Furniture Brands International: The Reverse Impact Of A Reverse Split

| About: Furniture Brands (FBNIQ)

Furniture Brands International (NYSE:FBN) is one of the largest manufacturers, designers, sellers and retailers of residential furniture in the U.S. It is headquartered in St. Louis, Missouri, U.S. Some of its well-known brands include Henredon, Thomasville, Drexel-Heritage, Lane Venture, Maitland-Smith, LaBarge, Lane, Hickory, Pearson and Broyhill among others. The company is present in the market through different channels of marketing including its own retail stores under the name of "Thomasville" and also through interior designers, third-party retailers and mass merchants.

The 1:7 split announced on May 29, 2013, reaffirms the "underperform" recommendation on the stock. It is unambiguously obvious that the reverse split was carried out for fear of delisting from the NYSE. However, the latest development puts that risk to rest for the near to medium term.

In reality, it could be said that the reverse split only provides for the stock to fall from higher heights and in higher chunks. The prospects of the company will only improve when its net sales and earnings show some positive momentum. However, contrary to improved performance, the latest products on the block do not resonate same.

In general, it has been observed that companies usually resort to reverse splits in desperate times and not when their fundamentals are strong enough to sail through difficult times. It is evident that the company is buying time to remove the risks of delisting in near-term. However, till the time the company writes a turnaround story, its stunted market capitalization is likely to fall further. The reverse split has reduced the outstanding shares of the company to 8 million from 55 million, thus jeopardizing liquidity further. In addition, we see a widened gap between the bid and the ask price.


Challenged Net sales:

The company has registered net sales declines in last 22 quarters out of a total of 25 quarters, including the latest, 1Q2013. The primary reason for decline in sales could be attributed to choppy shipments. The top-priority brand of the company declined 2.0% compared to 4Q2012.

However, the company plans to revamp all the 49 company-owned Thomasville retail stores in the coming twelve months, in an effort to promote the brand as the flagship brand. Thus far in 2013, the company has remodeled 4 of the Thomasville stores.

We would rather suggest improving pricing efforts, greater penetration levels, and channel expansion to perk up the operational performance of the company.

Pressured Margins:

The gross margin declined 427bps to 20.6% in 1Q2013 owing to sales deleveraging of fixed manufacturing costs, higher freight expenses, and increased employee benefits spends. SG&A expenses, though declined compared to last year, were negatively impacted by increased advertising costs. The operating margin plummeted 684bps to -6.3%. Though the company is undertaking several turnaround measures, the most important factor to impact margin remains increase in net sales.

Furniture Brands recently introduced a program to ship full containers carrying different brands directly to its customers from the facilities in Asia where they manufacture, and have started reaping in benefits. This initiative lowers the shipping costs of final products which can be chipped into pricing where the company can sharpen its price points.

Shrinking Balance Sheet:

Cash & equivalents totaled $10.3 million at the end of 1Q2013, a decline of 33.3% YoY. Total liquidity amounted to $60.4 million in 1Q2013, a decline of 30.8% compared to $87.3 million in 4Q2012. Capex increased 28.6% to $1.8 million in 1Q2013 compared to $1.4 million in 1Q2012. Management has lowered the capex guidance to $15 million for FY2013 from its earlier estimation of $18 million, the lowest capex estimated in the last 20 years' history of the company. Free cash flows were a negative $13 million and are expected to remain in red with an additional burden between $20 million and $30 million until the company increases its net sales substantially. Cash for the year 2013 is expected to be sourced through working capital which would be generated by lower inventories.

Early May 2013 remained challenging for the furniture as well as the retail industry at large. However, growth rate is expected to improve a tad year over year given the expected traction in the housing market. In addition, the employment data is also expected to be optimistic. The Memorial Day weekend enthusiastic sales further bolster that view.

Disappointing revenues and pressured operating margins are expected to continue, heightened by the sluggish consumer backdrop. New merchandises and improved housing data are expected to provide tailwinds; however, cash outflows in the near to intermediate term cannot be ruled out. Management has undertaken several restructuring initiatives in the past to push positive results. However, net sales, the key to success, remains challenging. Investors are however advised to sit on the fence, take notice till the company gains traction and shows consistency in its financial results. In addition, the cash flows of the company need to improve substantially.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.