Furniture company - or hedge fund?
If you lose money selling couches and chairs, how can you pay your investors a hefty dividend? You play the markets.
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| Bassett makes nice furniture - and even nicer investments. |
(Fortune) -- Everybody's heard of mattresses stuffed with cash, or coins lodged beneath the cushions of a couch. But one venerable Virgina company seems genuinely confused about whether it's in the furniture business or the money business.
Bassett Furniture Industries (BSET), a 106-year-old furniture company founded by a traveling lumber salesman, has seen better days in the furniture business. It lost $19.9 million from continuing operations last year. Its revenues dropped 10% year-over-year - and three of the last four years. So how can it afford to pay any dividend, let alone an impressive 80 cents per share?
A quick peek at Bassett's 10-K however reveals the answer: The company has $51.7 million invested across a spectrum of hedge funds, which kicked in just over $5.92 million in loss-defraying cash last year. With an additional $25.1 million invested in marketable securities (80% equities), just under 25 percent of Bassett's $310.7 million balance sheet is now at work in the capital markets.
Having shut almost 60% of its U.S. manufacturing facilities in the past five years, management told Fortune that the investment portfolio is helping Bassett's balance sheet "stay flexible" without having to borrow money.
There's nothing wrong, of course, or even inappropriate about Bassett's surprisingly large hedge fund and real-estate investments, and they've no doubt helped keep the firm afloat. Without the annual $10 million-$12 million in returns thrown off from these investments, the profits of 2006 and 2005 would have gone up in smoke.
Bassett has come to rely on the returns generated by its investment portfolio because the U.S. furniture industry is in something of a collapse. Asian imports are now not only much cheaper, but of increasingly high quality. The effects of this competition have been devastating: tens of thousands of furniture-making jobs have been lost and a sharp decline in the fortunes of many publicly-held furniture makers.
So why not dump the furniture business and concentrate on the parts of Bassett that make money? Bassett's chief executive Robert Spilman told Fortune that his company is determined to stay in the furniture game. It has launched a series of initiatives designed to improve the performance of its retail stores, including rolling out a new store prototype and offering a series of do-it-yourself interior design options, which appear to be bearing some fruit. He predicted that revenues will likely stabilize, putting them on a $290-$300 million run-rate for this year.
The hedge fund stake isn't the only non-furniture lifeline the Basset, Va.-based company has, however. Last year, Bassett's 46.9% stake in High Point, N.C.'s International Home Furnishings Center - long home to the world's premier furniture trade shows, but which is seeing increasing competition from Las Vegas - provided $6.3 million in earnings and almost $6.1 million in dividends.
For 2006, a year when it reported a $5.4 million profit, over $11.7 million in income was recognized from the IHFC and hedge fund investments, keeping Bassett solidly in the black.
There is at least one high-profile dissenter from Bassett's strategy: activist shareholder Seth Hamot of Boston-based hedge fund Roark, Reardon and Hamot, who owns 5.1% of the company and is seeking to replace current board members with a hand-picked list of his own nominees. In an interview, Hamot told Fortune that neither the hedge funds nor the IHFC should be supporting the Bassett business anymore.
"This subsidy business should end and without any chance of continuance in the future," said Hamot. "Without the [hedge fund investments], management would have to face tough decisions to rationalize the business. The hedge funds and IHFC have no supported no job preservation for employees and have only served to delay decision making." Hamot argued that a management that did not have this hedge fund cushion would have sought a merger partner, and that regardless of the [hedge fund/IHFC] short-term performance, the investments are taking up valuable capital. "Investors who want to own furniture companies should own furniture companies; investors who want to invest in hedge funds should invest in hedge funds," Hamot said.
A Bassett spokesman asked to comment on Hamot's charges told Fortune: "The Company obviously disagrees with Hamot's position. These assets have been very important in supporting our retail transition, and in allowing us to pay out more than $48 million in dividends over the past five years. They have also allowed us to keep our debt relatively low and incur lease commitments and contingencies key to our retail growth strategies."
Who handles Bassett's money? Private Advisors LLC, a Richmond, Va.-based investment advisor, has overseen Bassett's investments in hedge funds since 1998, according to chief financial officer Barry Safrit. He told Fortune that the board picked the firm based on the recommendations of a former board member - he declined to specify which one - who had what Safrit described as "a relationship" with Private Advisors at the time. Safrit said that the hedge fund strategy is geared toward capital preservation. The hedge fund investments have been solid performers in the past three years, clocking in just below 11% each year, and beating the Standard & Poor's 500 index return last year and in 2005.
But Bassett faces a possible future headache: its $5.7 million investment in the D.B. Zwirn Special Opportunity Fund L.P. As Fortune.com reported last week, the fund is shutting this $4 billion portfolio down amidst a wave of investor redemptions. Further complicating matters is the fact that the Zwirn fund has a number of investments in private investments and loans, which are illiquid and difficult to value. The fund has stated that it might take up to two years to return client capital. 
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