Bassett Furniture: 104-year-old startup
The announcement in early March by Bassett Furniture Industries Inc. (Nasdaq: BSET) appeared to hammer another nail in the coffin for the U.S. furniture industry. The century-old company said it would begin closing its manufacturing facility in the Virginia hometown that bears the same name.
While the shutdown will eliminate 280 jobs, or 15% at Bassett, the announcement also sounded another death knell for American-made furniture that can’t effectively compete with cheap imports, mainly from Asia.
The struggles of Bassett, Haverty Furniture Companies Inc. (NYSE: HVT) and even giant Ethan Allen Interiors Inc. (NYSE: ETH) have left investors wondering if they should chop down their losses and toss them on a funeral pyre for what is an industry blindsided by a transition that it failed to anticipate.
As Bassett, Va., becomes another Appalachian region company town without much of a company, Bassett Furniture will use its plant there to process imported goods. This year, more than half of the company’s products will be made outside the United States.
Robert Spilman, the president and CEO, said in a press release that shutting down furniture making at the plant was part of Bassett’s transition “from being primarily a domestic furniture manufacturing company to a retailer, manufacturer and marketer of branded home furnishings.”
Just like Ethan Allen, Bassett Furniture has strong brand recognition. What it doesn’t have is a growing queue of customers for its better-quality, midpriced products.
Indeed, in its annual report, the company characterized itself as a “104-year-old startup” as it reshapes its business model. Yet it’s struggling to find the right product mix that will bring customers into a network of about 130 Bassett Furniture Direct retail stores, or to choose its wares at multi-branded stores or from a catalog. Last year, Bassett sent out its first product catalog to a core demographic of customers in cities where it has company-run or licensed retail outlets.
Bassett’s emerging retail strategy focuses on the sale of custom-built furniture that it expects to deliver to the customer’s home within 30 days. In general, it’s not a case of instant gratification, where the consumer can go into a store and walk out with at least some of the Bassett merchandise, or expect next-day delivery. Bassett’s emphasis is that quality takes some time.
Recent softness in the U.S. economy, triggered by a housing industry slowdown, hasn’t helped furniture makers either, as consumers have put off major purchases. If they’re not buying homes, they’re obviously not shopping for home furnishings to decorate a new residence.
In the first quarter ended Feb. 24, Bassett reported a loss of $4.2 million, or $0.35 a share, compared with a profit of $2.2 million, or $0.18 a share, in the same period the year before. Sales slumped, to $73.4 million, from $86.5 million in the 2006 quarter. This year’s results were impacted by a $3.6 million charge for the pending manufacturing shutdown.
“While we are reducing our cost structure to reflect the pace of incoming orders, the company continues to pursue mid- and long-term growth initiatives on a number of fronts,” Spilman said in a press release accompanying the financial data, noting an increased focus on value-priced merchandise and a store redesign.
For the 2006 fiscal year, the company saw sales decline 2% to $328.2 million, while earnings fell by nearly a half – to $5.4 million, or $0.46 a share, from the 2005 net income of $9.8 million, or $0.82 a share.
The tough retail environment was made tougher by nearly $3 million in fourth-quarter charges as the company restated results from 2005 and parts of 2006 for changes in how it accounted for some acquisitions and how it handled bedroom furniture imported from China under anti-dumping rules.
The December announcement of the restatements resulted in a downgrade from BB&T Capital Markets to hold from buy. Analyst Joel Havard said Bassett was facing weak demand because of the housing slump, adding to the pressure on its sales and profit margin.
Another analyst around the same time, John Baugh of Stifel Nicolaus, expressed an opinion that the furniture industry is facing long-term problems, and that the downturn isn’t just cyclical.
In a research note to investors, Baugh cited the competition from Asian manufacturers, whose cost structure is much lower than for American-made products. “If the decline in profitability is more tied to the secular misfortunes of the industry rather than the current macroeconomic conditions, a cyclical rebound alone will likely not be enough for a material rally in this group of stocks,” Baugh wrote.
Still, there are some growth prospects for the industry, as celebrities lend their name, if not their tastes, to various products a la Martha Stewart. At the semiannual furniture trade show in High Point, N.C., in late March, business mogul Donald Trump introduced the Trump Home line, joining the likes of Stewart and Liz Claiborne in home furnishings.
And Bassett’s collections do include several lines inspired by legendary NFL quarterback John Elway, with their “rugged good looks,” that are sold alongside such marques as Louis-Philippe, 5th Avenue and Simply Yours. Of course, like Trump, Elway’s celebrity as one of the best QBs in NFL history hasn’t fully carried over into his home décor style. But in the company’s product portfolio, the Elway line does present an attractive group of furnishings that Bassett probably won’t sack anytime soon.
The transformation at Bassett Furniture is a work in progress – and it’s not going to be a quick fixer-upper. The stock isn’t moving much, and currently is trading near the bottom of its 52-week range of $13.25 to $18.80. So far, there hasn’t been much interest in the U.S. furniture industry from private equity. Perhaps a buyout in the industry by a group with deep pockets – another struggling brand, or maybe even Bassett -- would help give the sector a boost.
The stock of home furnishings and furniture companies could pick up a little in the coming months as the housing industry picks up steam. But industry analysts have indicated that buying the shares now remains a risky proposition, and Bassett stock is likely to continue collecting dust.
