Here's How Bassett Furniture Performed In FY 2014

Summary

• Desirable merchandise brought customers through Bassett Furniture’s doors.
• Bassett Furniture saw decent profitability gains due to pricing and superior margins in its wholesale segment.
• Bassett Furniture is free cash flow positive for the fourth time in a decade.

On Jan. 22, furniture maker, seller and marketer Bassett Furniture (NASDAQ: NASDAQ:BSET) came out with its FY 2014 earnings announcement and 10-k. Bassett Furniture registered a solid year thanks to an improving housing market and overall economy. Let's take a look to see what's going on with the company and where it's heading.

Expansion in revenue and net income

Bassett Furniture's revenue and net income increased 6% and 82% respectively during its FY 2014. Increased store locations and market share gains within its wholesale segment contributed to the overall revenue gains. Company management gave indication that its recent inventory offerings are setting well with customers. This is a good thing because pleasing the customer is crucial to winning in retailing.

With that said, net income increased a whopping 82% during FY 2014. Bassett Furniture's income from operations also increased 51%. Pricing strategies played a role. Customers were willing to pay full price for furniture they considered stylish. In a related matter, superior margins in its wholesale segment, stemming from the salability of its merchandise to retailers outside of its store network, also contributed to net income gains.

Free cash flow positive

FY 2014 only represents the fourth year in the past decade where Bassett Furniture registered positive free cash flow, according to Morningstar. I like to invest in companies that grow free cash flow consistently. Bassett Furniture's free cash flow clocked in at $17.1 million vs. a negative $2.7 million last year, stemming from favorable changes in assets and liabilities, particularly accounts payable and "tenant improvement allowance received from lessors".

Excellent balance sheet

Bassett Furniture does maintain an excellent balance sheet. Its $50 million in cash and short term investments came to 32% of stockholder's equity. I like to see companies maintain a cash and short term investments position amounting to 20% or greater of stockholder's equity to get them through tough times. The company also possesses no long-term debt which represents a good thing because debt creates interest cost which chokes out profitability and cash flow. I like to see a company's long-term debt to equity ratio at 50% or less.

Dividends

Bassett Furniture does pay a dividend. The best way to gauge dividend sustainability is to compare how much a company pays in dividends to its free cash flow in a full year. I always look for companies that pay out 50% or less of their free cash flow. In FY 2014, Bassett Furniture paid out 30% of its free cash flow in dividends. Currently the company pays shareholders $0.32 per share per year and yields 1.6%. However, given its inconsistent free cash flow history the company at some point may cut out its dividend, especially during an economic downturn.

Looking ahead

The company will do well as long as it keeps executing on its merchandise strategy and the economy remains strong. Bassett Furniture also launched its e-commerce site and a new store concept that caters to children, called Bassett Baby and Kids, which should bode well for shareholders. The company currently trades at a P/E ratio of 31 vs. 19 for the S&P 500 and 13 for Bassett Furniture's five year history making it overvalued. Finally, given its inconsistent free cash flow history and high market price risk investors may want to take their investment dollars elsewhere.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.