BASSETT, Va. -- Bassett Furniture Industries, Inc. (Nasdaq: BSET) announced today its results of operations for its fourth quarter ended November 27, 2021 and discusses the previously announced sale of the assets of Zenith Freight Lines, LLC for $87 million in cash.
In a letter to shareholders, Robert H. Spilman, Jr., chairman and CEO, stated:
Our fourth quarter concluded another turbulent year for the industry with a consolidated sales increase of 9.7%, coming in at $129.9 million. Although incoming wholesale orders did slow from 2020’s torrid pace, fourth quarter written orders were 8.7% ahead of 2019. Despite ongoing supply chain complications, we were able to slightly reduce our backlog at year end measured against the end of our third quarter. Nevertheless, we ended the year with a wholesale backlog of $90.1 million compared to $54.9 million in 2020 and $20.0 million in 2019. Raw material stock outages have improved somewhat since the end of November, making way for further reduction of the wholesale backlog to start 2022.
Operating profit of $7.1 million was behind last year due to margin pressure in our wholesale and logistics operations and higher spending levels, primarily related to technology initiatives. I am especially pleased that we generated $26.0 million of operating profit for the full year, the most since 2017, despite the aforementioned margin pressures. For the past five quarters, we have sought to combat ceaseless raw material and ocean freight increases with wholesale price increases of our own; passed along to our customers. Unfortunately, our spiraling costs coupled with late shipments from our suppliers have eroded our wholesale margins as we continue to produce goods today with higher material costs than they had when the finished goods were sold months ago. This dynamic will remain with us for the first few months of 2022 as we whittle the backlog down to normalized levels and our pricing becomes current with our costs. We hope the pace of cost increases has slowed such that future wholesale price increases will be at a more normal level. Furthermore, we are experiencing COVID related delays in our wood import business to begin the year as plant schedules have been compromised in Vietnam since a second wave of the virus hit that country this fall.
Supply chain issues also prevented our corporate retail stores from realizing the full benefit of the sales generated over the course of the year. In spite of that, corporate retail grew sales and profits in the fourth quarter and the year by reducing its SG&A costs significantly. Also, for the year, corporate retail gross margins improved by 200 basis points, primarily attributable to lower promotional costs and reduced levels of discounting for obsolescence. This trend continued at a greater level in the fourth quarter and should keep going in 2022.
2021 represented growth for all of our sales channels, led by our open market accounts, customers outside of our corporate and licensed store network. Excluding our Lane Venture outdoor division, total wholesale shipments for the year were comprised of 57% retail sales and 43% open market. Open market shipments grew by 49% compared to last year. Both our Bassett Design Center (BDC) store-within-a-store network and Bassett Club Level motion furniture store accounts were major contributors to this exciting trend. Equally exciting was the progress we made in advancing our position in the outdoor furniture arena. Though experiencing daily disruptions to our production schedule due to poor service from outdoor fabric suppliers, our sales momentum allowed us to partially overcome this handicap and grow our Lane Venture and Bassett Outdoor divisions by 28%.
Looking ahead, we have started a series of initiatives currently underway that are designed to grow Bassett and to make us more competitive in the short- and mid-term. We plan to invest up to $30 million in the business in 2022 in the following areas:
Technology – Our digital transformation program is well underway, which includes reformatting our business data with a new Product Information Management package and introducing a new website platform this fall.
Retail – We plan to open two new format stores in 2022, one of which will be in a new market while the other store will be a reposition of a store in the Dallas market. We also have plans to remodel at least three others.
Manufacturing – New advanced machinery purchases are in process for both our North Carolina upholstery operations and our Virginia based woodworking facilities. We have also invested in new material handling equipment to improve the ergonomic environment of our facilities and to further protect our products on their way to our customers.
Outdoor – The domestic aluminum outdoor furniture operation that we acquired in Haleyville, Alabama in 2019 has the potential to significantly contribute to our growth plan. We are negotiating to buy the facility (currently leased) and another adjacent building and continue with the upgrade program that is already underway.
Today we made a joint announcement with J.B. Hunt Transport Services, Inc (J.B. Hunt) to sell Zenith Freight Lines to a subsidiary of J.B. Hunt for $87 million subject to customary closing conditions. We expect to close the deal by the end of February. This transaction will open an exciting new chapter in our quest to provide the highest level of service to our customers. Disruption caused by the pandemic aside, we believe that the consolidation of the traditional “middle mile” segment of specialized furniture carriers is inevitable. There are already much fewer of these providers today than were in existence a few years ago. Accordingly, this thinking led us to seriously consider selling Zenith to J. B. Hunt when the initial overtures were made last year. As due diligence progressed, we came to understand the benefits that the scale of J.B. Hunt could provide in terms of equipment, technology, driver recruitment, intermodal transportation, and warehousing density. As we became more familiar with their management team and developed respect for them, we became convinced that they were the right partners for our vision to build out a nationwide network of Regional Fulfillment Centers that could serve as local warehouses for our “Make, Then Sell” stocking assortment while serving as cross docks for our “Sell, Then Make” custom programs that have been so successful for us for so long. The idea is to reduce costs to our customers and get them their goods faster, while providing more visibility to the status of their shipment in the process. We plan to open the first of these new facilities in Florida this spring and we are working on every aspect of the model that will be required to allow our new logistics strategy to serve as a linchpin for future wholesale and retail growth for Bassett. We are extremely enthusiastic about the potential to better serve our customers with the 50-year accumulated furniture know-how of Zenith in combination with the power of the JB Hunt platform.
Of course, there are additional considerations brought on by today’s announcement for Bassett. In light of the cash value of the transaction where we expect to net in the neighborhood of $65 million after taxes, our Board of Directors and Management will evaluate appropriate capital allocation strategies which may include any or all of the following:
Payment of a special dividend
Increase in the regular quarterly dividend
Investment in a strategic acquisition or other partnership
Increase in the share repurchase authorization
Increase in capital investment in the business
Our business has notably improved since the return from the first phase of COVID in May 2020. Sales have grown and we have developed new capabilities and new sales channels, particularly with our Club Level motion line and with a deepening commitment to the outdoor furniture category. The partnership with J.B. Hunt and the upcoming investments in technology and new growth strategies represent a tremendous opportunity for us to build on the successful elements of our business and to augment them with new products, better technology, and higher levels of service. We will provide additional insights into our business and capital allocation strategies after the transaction with J.B. Hunt closes.