Bassett Furniture Sales Decline 13% For Quarter

Furniture World Magazine

Bassett Furniture Industries Inc. announced its earnings for its fourth quarter and fiscal year ended November 25, 2006. Sales for the fourth quarter of 2006 were $76.5 million, down 13% from fourth quarter 2005 levels. The Company reported net income of $0.4 million or $.03 per share as compared to net income of $2.1 million or $.18 per share in the fourth quarter of 2005. Year-to-date, sales were $328.2 million, down 2% from the prior year. The Company reported net income of $5.4 million or $.46 per diluted share as compared to the Company’s restated net income of $9.8 million or $.82 per diluted share in 2005. 2006 earnings were impacted by two unusual items, a fourth quarter goodwill impairment charge of $1.4 million and $1.5 million of income related to subsidies received in connection with the Continued Dumping and Subsidy Offset Act (CDSOA). The decline in sales along with retail segment operating losses in the Company-owned BFD stores were the primary factors in the quarter over quarter and year over year decrease in earnings from 2005 to 2006. See below and the attached chart for a discussion of the Company’s results by segment. A reconciliation of reported to adjusted net income and earnings per share has also been set forth below for the fourth quarter and the year 2006 compared to 2005. “The fourth quarter was tough for our industry and Bassett was no exception,” said Robert H. Spilman, Jr., President and Chief Executive Officer. “Although retail conditions continue to be challenging, we are committed to investing in the future of the Bassett store program and the Bassett brand. Examples are the ongoing addition of new retail talent and a commitment to increased distribution of our consumer catalog. Furthermore, we are in the process of preparing to unveil a new store prototype later in 2007. We will, however, continue to examine our cost structure in light of the cost of our new initiatives and the current retail environment.” 2005 and 2006 Restatements and Other Unusual Items As previously announced, the Company has restated its financial statements as of and for the year ended November 26, 2005 and will provide amended quarterly information for fiscal 2005 and 2006 as part of its Annual Report on Form 10-K for the year ended November 25, 2006. The Company's 2005 Annual Report on Form 10-K was reviewed by the Staff of the Securities and Exchange Commission (SEC) as part of its normal review process. The Staff recommended changes to the Company's accounting treatment associated with its acquisitions of three retail licensee operations in fiscal 2005. Upon further review, the Company concurred with the accounting treatment recommended by the Staff. In connection with the Company's acquisitions of the three retail licensee operations in 2005, the Company recognized pre-tax charges of $4.2 million to (1) eliminate the gross profit on inventories previously sold to the licensees by Bassett and subsequently acquired in the acquisitions and (2) reduce goodwill associated with the acquisitions to a value the Company believed was appropriate. Upon further review, the Company has concluded that no charges should have been recognized with the acquisitions. A reconciliation detailing the effects on net income and earnings per share due to the restatements has been included. The Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) provides for the distribution of monies collected by U.S. Customs and Border Protection from antidumping cases to qualified domestic producers, in cases where domestic producers have continued to invest in their technology, equipment and people. For the year ended November 25, 2006, the Company recorded approximately $1.5 million in CDSOA subsidies, in connection with the case involving wooden bedroom furniture imported from China. Subsidies recorded in fiscal 2005 were insignificant. In the fourth quarter of 2006, the Company recorded a $1.4 million impairment charge to write-off the goodwill associated with its retail segment. While the Company is improving and refining its BFD store program, the retail segment continues to experience operating losses coupled with a soft furniture retail environment, particularly for the company-owned store locations. The Company, however, remains confident that recent and planned initiatives and long-term improvement in the retail environment will result in a profitable retail operation. Wholesale Segment: On a wholesale basis, net sales were $65.9 million for the fourth quarter of 2006, 14% below the $77.1 million sales level attained in the fourth quarter of 2005. For the year, wholesale sales were $284.8 million, 5% below sales levels attained in 2005. For 2006, 72% of wholesale shipments were to BFDs compared to 67% in 2005. Approximately 44% of wholesale shipments were imported products as compared to 35% in the fourth quarter of 2005. Overall, the segment’s gross margins increased one percentage point in 2006 compared to 2005 and year-over-year operating earnings increased $2.5 million. This improvement was primarily driven by an improved mix of imported products and the performance of the upholstery division. Upholstery shipments and operating earnings continued to improve due to the retail acceptance of our custom programs and the new imported leather products introduced over the past several years. The Bassett Furniture Direct retail store program had 134 stores (107 licensed and 27 corporately owned) in operation at the end of the fourth quarter. The Company opened one store and two licensed stores were closed during the fourth quarter. Overall retail conditions and the Company’s initiative to develop a new store prototype have temporarily slowed store count growth. The Company expects licensees to open four to six stores in fiscal 2007. Retail Segment: Retail sales for the fourth quarter of 2006 were $21.5 million, 10% below fourth quarter of 2005 levels. For the year, sales were $84.4 million, up $13.9 million from 2005. The increase in sales for 2006 is due to the stores the Company acquired during 2005. Bassett’s 27 corporate stores continued to experience relatively soft conditions at retail and incurred an operating loss of $3.4 million for the fourth quarter of 2006, compared to loss of $1.6 million in the fourth quarter of 2005. Net sales and margins were lower than planned primarily due to the overall soft retail conditions, selling of selected products at clearance prices in order to prepare for the arrival of new products and featured catalog products, and promotions geared to respond to the overall soft market conditions. As previously discussed, changes being made to drive more traffic, improve staffing, and streamline operations are taking longer than anticipated to implement. The Company has made additional changes in both the leadership and pricing structure of the Company-owned stores which it believes will lead to better performance in 2007. Balance Sheet and Cash Flow: The Company used cash in its operating activities in 2007 to fund retail segment losses, an increase in accounts receivable, and a reduction in payables and accrued liabilities. The reduction in current liabilities related in part to payments of prior year restructuring related obligations and a reduction in payables related to the mix shift from domestic to imported purchases. To fund this $5.1 million of operating cash usage, a net $3.9 million in capital spending, and the payment of over $9.4 million in dividend payments to our shareholders, the Company received approximately $6.6 million in dividends from an affiliate, liquidated approximately $6.9 million from its investment portfolio and borrowed approximately $4.4 million under real estate notes payable. The Company’s balance sheet remains strong with over $80 million of cash and investments, $38 million of accounts receivable, $49 million of inventories and total long-term debt including real estate mortgages of $23.5 million. The Company has not included its complete consolidated balance sheet in this release as it is still in the process of verifying its postretirement long-term liability balance. The Company does not expect any potential adjustment to materially impact its current year operating results. Accounts receivable have increased $1.2 million for the year, due to the slower pace of collections from certain BFD licensees related in part to the overall retail environment. Inventories have decreased for the year, due largely to a significant decrease in domestic wood inventories that more than offset an increase in the amount of imported products. Inventories did, however, decrease $2 million during the fourth quarter largely in response to the lower business levels. Bassett also announced that its Board of Directors has declared a regular quarterly dividend of $.20 per share payable on March 1, 2007, to shareholders of record on February 12, 2007. Bassett Furniture Industries, Inc. is a leading manufacturer and marketer of high quality, mid-priced home furnishings. With over 130 Bassett Furniture Direct stores, Bassett has leveraged its brand name in furniture with a network of licensed and Company-owned stores that focus on providing consumers with a friendly and professional environment for buying furniture and accessories. The Company continues to sell its products to other retailers, in addition to the Company’s dedicated retail store program. Bassett’s retail strategy promotes 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 1,000 upholstery fabrics, free in-home design visits, and coordinated decorating accessories. For more information, visit the Company’s website at www.bassettfurniture.com.