BASSETT FURNITURE INDUSTRIES INC 10-Q

Item 2. 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 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:   This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Bassett Furniture Industries, Incorporated and subsidiaries. Such forward-looking statements are identified by use of forward-looking words such as “anticipates” , “believes” , “plans” , “estimates” , “expects” , “aim s ” and “intends” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include:   • the impact of the COVID-19 outbreak upon our ability to maintain normal operations at our retail stores and manufacturing facilities and the resulting effects any future interruption of those operations may have upon our financial condition, results of operations and liquidity, as well as the impact of the outbreak upon general economic conditions, including consumer spending and the strength of the housing market in the United States   • competitive conditions in the home furnishings industry   • overall retail traffic levels and consumer demand for home furnishings   • ability of our customers and consumers to obtain credit   • Bassett store openings and store closings and the profitability of the stores (independent licensees and Company-owned retail stores)   • ability to implement our Company-owned retail strategies and realize the benefits from such strategies, including our initiatives to expand and improve our digital marketing capabilities, as they are implemented   • fluctuations in the cost and availability of raw materials, fuel, labor and sourced products, including those which may result from the imposition of new or increased duties, tariffs, retaliatory tariffs and trade limitations with respect to foreign-sourced products   • results of marketing and advertising campaigns   • effectiveness and security of our information and technology systems   • future tax legislation, or regulatory or judicial positions   • ability to efficiently manage the import supply chain to minimize business interruption   • concentration of domestic manufacturing, particularly of upholstery products, and the resulting exposure to business interruption from accidents, weather and other events and circumstances beyond our control   • 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 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.   25 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   You should keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which such forward-looking statement is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the events described in any forward-looking statement made in this report or elsewhere, might not occur.   Impact of the COVID-19 Pandemic Upon Our Financial Condition and Results of Operations   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 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 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.   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 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. Our rich 118-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.   26 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   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. In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 30 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States.   The BHF stores feature custom order furniture, free in-home design visits (“home makeovers”) and coordinated decorating accessories. Our philosophy is based on building strong long-term relationships with each customer. Sales people are referred to as “Design Consultants” and are trained to evaluate customer needs and provide comprehensive solutions for their home decor. 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 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. 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 prior to COVID-19 closures. 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. 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. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry. Approximately 60% of Zenith’s revenue is generated from services provided to non-Bassett customers.   During fiscal 2018, we purchased certain assets and assumed certain liabilities of Lane Venture from Heritage Home Group, LLC. Lane Venture is a manufacturer and distributor of premium outdoor furniture and is now being operated as a component of our wholesale segment. This acquisition marked our entry into the market for outdoor furniture and we believe that Lane Venture has provided a foundation for us to become a significant participant in this category. Our strategy is to distribute this brand outside of our BHF store network only. With the knowledge we have gained through operating Lane Venture, we have developed a new separate brand of premium outdoor furniture that is only marketed through the BHF store network. This allows Bassett branded product to move from inside the home to outside the home to capitalize the growing trend of outdoor living.   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. We instituted a “virtual appointment” program for our stores in late March, whereby consumers digitally engage with our designers and transact without physically visiting a store. Adding this new form of engagement is one of the many lasting changes that will come out of the 2020 pandemic.   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. We plan to expand our merchandising strategies to include more product that can be more easily purchased online with or without a store visit. While we work to increase web sales, we will not compromise on our in-store experience or the quality of our in-home makeover capabilities.   27 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   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 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. We believe the seismic shift in shopping behavior which has been tremendously accelerated by closures of bricks and mortar stores as a result of COVID-19 will ultimately result in more favorable retail rent structures.   The migration to digital brand research and compressed transaction cycles have caused us to comprehensively evaluate all of our American made custom products. While our Custom Upholstery, Custom Dining, and Bench Made product lines continue to be our most successful offerings, they are not conducive to web transactions; most of these items must be purchased in a store. 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. We also plan to heavily emphasize our “Made in America” 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 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 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     Change     Nine Months Ended*     Change       August 29, 2020     August 31, 2019     Dollars     Percent     August 29, 2020     August 31, 2019     Dollars     Percent                                                                                                     Sales revenue:                                                                                                 Furniture and accessories   $ 80,341       87.7 %   $ 98,369       89.9 %   $ (18,028 )     -18.3 %   $ 232,283       86.8 %   $ 301,550       89.1 %   $ (69,267 )     -23.0 % Logistics revenue     11,218       12.3 %     11,050       10.1 %     168       1.5 %     35,197       13.2 %     36,900       10.9 %     (1,703 )     -4.6 % Total sales revenue     91,559       100.0 %     109,419       100.0 %     (17,860 )     -16.3 %     267,480       100.0 %     338,450       100.0 %     (70,970 )     -21.0 % Cost of furniture and accessories sold     38,418       42.0 %     42,246       38.6 %     (3,828 )     -9.1 %     113,140       42.3 %     133,953       39.6 %     (20,813 )     -15.5 % SG&A expenses     50,394       55.0 %     63,519       58.1 %     (13,125 )     -20.7 %     165,407       61.8 %     197,495       58.4 %     (32,088 )     -16.2 % New store pre-opening costs     -       0.0 %     254       0.2 %     (254 )     -100.0 %     -       -0.1 %     1,117       0.3 %     (1,117 )     -100.0 % Other charges     -       0.0 %     -       0.0 %     -       100.0 %     15,205       6.5 %     835       0.3 %     14,370       100.0 %                                                                                                   Income (loss) from operations   $ 2,747       3.0 %   $ 3,400       3.1 %   $ (653 )     -19.2 %   $ (26,272 )     -9.7 %   $ 5,050       1.5 %   $ (31,322 )     N/M     *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 nine months ended August 29, 2020 as compared with the prior year periods.   28 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   Segment Information   We have strategically aligned our business into three reportable segments as described below:     Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. 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 income (loss), net, in our condensed consolidated statements of operations.     Retail – Company-owned s tores. Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.     Logistical services . Our logistical services segment reflects the operations of Zenith. In addition to providing shipping and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statements of operations. Zenith’s operating costs are included in selling, general and administrative expenses.   29 of 40     PART I-FINANCIAL INFORMATION-CONTINUED 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 August 29, 2020       Wholesale     Retail     Logistics     Eliminations           Consolidated   Sales revenue:                                               Furniture & accessories   $ 55,443     $ 48,144     $ -     $ (23,246 )   (1)     $ 80,341   Logistics     -       -       17,848       (6,630 )   (2)       11,218   Total sales revenue     55,443       48,144       17,848       (29,876 )           91,559   Cost of furniture and accessories sold     37,079       24,243       -       (22,904 )   (3)       38,418   SG&A expense     15,040       25,486       16,826       (6,958 )   (4)       50,394   Income (loss) from operations   $ 3,324     $ (1,585 )   $ 1,022     $ (14 )         $ 2,747         Quarter Ended August 31, 2019       Wholesale     Retail     Logistics     Eliminations           Consolidated   Sales revenue:                                               Furniture & accessories   $ 62,690     $ 66,539     $ -     $ (30,860 )   (1)     $ 98,369   Logistics     -       -       18,899       (7,849 )   (2)       11,050   Total sales revenue     62,690       66,539       18,899       (38,709 )           109,419   Cost of furniture and accessories sold     41,072       31,849       -       (30,675 )   (3)       42,246   SG&A expense     18,574       34,867       18,289       (8,211 )   (4)       63,519   New store pre-opening costs     -       254       -       -             254   Income (loss) from operations   $ 3,044     $ (431 )   $ 610     $ 177           $ 3,400         Nine Months Ended August 29, 2020*       Wholesale     Retail     Logistics     Eliminations           Consolidated   Sales revenue:                                               Furniture & accessories   $ 153,588     $ 147,161     $ -     $ (68,466 )   (1)     $ 232,283   Logistics     -       -       54,422       (19,225 )   (2)       35,197   Total sales revenue     153,588       147,161       54,422       (87,691 )           267,480   Cost of furniture and accessories sold     108,256       74,638       -       (69,754 )   (3)       113,140   SG&A expense     46,676       84,527       54,407       (20,203 )   (4)       165,407   Income (loss) from operations (5)   $ (1,344 )   $ (12,004 )   $ 15     $ 2,266           $ (11,067 )       Nine Months Ended August 31, 2019*       Wholesale     Retail     Logistics     Eliminations           Consolidated   Sales revenue:                                               Furniture & accessories   $ 198,602     $ 198,736     $ -     $ (95,788 )   (1)     $ 301,550   Logistics     -       -       60,743       (23,843 )   (2)       36,900   Total sales revenue     198,602       198,736       60,743       (119,631 )           338,450   Cost of furniture and accessories sold     131,413       97,578       -       (95,038 )   (3)       133,953   SG&A expense     56,790       106,471       59,169       (24,935 )   (4)       197,495   New store pre-opening costs     -       1,117       -       -             1,117   Income (loss) from operations (6)   $ 10,399     $ (6,430 )   $ 1,574     $ 342           $ 5,885     30 of 40     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:   (1) Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores. (2) Represents the elimination of logistical services billed to our wholesale segment. (3) 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. (4) 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:       Quarter Ended     Nine Months Ended*       August 29, 2020     August 31, 2019     August 29, 2020     August 31, 2019                                     Intercompany logistical services   $ (6,630 )   $ (7,849 )   $ (19,225 )   $ (23,843 ) Intercompany rents     (328 )     (362 )     (978 )     (1,092 )                                   Total SG&A expense elimination   $ (6,958 )   $ (8,211 )   $ (20,203 )   $ (24,935 )   (5) Excludes the effects of goodwill and asset impairment charges as well as litigation costs which are not allocated to our segments. (6) Excludes the effects of the 2019 early retirement program, which is not allocated to our segments.   *39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.   The following table reconciles income (loss) from operations as shown above for our consolidated segment results with income (loss) from operations as reported for GAAP:       Quarter Ended     Nine Months Ended                                         August 29, 2020     August 31, 2019     August 29, 2020     August 31, 2019   Consolidated segment income from operations before special charges   $ 2,747     $ 3,400     $ (11,067 )   $ 5,885   Less:                                 Asset impairment charges     -       -       12,184       -   Goodwill impairment charge     -       -       1,971       -   Litigation expense     -       -       1,050       -   Early retirement program     -       -       -       835                                     Income (loss) from operations as reported   $ 2,747     $ 3,400     $ (26,272 )   $ 5,050     Asset Impairment Charges   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 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).   31 of 40     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 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.   Early Retirement Program   During the first quarter of fiscal 2019, we offered a voluntary early retirement package to certain eligible employees of the Company. Twenty-three employees accepted the offer, which expired on February 28, 2019. 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 nine months ended August 31, 2019.   Wholesale Segment   Results for the wholesale segment for the periods ended August 29, 2020 and August 31, 2019 are as follows:       Quarter Ended     Change     Nine Months Ended*     Change       August 29, 2020     August 31, 2019     Dollars     Percent     August 29, 2020     August 31, 2019     Dollars     Percent                                                                                                     Net sales   $ 55,443       100.0 %   $ 62,690       100.0 %   $ (7,247 )     -11.6 %   $ 153,588       100.0 %   $ 198,602       100.0 %   $ (45,014 )     -22.7 % Gross profit     18,364       33.1 %     21,618       34.5 %     (3,254 )     -15.1 %     45,332       29.5 %     67,189       33.8 %     (21,857 )     -32.5 % SG&A expenses     15,040       27.1 %     18,574       29.6 %     (3,534 )     -19.0 %     46,676       30.4 %     56,790       28.6 %     (10,114 )     -17.8 %                                                                                                   Income (loss) from operations   $ 3,324       6.0 %   $ 3,044       4.9 %   $ 280     4.0 %   $ (1,344 )     -0.9 %   $ 10,399       5.2 %   $ (11,743 )   N/M     *39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.   Analysis of Results - Wholesale   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.   32 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   Wholesale shipments by type:   Quarter Ended     Change     Nine Months Ended*     Change       August 29, 2020     August 31, 2019     Dollars     Percent     August 29, 2020     August 31, 2019     Dollars     Percent                                                                                                     Bassett Custom Upholstery   $ 31,016       55.9 %   $ 36,809       58.7 %   $ (5,793 )     -15.7 %   $ 90,283       58.8 %   $ 115,200       58.0 %   $ (24,917 )     -21.6 % Bassett Leather     5,804       10.5 %     4,480       7.1 %     1,324       29.6 %     13,559       8.8 %     14,714       7.4 %     (1,155 )     -7.8 % Bassett Custom Wood     9,582       17.3 %     11,757       18.8 %     (2,175 )     -18.5 %     26,504       17.3 %     33,958       17.1 %     (7,454 )     -22.0 % Bassett Casegoods     9,041       16.3 %     9,644       15.4 %     (603 )     -6.3 %     23,242       15.1 %     32,263       16.2 %     (9,021 )     -28.0 % Accessories     -       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %     2,467       1.2 %     (2,467 )     -100.0 % Total   $ 55,443       100.0 %   $ 62,690       100.0 %   $ (7,247 )     -11.6 %   $ 153,588       100.0 %   $ 198,602       100.0 %   $ (45,014 )     -22.7 %   *39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.     Retail – Company- o wned Stores Segment   Results for the retail segment for the periods ended August 29, 2020 and August 31, 2019 are as follows:       Quarter Ended     Change     Nine Months Ended*     Change       August 29, 2020     August 31, 2019     Dollars     Percent     August 29, 2020     August 31, 2019     Dollars     Percent                                                                                                     Net sales   $ 48,144       100.0 %   $ 66,539       100.0 %   $ (18,395 )     -27.6 %   $ 147,161       100.0 %   $ 198,736       100.0 %   $ (51,575 )     -26.0 % Gross profit     23,901       49.6 %     34,690       52.1 %     (10,789 )     -31.1 %     72,523       49.3 %     101,158       50.9 %     (28,635 )     -28.3 % SG&A expenses     25,486       52.9 %     34,867       52.4 %     (9,381 )     -26.9 %     84,527       57.4 %     106,471       53.6 %     (21,944 )     -20.6 % New store pre-opening costs     -       0.0 %     254       0.4 %     (254 )     -100.0 %     -       0.0 %     1,117       0.6 %     (1,117 )     -100.0 % Loss from operations   $ (1,585 )     -3.3 %   $ (431 )     -0.6 %   $ (1,154 )     267.7 %   $ (12,004 )     -8.2 %   $ (6,430 )     -3.2 %   $ (5,574 )     86.7 %   *39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.   Analysis of Results - Retail   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. 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 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.   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 assortment as previously discussed.   33 of 40     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 August 29, 2020 and August 31, 2019 are as follows:       Quarter Ended     Change     Nine Months Ended*     Change       August 29, 2020     August 31, 2019     Dollars     Percent     August 29, 2020     August 31, 2019     Dollars     Percent                                                                                                     Logistical services revenue   $ 17,848       100.0 %   $ 18,899       100.0 %   $ (1,051 )     -5.6 %   $ 54,422       100.0 %   $ 60,743       100.0 %   $ (6,321 )     -10.4 % Operating expenses     16,826       94.3 %     18,289       96.8 %     (1,463 )     -8.0 %     54,407       100.0 %     59,169       97.4 %     (4,762 )     -8.0 %                                                                                                   Income from operations   $ 1,022       5.7 %   $ 610       3.2 %   $ 412       67.5 %   $ 15       0.0 %   $ 1,574       2.6 %   $ (1,559 )     -99.0 %   *39 weeks for fiscal 2020 as compared with 40 weeks for fiscal 2019.   Analysis of Operations – Logistical Services   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 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   We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision.  Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter.   On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. 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 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.   34 of 40     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 Flows   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 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. 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. 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 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 $1,802 at August 29, 2020. See Note 11 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.   35 of 40     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 29, 2020 (Dollars in thousands except share and per share data)   Investment in Retail Real Estate   We have a substantial investment in real estate acquired for use as retail locations. 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 $17,463 at August 29, 2020.   The following information summarizes our total investment in retail real estate owned at August 29, 2020:       Number of     Aggregate     Net Book       Locations     Square Footage     Value                             Real estate occupied by Company-owned and operated stores, included in property and equipment, net     8       201,096     $ 17,463     Critical Accounting Policies and Estimates   There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2019, except for changes related to our adoption of Accounting Standards Codification Topic 842 as described in Note 1 and Note 11 to the condensed consolidated financial statements.   Off-Balance Sheet Arrangements   We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. In addition, we have guaranteed certain lease obligations of licensee operators for some of their store locations. See Note 11 to our condensed consolidated financial statements for further discussion of lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.   Contingencies   We are involved in various legal and environmental matters, which arise in the normal course of business. 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 August 29, 2020.