What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-10-01 compared with 2020-07-09 · 147 added, 114 removed, 240 unchanged (52% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks.  The prior fiscal year ending November 30, 201 9 was a 53-week year, with the additional week being included in the first fiscal quarter.  Accordingly, the information presented below includes 26 weeks of operations for the six months ended May 30 , 2020 as compared to 27 weeks included in the six months ended June 1 , 2019 .

Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks.  The prior fiscal year ending November 30, 201 9 was a 53-week year, with the additional week being included in the first fiscal quarter.  Accordingly, the information presented below includes 39 weeks of operations for the nine months ended August 29, 2020 as compared to 40 weeks included in the nine months ended August 31, 2019 .

Safe-harbor, forward-looking statements:

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general risks associated with providing freight transportation and other logistical services through our wholly-owned subsidiary, Zenith Freight Lines, LLC

Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Item 1A.

Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019.

Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Part I, Item 1A.

Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2019 and in Part II, Item 1A.

Risk Factors in this report.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

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On March 11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic.

In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness.

In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness.

These measures have had a significant adverse impact upon many sectors of the economy, including non-essential retail commerce. 

In response to these measures and for the protection of our employees and customers, we temporarily closed our dedicated stores, our manufacturing locations and many of our warehouses for several weeks during the second fiscal quarter of 2020.

While as of May 30, 2020, we had reopened most of our stores and resumed manufacturing and shipping activities, the extended period of suspended operations had a material adverse impact upon our results of operations for the quarter ended May 30, 2020 resulting in a 40% decrease in revenues and a net loss of $20,352.

In response to these unprecedented business conditions, we implemented several measures that have helped us to maintain sufficient liquidity during the second quarter and, we believe, for the next several months.

Specific measures, among other things, include the following:

Negotiating with our landlords to receive temporary rent deferrals, and in some cases abatement of rent, on many of our store leases

Negotiating with our vendors to defer payments

Cancelling various purchase orders for inventory

Negotiating with customers to maintain some level of in-coming cash and to reduce accounts receivable exposure

Instituting a 25% permanent workforce reduction along with temporary furloughs of an additional 42% of the workforce, many of which have returned to full- or part-time employment

Implementing a 20% to 25% salary and wage decrease for most other employees with the Chief Executive Officer and certain other executives taking a 50% pay reduction through June of 2020

Amending our bank credit agreement to increase the availability under our line of credit by an additional $25,000 through December 31, 2020

We continue to manage the impact of the COVID-19 crisis on a daily basis.

As of the date of this filing, we have reopened all of our retail stores.

However, our manufacturing operations continue in the ramp-up phase and are currently not producing at the incoming rate of wholesale orders.

We are unable to predict when and how quickly we will be able to resume full manufacturing operations and the impact this may have on our financial statements in the near and long term.

In response to the above and for the protection of our employees and customers, we temporarily closed our dedicated Bassett Home Furnishings (“BHF”) stores, our manufacturing locations and many of our warehouses for several weeks primarily during the second fiscal quarter of 2020.

We also implemented several operating changes which allowed us to maintain sufficient liquidity until we and other furniture retailers were able to reopen for business.

These included, among other things, an approximate 21% permanent workforce reduction, temporary salary and wage reductions for all remaining employees, including a 50% pay reduction for our chief executive officer and certain other executives, negotiations with our landlords to receive abatements of rent, and in some cases, temporary rent deferrals on many of our store leases and the amendment of our bank credit agreement to provide an additional $25,000 of availability under our credit line through December 31, 2020.

Although manufacturing operations resumed in May and all stores were reopened by mid-June of 2020, the operating disruption resulted in a 21% decrease in revenues and a net operating loss of $16,964 for the nine months ended August 29, 2020.

However, since restarting the manufacturing operations and reopening stores, the pace of incoming wholesale orders from both the retail stores and our independent dealers outside the BHF store network have far exceeded our post reopening forecasts.

Wholesale orders for the third quarter of 2020 increased 26% as compared to 2019.

While our manufacturing operations, primarily our upholstery division, and shipping operations have not been able to keep pace with the incoming order level, we were able to generate net income of $2,178 and operating cash flow of $23,230 for the quarter ended August 29, 2020.

As a result, we have restored all temporarily reduced salaries and wages and resumed the payment of quarterly dividends, including the payment of the dividend declared and subsequently suspended during the second quarter.

We continue to closely monitor the COVID-19 pandemic and the potential effects on the economy, the consumer and our business.

While the rate of incoming orders at both our wholesale and retail segments is currently strong, there are continuing logistical challenges faced by us and the entire home furnishings industry resulting from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs.

Although unable to predict with certainty, we expect the pace of manufacturing and shipping to increase and the level of wholesale and retail backlogs to begin decreasing by the end of the fourth quarter of 2020.

While the home furnishings industry has fared much better during the pandemic than other sectors of the economy, continued economic weakness may eventually have an adverse impact upon our business, and order cancellations could result if the present delays in order fulfillment continue for an extended period of time.

The timing of any future actions in response to COVID-19 is largely dependent on the mitigation of the spread of the virus, status of government orders, directives and guidelines, recovery of the business environment, economic conditions, and consumer demand for our products.

We expect a phased return to normal operations over a period of time.

Additionally, as we have re-opened stores and re-started plants, we continue to follow enhanced health and safety protocols across all locations for the protection of our employees and customers.

Overview  

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings.

Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores.

Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings name, with additional distribution through other wholesale channels including multi-line furniture stores.

We were founded in 1902 and incorporated under the laws of Virginia in 1930.

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

With 100 BHF stores at May 30, 2020, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.

With 100 BHF stores at August 29, 2020, we have leveraged our strong brand name in furniture into a network of Company-owned and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories.

Our store program is designed to provide a single source home furnishings retail store that provides a unique combination of stylish, quality furniture and accessories with a high level of customer service.

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Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home design services for our customers.

We have a factories in Newton, North Carolina that manufacture custom upholstered furniture and our Lane Venture and Bassett Outdoor furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made”

We have factories in Newton, North Carolina that manufacture custom upholstered furniture and our Lane Venture and Bassett Outdoor furniture, a factory in Martinsville, Virginia that primarily assembles and finishes our custom casual dining offerings and a factory in Bassett, Virginia that assembles and finishes our “Bench Made”

line of custom, solid hardwood furniture.

We recently closed our upholstery facility in Grand Prairie, Texas due to the expected demand reduction as a result of the COVID-19 crisis.

During the second quarter of 2020, we closed our upholstery facility in Grand Prairie, Texas due to the expected demand reduction as a result of the COVID-19 crisis.

In late 2019, we also began operating a facility in Haleyville, Alabama that provides Bassett with the capability to manufacture custom aluminum outdoor furniture primarily under the Lane Venture brand.

Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its process, with custom pieces often manufactured within two weeks of taking the order in our stores.

Due to the significant increase in wholesale orders, manufacturing lead times are temporarily in excess of eight weeks.

Our logistics team then promptly ships the product to one of our home delivery hubs or to a location specified by our licensees.

In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture (casegoods) and certain leather upholstery offerings from several foreign plants, primarily in Vietnam, Thailand and China.

Over 75% of the products we currently sell are manufactured in the United States.

Approximately 75% of the products we currently sell are manufactured in the United States.

We also own Zenith Freight Lines, LLC (“Zenith”) which provides logistical services to Bassett along with other furniture manufacturers and retailers.

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This allows Bassett branded product to move from inside the home to outside the home to capitalize the growing trend of outdoor living.

At May 30, 2020, our BHF store network included 66 Company-owned stores and 34 licensee-owned stores.

During the second quarter of fiscal 2020, we completed the closure of three underperforming Company-owned stores in Newport News, Virginia, Stoughton, Massachusetts, and Torrance, California.

At August 29, 2020, our BHF store network included 66 Company-owned stores and 34 licensee-owned stores.

In addition to the closure of four underperforming Company-owned stores earlier in fiscal 2020, we closed two additional stores in Coral Gables and Ft.

Lauderdale, Florida subsequent to August 29, 2020 leaving 64 Company-owned stores in operation at the time of this filing.

The COVID crisis has given us the opportunity to look inward and to begin making structural improvements to our business model.

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program for our stores in late March, whereby consumers digitally engage with our designers and transact without physically visiting a store.

The vast majority of our design appointments were of the virtual variety in the month of April.

And, in June, when most of our stores had been reopened, approximately one in five of our appointments were still virtual.

Adding this new form of engagement is one of the many lasting changes that will come out of the 2020 pandemic.

Our pure e-commerce sales (ordering directly from the website) have historically been immaterial.

However, with our stores closed for much of the second quarter of 2020, our on-line sales nearly doubled as compared to 2019.

We expect to continue investing in our website to improve the navigation and the ordering capabilities to increase web sales.

We consider our website to be the front door to our brand experience where customers can research our furniture and accessory offerings and subsequently buy online or engage with an in-store design consultant.

Customer acquisition resulting from our digital outreach strategies increased our traffic to the website by 63% and web orders by 118% for the third quarter of 2020 as compared to 2019.

Digital advertising dominated our marketing expenditures for the quarter as we chose to spend less in traditional television and direct mail advertising.

We are currently evaluating our advertising and outreach strategy for 2021 and plan to continue with increased levels of digital spend.

We also expect to continue investing in our website to improve the navigation and the ordering capabilities to increase web sales.

Much of our current product offerings highlight the breadth and depth of our custom furniture capabilities which are difficult to show and sell online.

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

We have also begun to re-examine the performance of every one of our stores.

We also continue to re-examine the performance of every one of our stores.

Store traffic has been declining for three years and the effect on our retail model has become increasingly challenging.

We believe that on a market-by-market basis, there will be fewer stores in the future that must operate with a leaner structure.

As a result, our retail management team has created a new retail staffing model that includes fewer designers, less administrative staff, and a smaller field management organization.

After a thorough review, we decided to close three additional stores over the coming months that will leave us with 63 Corporate stores.

We believe that on a market-by-market basis, there will be fewer stores in the future and that they will operate with a leaner structure.

As a result, our retail management team has implemented a new retail staffing model that includes fewer designers, less administrative staff, and a smaller field management organization.

We will continue to evaluate store-by-store performance as we seek the optimal store count in the markets in which we compete at retail.

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most of these items must be purchased in a store.

Furthermore, we offer many upholstery trim options, fabrics, finishes that have low rates of sale and that make web navigation more difficult for the consumer.

Consequently, we have begun to methodically re-design each one of these important lines over the next several months.

Furthermore, we offer many upholstery trim options, fabrics and finishes that have low rates of sale and that make web navigation more difficult for the consumer.

Consequently, we continue to methodically re-design each one of these important lines over the next several months.

Our intent is to continue to offer the consumer custom options that will help them personalize their home but do so in an edited fashion that will provide a better web experience in the research phase and will also allow the final purchase to be made either on the web or in the store.

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story and utilize locally harvested and organic materials when possible.

While this will all take time, we expect that new products will begin to appear this fall.

A substantial part of the $2,936 in inventory valuation charges that we recognized during the second quarter of 2020 was related to existing raw materials that will no longer be part of the mix and to the selloff of retail inventory that will become obsolete as a result of our new approach.

While this will all take time, we expect that new products will begin to appear late in the fall of 2020 A substantial part of the $3,814 in inventory valuation charges that we recognized during the nine months ended August 29, 2020 was related to existing raw materials that will no longer be part of the mix and to the selloff of retail inventory that will become obsolete as a result of our new approach.

Results of Operations –

Periods ended May 30 , 2020 compared with the periods ended June 1 , 2019 :

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the three and six months ended May 30, 2020 and June 1, 2019:

Periods ended August 29, 2020 compared with the periods ended August 31, 2019 :

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income (loss) from operations were as follows for the three and nine months ended August 29, 2020 and August 31, 2019:

Quarter Ended

Six Months Ended*

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

Sales revenue:

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*39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and six months ended May 30, 2020 as compared with the prior year periods.

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three and nine months ended August 29, 2020 as compared with the prior year periods.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

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Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores.

The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.

The earnings and costs associated with these assets are included in other income (loss), net, in our condensed consolidated statements of operations.

Retail –

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

The following tables illustrate the effects of various intercompany eliminations on income from operations in the consolidation of our segment results:

Quarter Ended May 30, 2020

Quarter Ended August 29, 2020

Sales revenue:

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Cost of furniture and accessories sold

Loss from operations (5)

Quarter Ended June 1, 2019

Income (loss) from operations

Quarter Ended August 31, 2019

Sales revenue:

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Income (loss) from operations

Six Months Ended May 30, 2020*

Nine Months Ended August 29, 2020*

Sales revenue:

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Cost of furniture and accessories sold

Loss from operations (5)

Six Months Ended June 1, 2019*

Income (loss) from operations (5)

Nine Months Ended August 31, 2019*

Sales revenue:

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Income (loss) from operations (6)

Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.

Represents the elimination of logistical services billed to our wholesale segment.

Represents the elimination of purchases by our Company-owned BHF stores from our wholesale segment, as well as the change for the period in the elimination of intercompany profit in ending retail inventory.

Represents the elimination of rent paid by our retail stores occupying Company-owned real estate, and the elimination of logisitcal services charged by Zenith to Bassett's wholesale segment as follows:

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

Notes to segment consolidation table:

Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.

Represents the elimination of logistical services billed to our wholesale segment.

Quarter Ended

Six Months Ended*

Nine Months Ended*

Intercompany logistical services

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Quarter Ended

Six Months Ended

Nine Months Ended

Consolidated segment income from operations before special charges

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Asset Impairment Charges

During the three and six months ended May 30, 2020 we recorded $11,114 of non-cash asset impairment charges on five underperforming retail stores, including $6,239 for the impairment of operating lease right-of-use assets, and $1,070 of non-cash impairment charges in our wholesale segment, primarily due to the closure of our custom upholstery manufacturing facility in Grand Prairie, Texas.

During the nine months ended August 29, 2020 we recorded $11,114 of non-cash asset impairment charges on five underperforming retail stores, including $6,239 for the impairment of operating lease right-of-use assets, and $1,070 of non-cash impairment charges in our wholesale segment, primarily due to the closure of our custom upholstery manufacturing facility in Grand Prairie, Texas.

Goodwill Impairment Charge

Due to the impact of the COVID-19 pandemic, we performed an interim impairment assessment of our goodwill as of May 30, 2020.

As a result, we recognized a non-cash charge of $1,971 for the impairment of goodwill associated with our wood reporting unit within our wholesale segment (see Note 6 to our Condensed Consolidated Financial Statements).

As a result, we recognized a non-cash charge of $1,971 during the nine months ended August 29, 2020 for the impairment of goodwill associated with our wood reporting unit within our wholesale segment (see Note 6 to our Condensed Consolidated Financial Statements).

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

Litigation Expense

During the three and six months ended May 30, 2020 we accrued an additional $1,050 for the estimated costs to resolve certain wage and hour violation claims that have been asserted against the Company and have received class action designation, bringing our total recorded reserve for these claims to $1,750 at May 30, 2020.

During the nine months ended August 29, 2020, we accrued an additional $1,050 for the estimated costs to resolve certain wage and hour violation claims that have been asserted against the Company and have received class action designation, bringing our total recorded reserve for these claims to $1,750 at August 29, 2020.

While the ultimate cost of resolving these claims may be substantially higher, the amount accrued represents our estimate of the most likely outcome of a mediated settlement.

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These employees are to receive pay equal to one-half their current salary plus benefits over a period of one year from the final day of each individual’s active employment.

Accordingly, we recognized a charge of $835 during the six months ended June 1, 2019.

Accordingly, we recognized a charge of $835 during the nine months ended August 31, 2019.

Wholesale Segment

Results for the wholesale segment for the periods ended May 30, 2020 and June 1, 2019 are as follows:

Results for the wholesale segment for the periods ended August 29, 2020 and August 31, 2019 are as follows:

Quarter Ended

Six Months Ended*

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

SG&A expenses

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Analysis of Results - Wholesale

Net sales for the three and six months ended May 30, 2020 declined $30,003 and $37,767, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of our manufacturing and retail operations from late March through early May of the second quarter. 

Our net sales through the first quarter had been trending approximately 11% below the prior year, primarily due to the decrease in juvenile furniture shipments as we have exited this line of business, along with declines in shipments to traditional open market customers. 

These declines in the first quarter of the year had been partially offset by increases in shipments to the BHF store network and shipments of Lane Venture product.

Gross margins were significantly impacted by reduced leverage of fixed costs due to the temporary shutdown of the manufacturing locations.

In addition, we recorded increased inventory valuation reserves in the second quarter of 2020 as we reevaluate the inventory levels throughout the segment given expected reduced demand.

We are also reevaluating the inventory assortment to simplify the product offerings and to make them more compatible with our omnichannel marketing strategy, which integrates both internet and store-based selling.

SG&A expenses as a percent of sales were also significantly impacted by reduced leverage of fixed costs.

We also recorded increased bad debt expense as our customers struggled to pay us during the shutdown period.

As of the date of this report, cash receipts on past due receivables have shown improvement since the end of the second quarter.

Net sales for the three and nine months ended August 29, 2020 declined $7,247 or 11.6% and $45,014 or 22.7%, respectively, from the prior year periods.

Wholesale orders for the third quarter of 2020 increased 26% as compared to 2019 resulting in a wholesale backlog of $37,408 at August 29, 2020 as compared to $11,580 at August 31, 2019.

Wholesale orders from independent dealers increased 61% for the current quarter as compared to the prior year period driven by increases from existing dealers along with an expansion of the dealer base.

In addition, orders from the Bassett Home Furnishings store network increased 10% while Lane Venture orders increased by 17%.

As previously discussed, Bassett and most of the home furnishings industry has been faced with continuing logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs.

Gross margins for the third quarter of 2020 decreased by 140 basis points primarily driven by lower margins in the imported wood line as we have begun the process of lowering inventory levels and reducing the overall import wood offerings.

Margins were also impacted by lower sales volumes decreasing the leverage on fixed manufacturing costs.

SG&A costs for the third quarter of 2020 were significantly reduced by previously discussed workforce reductions and temporary salary reductions, lower marketing and promotional spending, and overall cost containment activities.

In addition, the results of the nine months ended August 29, 2020 were impacted by increased inventory valuation reserves recorded in the second quarter of 2020 as we continue to evaluate the inventory levels and offerings throughout the segment.

We are evaluating our inventory assortment to simplify the product offerings and to make them more compatible with our omnichannel marketing strategy, which integrates both internet and store-based selling.

The results of the nine months ended August 29, 2020 also included increased bad debt expense recorded in the second quarter of 2020 as our customers struggled to pay us during the shutdown period.

As of the date of this report, cash receipts have shown significant improvement along with a significant reduction in past due accounts receivable.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

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Quarter Ended

Six Months Ended*

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

Bassett Custom Upholstery

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*39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.

Wholesale Backlog

The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $17,270 at May 30, 2020 as compared with $14,373 at June 1, 2019.

The increase in backlog over the prior year level is primarily due to what we believe are short-term challenges in restoring our production to the levels required to meet the in-flow of orders, which has risen faster than expected during the latter part of the second quarter and subsequently.

Retail –

Company- o wned Stores Segment

Results for the retail segment for the periods ended May 30, 2020 and June 1, 2019 are as follows:

Results for the retail segment for the periods ended August 29, 2020 and August 31, 2019 are as follows:

Quarter Ended

Six Months Ended*

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

SG&A expenses

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Analysis of Results - Retail

Net sales for the three and six months ended May 30, 2020 declined $29,397 and $33,180, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of our retail operations from late March through early May of the second quarter. 

Gross margins decreased as we recorded increased inventory valuation reserves as we reevaluate the inventory assortment to simplify the product offerings and to make them more web friendly.

This is expected to result in increased clearance activity over the remainder of fiscal 2020.

SG&A expenses as a percent of sales were also significantly impacted by reduced leverage of fixed costs.

Retail Backlog

The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was $28,949, or an average of $439 per open store, at May 30, 2020 as compared with a retail backlog of $30,910, or an average of $442 per open store, at June 1, 2019.

Net sales for the three and nine months ended August 29, 2020 declined $18,395 or 27.6% and $51,575 or 26.0%, respectively.

Written sales, the value of sales orders taken, but not delivered, increased 10% for the quarter ended August 29, 2020 as compared to the prior year quarter resulting in a retail backlog of $47,904 at August 29, 2020 as compared to $28,247 at August 31, 2019.

Gross margins for the third quarter of 2020 decreased by 250 basis points primarily driven by more aggressive inventory clearance activity as we evaluate our inventory assortment to make it more compatible with our omnichannel marketing strategy, which integrates both internet and store-based selling.

SG&A expenses for the third quarter of 2020 as a percent of sales increased slightly as compared to the third quarter of 2019.

This was driven by significant fixed cost de-leverage from reduced delivered sales partially offset by the previously discussed workforce reductions and temporary salary reductions, lower advertising spending, and overall cost containment activities.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

Logistical Services Segment

Results for our logistical services segment for the periods ended May 30, 2020 and June 1, 2019 are as follows:

Results for our logistical services segment for the periods ended August 29, 2020 and August 31, 2019 are as follows:

Quarter Ended

Six Months Ended*

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

Logistical services revenue

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Logistical Services

Net revenues for the three and six months ended May 30, 2020 declined $4,834 and $5,270, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of furniture retail operations throughout the country from late March through early May of the second quarter. 

To maintain some level of revenue and retain our drivers primarily during April, we ran some of our trucks at substantially lower than optimal load levels resulting in inefficiencies and provided freight services for customers outside of the furniture industry.

Net revenues for the three and nine months ended August 29, 2020 declined $1,051 or 5.6% and $6,321 or 10.4%, respectively.

Operating profit improved for the third quarter of 2020 as compared to 2019 primarily due to improved fleet costs driven by lower fuel prices partially offset by higher warehousing labor costs as Zenith has been challenged to find and maintain freight-handling personnel in the warehousing operation due to the previously discussed COVID-related labor shortages.

Other I tems A ffecting N et Income

Other L oss, N et

Other loss, net, for the three and six months ended May 30, 2020 was $765 and $1,127, respectively, as compared to $145 and $268, respectively for the three and six months ended June 1, 2019.

The increased net loss for each respective period is primarily due to death benefits received in the prior year periods from life insurance policies covering former executives, declining interest income from our investments in CDs, and higher net costs for Company-owned life insurance.

Other Income ( L oss ) , N et

Other income for the three months ended August 29, 2020 was $697 compared to a loss of $298 for the three months ended August 31, 2019.

The change was primarily due to a $914 gain recognized in the current period for a death benefit from Company-owned life insurance.

Other loss, net, for the nine months ended August 29, 2020 and August 31, 2019 was $430 and $566, respectively.

The decreased net loss is primarily due to higher death benefits from Company-owned life insurance recognized in the current year period as compared to the prior year, partially offset by declining interest income from our investments in CDs.

Income T axes

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A major provision of the CARES Act allows net operating losses from the 2018, 2019 and 2020 tax years to be carried back up to five years.

As a result, our effective tax rates for the three and six months ended May 30, 2020 were (36.4%) and (36.5%), respectively, which differ from the federal statutory rate of 21% primarily due to the effects of carrying back our current net operating loss to tax years in which the federal statutory rate was 35%, and to the effects of state income taxes and various permanent differences, including a tax deficiency of $114 during the six months ended May 30, 2020 arising from stock-based compensation.

Our effective tax rates for the three and six months ended June 1, 2019 were 20.0% and 23.8%, respectively, and differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including the recognition of non-taxable proceeds from Company-owned life insurance.

As a result, our effective tax rates for the three and nine months ended August 29, 2020 were 36.8% and (36.5%), respectively, which differ from the federal statutory rate of 21% primarily due to the effects of carrying back our current net operating loss to tax years in which the federal statutory rate was 35%, and to the effects of state income taxes and various permanent differences, including those related to the non-taxability of Company-owned life insurance.

Our effective tax rates for the three and nine months ended August 31, 2019 were 30.5% and 28.4%, respectively, and differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including those related to the non-taxability of Company-owned life insurance.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

Liquidity and Capital Resources

Cash used in operations for the first half of 2020 was $5,747 compared to $8,942 used in operations for the first half of 2019, representing a decrease in cash used of $3,195.

This decreased use of cash is primarily due to decreased investment in inventory as there were no store openings in the first half of fiscal 2020, other changes in working capital due in part to the timing impact of the additional week in the prior year period and improved operations in our retail segment, and cash conservation measures implemented in the second quarter of fiscal 2020 in response to the impact of COVID-19.

Our overall cash position decreased by $8,252 during the first half of 2020, compared to an overall decrease of $21,887 during the first half of 2019.

In addition to the cash used in operations, we had a net $102 source of cash from investing activities in the current period as compared to a net use of $7,959 for the prior year period, with the change primarily consisting of reduced capital expenditures as compared with the prior year period along with proceeds received in 2020 from the sale of one of our real estate holdings.

Net cash used in financing activities was $2,607 for the current period compared to $4,986 used in the prior year period.

The decreased use for financing is primarily due to cash conservation measures implemented in response to COVID-19, including delaying the payment of the $1,249 dividend which was declared in the second quarter of 2020, along with a temporary suspension of repurchases of our stock.

Share repurchases totaled $1,241 during the first half of 2020 as compared with $2,347 repurchased during the first half of 2019.

As of May 30, 2020, $9,398 remains authorized under our existing share repurchase plan.

Cash provided by operations for the first nine months of fiscal 2020 was $17,483 compared to $2,059 used in operations for the first nine months of fiscal 2019, representing an increase in cash provided by operations of $19,542.

This increase in operating cash flow is primarily due to a substantial increase in customer deposits taken against unfilled orders, decreased investment in inventory as there were no store openings in the first nine months of fiscal 2020, other changes in working capital due in part to the timing impact of the additional week in the prior year period, improved operations in our retail segment, and cash conservation measures implemented in the second and third quarters of fiscal 2020 in response to the impact of COVID-19.

Cash flow from operations for the third quarter of fiscal 2020 was $23,230.

Our overall cash position increased by $11,342 during the first nine months of fiscal 2020, compared to an overall decrease of $18,830 during the first nine months of fiscal 2019, an improvement of $30,172 over the prior year period.

In addition to the improvement in cash flows from operations, cash used in investing activities was $1,201 for the first nine months of fiscal 2020 as compared to $6,038 used in the prior year period, a net decrease of $4,837.

This decrease was primarily due to lower capital expenditures in the current year and proceeds from the sale of our closed Gulfport store location in fiscal 2020, partially offset by lower proceeds from the maturity of investments in CDs as compared to the prior year period.

Net cash used in financing activities was $4,490 for the current period compared to $10,733 used in the prior year period, a decrease of $5,793.

This decrease is primarily due to lower repurchases of our stock primarily in response to COVID-19.

Share repurchases totaled $1,542 during the first nine months of fiscal 2020 as compared with $6,845 repurchased during the first nine months of fiscal 2019.

As of August 29, 2020, $9,097 remains authorized under our existing share repurchase plan.

Debt and Other Obligations

Our credit facility as of May 30, 2020 provided for a line of credit of up to $25,000.

At May 30, 2020, we had $4,773 outstanding under standby letters of credit against our line, leaving availability under our credit line of $20,227.

Our bank credit facility, which was amended effective June 15, 2020, provides for a line of credit of up to $50,000.

At August 29, 2020, we had $2,181 outstanding under standby letters of credit against our line, leaving availability under our credit line of $47,819.

In addition, we have outstanding standby letters of credit with another bank totaling $325.

Effective June 15, 2020, we executed an amended and restated credit facility with our bank to increase the maximum amount available under our credit line to $50,000 through December 31, 2020, after which date the maximum availability will return to the original amount of $25,000.

Under the terms of our credit facility, the maximum amount available under our credit line will remain at $50,000 through December 31, 2020, after which date the maximum availability will be reduced to $25,000.

The line bears interest at the rate of LIBOR plus 1.9%, with a fee of 0.25% charged for the unused portion of the line and is secured by a general lien on our accounts receivable and inventory.

In addition, all covenants based on financial ratios have been waived for the remainder of fiscal 2020, and the maturity of the facility will be extended from December 5, 2021 to January 31, 2022.

All covenants based on financial ratios have been waived for the remainder of fiscal 2020.

The credit facility matures on January 31, 2022.

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United States for warehousing and distribution hubs used in our logistical services segment.

We also lease tractors, trailers and local delivery trucks used in our logistical services and retail segments.

The total future minimum lease payments for leases with terms in excess of one year at May 30, 2020 is $183,043, the present value of which is $156,027 and is included in our accompanying condensed consolidated balance sheet at May 30, 2020.

In addition, we are currently in negotiations with a number of our lessors to obtain relief in the form of rent deferrals or abatements from rents currently due as a result of the effects of COVID-19 on our business.

We also have guaranteed certain lease obligations of licensee operators.

The total future minimum lease payments for leases with terms in excess of one year at August 29, 2020 is $172,371, the present value of which is $146,541 and is included in our accompanying condensed consolidated balance sheet at August 29, 2020.

We have negotiated with a number of our landlords to obtain relief in the form of rent deferrals or abatements of rent currently past due as a result of the effects of COVID-19 on our business.

At August 29, 2020, the unpaid rent was $2,769 which primarily represents rent deferred to fiscal 2021.

Remaining terms under these lease guarantees range from approximately one to five years.

We were contingently liable under licensee lease obligation guarantees in the amount of $1,793 at May 30, 2020.

We were contingently liable under licensee lease obligation guarantees in the amount of $1,802 at August 29, 2020.

See Note 11 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.

1 unchanged sentence

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

2 unchanged sentences

Such real estate is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and is considered part of our retail segment.

The net book value of such retail real estate occupied by Company-owned stores was $17,590 at May 30, 2020.

The following information summarizes our total investment in retail real estate owned at May 30, 2020:

The net book value of such retail real estate occupied by Company-owned stores was $17,463 at August 29, 2020.

The following information summarizes our total investment in retail real estate owned at August 29, 2020:

Square Footage

9 unchanged sentences

Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

See Note 10 to our condensed consolidated financial statements for further information regarding certain contingencies as of May 30, 2020.

See Note 10 to our condensed consolidated financial statements for further information regarding certain contingencies as of August 29, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis