High-Yield Bassett Furniture Rocks Into Reversal

Key Points

• Bassett Furniture had a mixed quarter, but earnings were far better than expected. 
• Industry and inventory normalization should drive margin expansion later this year. 
• The balance sheet is a fortress, and the high-yielding dividend is relatively safe. 

The furniture industry has struggled, but indications from Bassett Furniture NASDAQ: BSET echo news from other furniture manufacturers and have the shares rocketing higher. The takeaway is that normalization within the industry is at hand, and most manufacturers will “normalize” at a higher pace of business than before the pandemic. What this means for Bassett Furniture is an outlook for improved margins, profitability, and cash flow that promise to keep the high-yielding dividend in place. 

What’s happening now is inventory normalization. Inventory built up during the supply chain crisis comes with above-average freight and shipping costs, and that inventory is being cleared. As that happens, newer, lower-cost inventory fills the gap, reducing the carrying cost and widening the margin. The problem negatively impacted the Q2 results, but there are already signs of improvement-inventory fell 11% to improve cash flow and adjusted earnings substantially. 

Bassett Furniture Focuses On The Future 

Bassett Furniture had a rough quarter, with revenue falling 22% compared to last year. The decline is due to a combination of factors, including the absence of stimulus dollars and the impacts of inflation and rising interest rates. The high inflation and high rate environment is not expected to end soon, but Bassett is in an excellent position to weather the downturn. The company is well-capitalized and leaning into digital enhancements that will help control costs while maximizing customer relationships.

The core Wholesale segment led with a decline of 29.4%, offset by relative strength in the Retail segment. Retail sales fell only 19.6%, and the segment remained profitable despite markdowns and promotional activity. 

The margin contracted at wholesale and retail levels but by less than expected. The operating income fell YOY due to the revenue decline and impairments, but the cash flow and adjusted earnings were much better than expected. The operating cash flow came in at $5.8 million, more than double the income due to the 11% reduction in inventory and the impact on working capital.

The $0.24 in adjusted EPS is $0.21 better than expected and helped improve the dividend outlook. Regarding the 2nd half of the year, Inventory clearing and resetting actions will continue and likely drive bottom-line performance for the remainder of the year. 

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Bassett Furniture yields about 3.9% following the post-release surge in share prices and is among the highest-yielding in the group. Ethan Allen NYSE: ETD is the only significant player with a higher yield, about 5% and a rapidly improving outlook. The payout ratio for BSET is relatively high quarterly, near 65%, but the annualized figures are much better. The payout ratio is close to 35% annually versus the Marketbeat.com consensus figure, and the company showed clear bottom-line strength in Q2. It may do so again. Regardless, the balance sheet is a fortress, like most in the industry, with no long-term debt and ample cash. It can sustain operations and dividend payments. 

Opportunities In Furniture For Summer Traders 

Most major furniture manufacturers report earnings in early August and present exciting opportunities. The largest, La-Z-Boy NYSE: LZB, is expected to post significant sequential and YOY declines in revenue and earnings, but Ethan Allen and Haverty Furniture Company NYSE: HVT aren’t. Ethan Allen is expected to grow revenue sequentially and snap its business decline while earnings should hold relatively flat.

Haverty is expected to post a YOY decline but post sequentially flat results on the top and bottom lines. Either could produce a positive bottom-line surprise similar to Bassett; both outlooks are consistent with expected normalization within the industry. 

Shares of BSET are up more than 5% following the Q2 release. The move has the market at a 2-month high and on the cusp of breaking critical resistance. Critical resistance is at $16 and illuminated by a large upper wick on the session’s candle. If the market can move above $16, it can continue to rally; if not, this stock may remain range bound at current levels.