the overall retail environment late in the third quarter (see also discussion in the Wholesale and Retail Segments below).
Gross margins for the third quarter of 2008 and 2007 were 40.0% and 35.0%, respectively. Excluding the effects of the above-mentioned business change, the gross margin for 2008 and 2007 would have been 36.4% and 34.0%, respectively. This increase over 2007 results from improved margins in both the wholesale and retail segments. Selling, general and administrative expenses, which exclude the effects of the above-mentioned business change, increased $2.2 million for the third quarter of 2008 as compared to 2007 primarily due to a $3.2 million increase in the provision for bad debts related to the impact that the prolonged weak retail environment is having on certain of the Company’s dealers. The Company reported a net loss of $(2.7) million, or $(0.23) per share for the quarter ended August 30, 2008, as compared to net income of $0.7 million, or $0.06 per share, for the quarter ended August 25, 2007.
Sales for the 40 weeks ended August 30, 2008 were $226.6 million as compared to $219.3 million for the 39 weeks ended August 25, 2007, an increase of 3%. The 2008 and 2007 reported sales were increased by reported revenue of $12.7 million and $1.0 million, respectively, due to the change in the Company’s business practices as described above. In addition, fiscal 2008 included an additional week of sales due to the Company’s fiscal calendar. Gross margins for the 40 weeks ended August 30, 2008 and 39 weeks ended August 25, 2007 were 39.8% and 32.3%, respectively. Excluding the effects of the above-mentioned business change, the gross margin for 2008 and 2007 would have been 36.2% and 32.0%, respectively. This significant increase over 2007 results from improved margins in both the wholesale and retail segments. Selling, general and administrative expenses increased $4.9 million for the nine months of 2008 as compared to 2007 primarily due to the increase in the provision for bad debts as described above. The Company reported a net loss of $(2.5) million or $(0.22) per share for the 40 weeks ended August 30, 2008, as compared to a net loss of $(5.9) million, or $(0.50) per share, for the 39 weeks ended August 25, 2007.
The Bassett Furniture retail store program had 120 stores in operation as of August 30, 2008. For the first nine months of 2008, three new stores were opened (two licensee- and one corporate-owned) and 13 stores were closed (10 licensee and three corporate-owned). Although management will continue to work closely with its licensee stores to ensure the success of both the licensee and Bassett, the Company expects that three to five additional underperforming stores will close during the remainder of 2008.
“Despite our overall disappointing results, we believe that progress was made in key areas of our operations,” said Robert H. Spilman, Bassett’s president and chief executive officer. “We continue to show improved gross margins in both the wholesale and retail divisions over 2007 and our new product introductions have been well-received. We also have been successful in reducing our overall cost structure through targeted spending reductions. We remain encouraged by the sales results from our new retail store prototype despite the ongoing difficult home furnishings environment. Sales per square foot in the new format continue to meet our expectations and to noticeably outperform our existing fleet average.
“Given the difficult and somewhat unprecedented environment, we have had no choice but to take several important actions aimed at improving our results in the short-term. These include:
* Aggressively working with certain licensees to close those
stores that are underperforming thereby limiting further
exposure in our accounts receivable.
* Reducing our inventory levels to improve working capital
and cash flow.
* Right-sizing our expense structure in both our wholesale
and corporate retail divisions.
“Although we have these short-term actions in place, we will continue to think and act in the best long-term interests of our shareholders. We will continue to thoughtfully invest in store prototype conversions and remodels and work diligently with our licensed network to improve their operating results. With the improvements in our retail program and our strong balance sheet, we are well positioned to not only survive these turbulent times, but also to gain market share as some of our competitors exit the industry.”
The results for the 40 weeks ended August 30, 2008 included four unusual pretax items consisting of $1.4 million of legal and other expenses for the proxy contest with Costa Brava Partnership III L.P., a $1.3 million gain associated with the sale of the Company’s airplane, a $0.6 million loss on the exit of a corporate retail store lease recorded in the third quarter and a $0.6 million impairment charge associated with the writeoff of leasehold improvements for a closed store, of which $0.2 million was recorded in the third quarter. The loss for the 39 weeks ended August 25, 2007 included unusual pretax charges of $3.6 million for the writedown of the plant and equipment for the closing of the Bassett plant, $1.9 million associated with lease exit costs for certain closed stores, $1.0 million associated with the writeoff of tenant improvements from the downsizing of the Company’s showroom space and $0.9 million associated with severance from the closure of the Bassett plant. Please refer to the attached schedule which summarizes these unusual items.
Excluding these unusual items, the net loss for the quarter and 40 weeks ended August 30, 2008 would have been $(2.1) million and $(1.7) million, respectively, and the net loss for the 39 weeks ended August 25, 2007 would have been $(1.4) million. Please refer to the attached schedule which reconciles net income (loss) as reported to net income (loss) as adjusted.
Wholesale Segment
Net sales for the wholesale segment were $59.5 million for the third quarter of 2008 as compared to $58.5 million for the third quarter of 2007, an increase of 2%. The 2008 and 2007 reported sales were increased by reported revenue of $4.0 million and $1.0 million, respectively, due to a change in the Company’s business practices as described above. Excluding the effects of the business change, sales would have been $55.5 million for the quarter ended August 30, 2008 as compared to $57.5 million for the quarter ended August 25, 2007, a 3% decrease. Approximately 53% of wholesale shipments during the third quarter of 2008 were imported products compared to 51% for the third quarter of 2007. Gross margins for the wholesale segment were 29.7% for the third quarter of 2008 as compared to 24.4% for the third quarter of 2007. Excluding the effects of the invoicing change described above, gross margins for the third quarter of 2008 and 2007 would have been 24.7% and 23.1%, respectively, a 1.6 percentage point increase. This increase is primarily due to an improved product mix associated with increased imported products which carry a higher margin and the absence of certain wind down costs incurred in 2007 related to the closing of the Bassett plant. The Company recorded $4.1 million of bad debt expense, which was $3.2 million more than in 2007. Certain of the Company’s licensee-owned stores continue to be impacted by the deteriorating retail environment and strained credit markets coupled with lower consumer confidence. The increased bad debt expense was partially offset by reduced spending in other SG&A areas.
Net sales for the wholesale segment were $190.8 million for the 40 weeks ended August 30, 2008 as compared to $184.2 million for the 39 weeks ended August 25, 2007, an increase of 4%. The 2008 and 2007 reported sales were increased by reported revenue of $12.7 million and $1.0 million, respectively, due to a change in the Company’s business practices as described above. Gross margins for the wholesale segment were 29.7% for the 40 weeks ended August 30, 2008 as compared to 22.9% for the 39 weeks ended August 25, 2007. Excluding the effects of the business change described above, gross margins for the nine months of 2008 and 2007 would have been 24.8% and 22.5%, respectively, a 2.3 percentage point increase. This increase is primarily due to the improved product mix as described above. The Company recorded $6.1 million of bad debt expense for fiscal 2008, which was $3.9 million more than in 2007.
Retail Segment
The third quarter featured an unusual amount of activity in Bassett’s 29 corporate stores, as one store was permanently closed, two stores were temporarily closed for conversion to the new store prototype, and three stores were remodeled. Nevertheless, retail sales increased to $24.0 million in the third quarter of 2008 as compared to $22.2 million in the third quarter of 2007. These sales increases have primarily resulted from the additional Company-owned stores acquired during 2007 and an increase in comparable store sales. The comparable store sales increases were primarily driven by progress in the Dallas market, the benefits of store consolidation in upstate New York, and increased sales in its Pineville, N.C., store due to its conversion to the new store prototype. Gross margins for the quarter decreased 2.3 percentage points due primarily to lower margins in the Houston and Atlanta markets, resulting from the temporary closure of two stores for conversion to the new store prototype concept as these stores ran inventory liquidation events. Even with the lower gross margins and an overall difficult retail environment, the retail segment slightly reduced its operating loss over the prior year period. For its 24 comparable corporate stores, the Company reduced its operating losses by approximately 20% in the third quarter of 2008 as compared to the third quarter of 2007. The Company believes that the combination of new product introductions, store prototype retrofits, better hiring and training of design consultants and continued improved marketing efforts will lead to further improvement in retail operating results.
Net sales for the 40 weeks ended August 30, 2008 were $74.5 million as compared to $65.3 million for the 39 weeks ended August 25, 2007. These sales increases have primarily resulted from the additional Company-owned stores acquired during 2007 and increases in comparable store sales. Gross margins for the 2008 period increased 1.5 percentage points due to improved pricing and promotional strategies. The Company’s retail segment reduced its total operating losses by $0.8 million, a 10% decrease. For its 22 comparable corporate stores, the Company reduced its operating losses by approximately 35% in the 40 weeks ended August 30, 2008 as compared to the 39 weeks ended August 25, 2007.
Other, net
Other, net for the quarter and 40 week period ended August 30, 2008 was $(0.7) million and $(0.5) million as compared to $0.8 million and $4.5 million for the quarter and 39 week period ended August 25, 2007, respectively. These decreases were primarily related to the performance of the Company’s Alternative Asset Fund, as the Company recognized market losses of $(0.6) million and $(1.0) million for the quarter and nine months ended August 30, 2008 as compared to market gains of $0.1 million and $2.9 million for the quarter and nine months ended August 25, 2007. As of August 30, 2008, the fair value of the Company’s investment in the Alternative Asset Fund was $29.0 million, which is included in investments in the consolidated balance sheet.
Balance Sheet and Cash Flow
The Company used $12.7 million of cash in operating activities during the 40 weeks ended August 30, 2008 primarily due to the continued difficult environment at retail as well as payments to fund the inventory build at the end of 2007 for the January 2008 new product rollout. Representing one of the most extensive redesigns and rollouts in the Company’s recent history, the new product has been well-received at retail and has helped fuel sales. Due to the lead time to source the majority of the new product, inventory and accounts payable balances were unusually high at the end of fiscal 2007. Management expects inventory levels to slightly increase over the remainder of the year as the Company prepares for additional product introductions in January 2009. These introductions will not be as extensive as the 2008 rollout. The Company’s accounts payable balance was reduced by $7.8 million during the 40 week period and has returned to a more normalized level. The Company also funded $16.1 million in dividends, including an $8.7 million special dividend in August as discussed below, and repurchased $3.6 million of common stock under the previously announced $20 million share repurchase plan. These cash requirements were primarily funded through $27.6 million of net investment sales and $2.0 million in additional borrowings on the revolving credit facility.
Net accounts receivable increased $2.4 million during the 40 week period ended August 30, 2008, due primarily to the slower pace of collections from certain store licensees related primarily to the overall retail environment. The Company continually assesses its levels of bad debt reserves and recorded $6.1 million in provision for losses on accounts receivable in 2008 with $4.1 million of that recorded in the third quarter. A continuing difficult and weak retail environment could result in further bad debt expenses, reduced revenue and other store real estate charges.
Special Dividend and Status of Investment Redemptions
During the quarter ended August 30, 2008, the Company announced that its Board of Directors had approved the first installment of $0.75 per share to be paid as part of the $1.25 special dividend announced in April. Accordingly, $8.7 million was paid out in August. To fund this special dividend, the Company received $12.6 million during the quarter from the full liquidation of a position in the Alternative Asset Fund and $3.6 million from the partial liquidation of a position, with excess funds primarily being used for additional repurchases of common stock under the Company’s share repurchase plan and to reduce outstanding debt.
