"Our focus on strengthening our balance sheet and improving our operations showed more progress in the second quarter," said Robert H. Spilman Jr., President & CEO. "Gross margins improved substantially in both our retail and wholesale segments. Cost reductions and working capital management enabled us to retire the remaining $15 million obligation on our long term bank facility as well as another $5.8 million in mortgage debt. And, for the fifth consecutive quarter, we were able to generate positive operating cash flow; this time in the amount of $1.8 million. The economy has not shown a meaningful turnaround for the furniture industry overall. Therefore, we will continue to conservatively manage the business while being as aggressive as we can in our efforts to grow the Company."
Wholesale Segment
Net sales for the wholesale segment were $42.8 million for the second quarter of 2010 as compared to $45.0 million for the second quarter of 2009, a decrease of 4.9%. While the Company has seen a slight improvement in demand through its retail distribution channels, wholesale shipments were adversely affected by delays in receiving imported product from certain of the Company's overseas suppliers. In an effort to mitigate the stock outages caused by these delays, the Company began increasing inventory levels during the second quarter with respect to its imported goods. Approximately 49% of wholesale shipments during the second quarter of 2010 were imported products compared to approximately 51% for the second quarter of 2009. Gross margins for the wholesale segment were 32.4% for the second quarter of 2010 as compared to 28.5% for the second quarter of 2009. This increase is due to improved margins on the Company's imported wood products as well as the closure of its fiberboard plant during the fourth quarter of 2009 which essentially operated at a breakeven gross profit during 2009. Wholesale SG&A, excluding bad debt and notes receivable valuation charges, decreased $0.6 million, or 5.1%, for the second quarter of 2010 as compared to 2009, due primarily to lower spending due to lower sales and continued cost containment measures. The Company recorded $1.1 million of bad debt and notes receivable valuation charges for the second quarter of 2010 as compared to $5.8 million for the second quarter of 2009. This significant decrease in charges is primarily due to the Company's efforts to work diligently with its licensees to control increases in accounts and notes receivable exposure. In addition, many of the distressed licensees for which significant bad debt and notes receivable valuation charges were required in 2009 have since been acquired by the Company and are now run as Company-owned stores. The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and company stores, was $16.6 million at May 29, 2010 as compared with $8.8 million at May 30, 2009. A significant portion of the $7.8 million increase in wholesale backlog is attributable to delayed wholesale shipments and higher than anticipated orders of certain imported upholstery products.
"Generating top line growth at wholesale continues to present a challenge for us," said Mr. Spilman. "The overall sales environment remains tough as the consumer appears reluctant to spend on big-ticket items such as furniture, except during major promotional events. Furthermore, our shipments for the second quarter were hampered by several of our Asian suppliers' inability to meet our order demand. Consequently, we ended May 2010 with an order backlog double that of May 2009. A substantial portion of the backlog build for the second quarter should be delivered during the third quarter as product flow and service levels improve. We are encouraged by the reception of dealers and consumers to our recent product introductions, particularly in our upholstery segment. We also began production of our new popularly priced upholstery assortment in early May and anticipate a significant contribution to our top line from these products over the remainder of 2010."
Retail Segment
The Company-owned stores had sales of $30.5 million in the second quarter of 2010 as compared to $25.7 million in the second quarter of 2009, an increase of 18.7%. The increase was comprised of a $5.2 million increase from the net addition of 11 stores since the end of the first quarter of 2009, partially offset by a $0.4 million, or 1.7% decrease in comparable store sales ("comparable" stores include those locations that have been open and operated by the Company for all of each comparable reporting period). Deliveries to customers were adversely affected during the second quarter of 2010 by stock outages at the wholesale level due to delays in receiving imported product from the Company's overseas suppliers, partially offset by deliveries from a strong order backlog carried over into the second quarter from February 2010.
While the Company does not recognize sales until goods are delivered to the customer, the Company's management tracks written sales (the dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores during the second quarter of 2010 and 2009 were $21.3 million and $21.2 million, respectively.
Gross margins for the quarter increased 0.9 percentage points compared to the second quarter of 2009 due to improved pricing and promotional strategies and improved clearance margins. SG&A increased $2.4 million from the second quarter of 2009, comprised of an increase of $2.9 million resulting from the net addition of retail stores, partially offset by a decline of $0.5 million at comparable stores due to continued cost containment efforts during the quarter. On a comparable store basis, SG&A decreased 1.4 percentage points as a percentage of sales for the second quarter of 2010 as compared with the comparable 2009 period. As a result, operating losses for the comparable stores were reduced by 44% to $0.8 million. In all other stores (consisting of stores which have been acquired, opened or closed during the twelve months ended May 29, 2010), SG&A as a percentage of sales decreased 13.4 points from the second quarter of 2009 primarily because of larger backlogs acquired in the 2010 store purchases as compared with those acquired in the second quarter of 2009, resulting in a faster contribution to sales from those stores acquired in the second quarter of 2010. Refer to the accompanying schedule of Supplemental Retail Information for results of operations for the Company's retail segment by comparable and all other stores. The dollar value of retail backlog, representing orders received but not yet shipped to customers, was $13.2 million, or an average of $294 thousand per open store, at May 29, 2010 as compared with $10.5 million, or an average of $276 thousand per open store, at May 30, 2009. A significant portion of the $2.7 million increase in retail backlog is attributable to the addition of new stores along with delayed shipments due to stock outages.
"Our comparable corporate stores continued to improve, reducing operating losses in the second quarter of 2010 by 47% as compared to the second quarter of 2009," added Mr. Spilman. "We continue to be encouraged by this improvement. In addition, our overall corporate store results improved compared to the second quarter of 2009, despite startup costs associated with eight licensee store acquisitions and two new store openings. We do not expect to acquire as many licensee stores over the remainder of 2010, nor do we plan to open any additional new stores this year. Our focus on improved pricing and promotional strategies resulted in a 90 basis point improvement in gross margins over the second quarter of 2009 to 48.1%. As we move forward, we will continue to closely monitor the operating costs in our retail segment in order sustain these improvements."
Balance Sheet and Cash Flow
The Company generated $1.8 million in operating cash flow during the second quarter of 2010 through improved working capital management and continued cost containment efforts, marking the fifth consecutive quarter of positive cash flow. Operating cash flow during the second quarter of 2010 was $4.8 million lower than the first quarter of 2010 in part due to the Company's initiative to build its inventory of imported goods to levels needed to reduce the frequency of stock outages experienced during the first half of 2010. In addition, lower shipments that were experienced as a result of stock positions negatively impacted cash collections from the Company's customers, further contributing to the decline in operating cash flow. The Company expects that an incremental investment in inventory of $3 million to $5 million during the remainder of 2010 will be made to attain desired service levels for its customers. In addition to the $13.1 million of cash on-hand, the Company has investments of $14.9 million, primarily consisting of $14.1 million in cash, money market accounts, bond funds, and individual treasuries, and $0.8 million in a hedge fund. Although the $14.1 million is primarily cash and other liquid assets, the Company presents these as long-term assets as they are pledged as collateral for the revolving debt agreement.
During the second quarter of 2010, the Company received $4.2 million in proceeds from an eminent domain condemnation settlement for the Mt. Pleasant store property. Of those proceeds, $3.2 million was used to pay off an outstanding mortgage on that property. In addition, the Company repaid a $2.4 million mortgage on another retail property that matured during the second quarter. The Company also has three additional mortgages totaling approximately $6.9 million that will mature during the twelve month period following May 29, 2010. The Company expects to satisfy these obligations through a variety of means, which may include refinancing, drawing from its revolving credit facility, or paying from cash on hand or future operating cash flow. However, there can be no assurance that any of these strategies will be successful.
The Company substantially reduced its level of outstanding debt during the second quarter of 2010. In addition to the $5.6 million of mortgage pay-offs previously noted, the Company voluntarily repaid the outstanding balance of $15.0 million on its revolving credit facility during the quarter. While that facility remains in place, it matures on November 30, 2010. The Company has initiated discussions with its bank regarding the amendment and extension of the facility beyond its current maturity. While there can be no assurance that these discussions will result in a favorable outcome, the Company expects to have an amended and extended facility in place prior to November 30, 2010.
About Bassett Furniture Industries, Inc.
Bassett Furniture Industries, Inc. (Nasdaq:BSET), is a leading manufacturer and marketer of high quality, mid-priced home furnishings. With 104 licensee- and company- owned stores, Bassett has leveraged its strong brand name in furniture into a network of corporate and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories. The most significant growth opportunity for Bassett continues to be the Company's dedicated retail store program. Bassett's retail strategy includes affordable custom-built furniture that is ready for delivery in the home within 30 days. The stores also feature the latest on-trend furniture styles, more than 750 upholstery fabrics, free in-home design visits, and coordinated decorating accessories. For more information, visit the Company's website at bassettfurniture.com. (BSET-E)