What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-04-01 compared with 2020-10-01 · 138 added, 247 removed, 140 unchanged (73% 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 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”

Such forward-looking statements are identified by use of forward-looking words such as “

anticipates ”, “

believes ”, “

plans ”, “

estimates ”, “

expects ”, “

aims ”

intends ”

or words or phrases of similar expression.

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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)

the profitability of the Bassett stores (independent licensees and Company-owned retail stores) which may result in future store closings

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

fluctuations in the cost and availability of raw materials, fuel, labor and sourced products, including those which may result from supply chain disruptions and 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

effectiveness and security of our information and technology systems and possible disruptions due to cybersecurity threats, including any impacts from a network security incident;

and the sufficiency of our insurance coverage, including cybersecurity insurance.

future tax legislation, or regulatory or judicial positions

3 unchanged sentences

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.

Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 28, 2020.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

3 unchanged sentences

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.

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, many of which feature Bassett galleries or design centers.

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.

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.

With 97 BHF stores at February 27, 2021, 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. 

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.

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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.

We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States and ultimately gain market share.  

The BHF stores feature custom order furniture, free in-home or virtual design visits (“home makeovers”) and coordinated decorating accessories. 

Our philosophy is based on building strong long-term relationships with each customer. 

Salespeople 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 or virtual design services for our customers.

We have factories in Newton, North Carolina that manufacture custom upholstered furniture.

We also have factories in Martinsville and Bassett, Virginia that assemble and finish our custom dining offerings, including our solid hardwood furniture “Bench Made”

Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its manufacturing process.

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.

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

During fiscal 2018, we acquired Lane Venture, a manufacturer and distributor of premium outdoor furniture which is 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 the Bassett Outdoor brand 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 on the growing trend of outdoor living.

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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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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

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.

Customer acquisition resulting from our digital outreach strategies increased our traffic to the website by 53% and web orders by 55% for the first quarter of 2021 as compared to 2020.

Digital advertising continues to dominate our marketing expenditures as we continue to spend less in traditional television and direct mail advertising.

We 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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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.

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 believe that on a market-by-market basis, there will be fewer stores in the future.

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.

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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.

Consequently, we will continue to methodically re-design each one of these important lines.

Our intent is to continue to offer the consumer custom options that will help them personalize their home but to 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.

As part of this, we recently rebranded our premier Custom Upholstery line to be part of the Bench Made program emphasizing that those products are artisan crafted with exceptional domestic materials and are made to order.

In addition, we expanded our Bench Made solid wood dining offerings to provide a sleeker more contemporary styling product to complement our initial Bench Made dining offerings.

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.

These measures had a significant adverse impact upon many sectors of the economy, including non-essential retail commerce, beginning in our second fiscal quarter of 2020.

Therefore, our results of operations for the quarter ended February 29, 2020 were not impacted by COVID-19.

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

The disruption to our operations caused by the COVID-19 pandemic resulted in a significant loss for the second quarter of fiscal 2020 which drove the loss for the full year of fiscal 2020 despite our return to profitability during the third and fourth fiscal quarters.

Wholesale orders for the first quarter of 2021 increased 44% as compared to the pre-pandemic levels of the first quarter of fiscal 2020.

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 $4,011 and operating cash flow of $4,984 for the quarter ended February 27, 2021.

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

Although unable to predict with certainty, we expect gradual decreases in wholesale and retail backlogs over the remainder of 2021 driven by an anticipated lower rate of future incoming orders coupled with increased manufacturing and shipping activity.

While the home furnishings industry has fared much better during the pandemic than other sectors of the economy, the speed and direction of the economic recovery remains largely dependent upon the success of mass vaccination programs and the declining trend in COVID-19 cases, and any interruption or reversal of these trends may yet have an additional adverse impact upon our business.

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

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

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 February 27, 2021 compared with the quarter ended February 29, 2020:

Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense and income from operations were as follows for the three months ended February 27, 2021 and February 29, 2020:

Quarter Ended

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

February 27, 2021

February 29, 2020

Sales revenue:

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SG&A expenses

New store pre-opening costs

Other charges

Income (loss) from operations

*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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

(Dollars in thousands except share and per share data)

Income from operations

Refer to the segment information which follows for a discussion of the significant factors and trends affecting our results of operations for the three months ended February 27, 2021 as compared with the prior year period.

Segment Information

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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 income (loss), net, in our condensed consolidated statements of operations.

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

Retail –

Company-owned s tores.

Company-owned stores.

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.

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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.

Revenue from the performance of these services to other customers is included in logistical services revenue in our condensed consolidated statements of income.

Zenith’s operating costs are included in selling, general and administrative expenses.

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BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

FEBRUARY 27, 2021

(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

Sales revenue:

Furniture & accessories

Total sales revenue

Cost of furniture and accessories sold

Income (loss) from operations

Quarter Ended August 31, 2019

Sales revenue:

Furniture & accessories

Total sales revenue

Cost of furniture and accessories sold

New store pre-opening costs

Income (loss) from operations

Nine Months Ended August 29, 2020*

Quarter Ended February 27, 2021

Sales revenue:

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Cost of furniture and accessories sold

Income (loss) from operations (5)

Nine Months Ended August 31, 2019*

Income from operations

Quarter Ended February 29, 2020

Sales revenue:

2 unchanged sentences

Cost of furniture and accessories sold

New store pre-opening costs

Income (loss) from operations

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:

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Quarter Ended

Nine Months Ended*

February 27, 2021

February 29, 2020

Intercompany logistical services

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Total SG&A expense elimination

Excludes the effects of goodwill and asset impairment charges as well as litigation costs which are not allocated to our segments.

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

Consolidated segment income from operations before special charges

Asset impairment charges

Goodwill impairment charge

Litigation expense

Early retirement program

Income (loss) from operations as reported

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).

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

FEBRUARY 27, 2021

(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:

Results for the wholesale segment for the periods ended February 27, 2021 and February 29, 2020 are as follows:

Quarter Ended

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

February 27, 2021

February 29, 2020

SG&A expenses

Income (loss) from operations

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

Income from operations

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.

Net sales for the three months ended February 27, 2021 increased $5,247 or 8.1% over the prior year period.

Wholesale orders for the first quarter of 2021 increased 44% as compared to 2020 resulting in a wholesale backlog of $67,469 at February 27, 2021 as compared to $54,874 at November 28, 2020 and $14,617 at February 29, 2020.

Wholesale orders from independent dealers increased 98% 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.

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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)

SG&A expenses as a percentage of sales decreased 240 basis points due to increased leverage of fixed costs due to higher sales volume coupled with various expense reductions implemented in the second and third quarters of fiscal 2020 in response to the COVID-19 pandemic.

Wholesale shipments by type:

Quarter Ended

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

February 27, 2021

February 29, 2020

Bassett Custom Upholstery

2 unchanged sentences

Bassett Casegoods

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

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

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:

Company-owned Stores Segment

Results for the retail segment for the periods ended February 27, 2021 and February 29, 2020 are as follows:

Quarter Ended

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

February 27, 2021

February 29, 2020

SG&A expenses

New store pre-opening costs

Loss from operations

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

Income (loss) from operations

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.

Net sales for the three months ended February 27, 2021 declined $5,451 or 8.3% from the prior year period.

Written sales, the value of sales orders taken, but not delivered, increased 4.1% for the quarter ended February 27, 2021 as compared to the prior year quarter in spite of having seven fewer stores in operation this year, resulting in a retail backlog of $64,806 at February 27, 2021 as compared to $57,041 at November 28, 2020 and $29,775 at February 29, 2020.

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)

Gross margins for the first quarter of 2021 increased by 150 basis points primarily driven by lower levels of promotional activity coupled with improved margins on clearance activity.

SG&A expenses for the first quarter of 2021 as a percentage of sales decreased by 220 basis points as compared to the first quarter of 2020.

This was driven by workforce reductions, lower advertising spending, and overall cost containment activities.

In addition, over the course of fiscal 2020 we closed seven unprofitable store locations, six of which were closed subsequent to the first quarter of 2020.

Logistical Services Segment

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

Results for our logistical services segment for the periods ended February 27, 2021 and February 29, 2020 are as follows:

Quarter Ended

Nine Months Ended*

August 29, 2020

August 31, 2019

August 29, 2020

August 31, 2019

February 27, 2021

February 29, 2020

Logistical services revenue

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Income from operations

*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.

Net revenues for the three months ended February 27, 2021 declined $1,234 or 5.8% from the prior year period.

Operating profit declined for the first quarter of 2021 as compared to 2020 primarily due to 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, partially offset by improved fleet costs driven by lower fuel prices.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

Other Items Affecting Net Income

Other Loss, Net

Other loss, net, for the three months ended February 27, 2021 was $337 compared to $362 for the three months ended February 29, 2020, a decrease of $25.

The net change was primarily due to reduced interest income from our investments in CDs along with higher interest expense resulting from additional finance leases, partially offset by lower net cost of Company-owned life insurance.

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.

Our effective tax rates for the quarters ended February 27, 2021 and February 29, 2020 of 29.4% and 34.5%, respectively, differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including tax deficiencies of $135 and $114 during the quarters ended February 27, 2021 and February 29, 2020, respectively, arising from stock-based compensation.

Liquidity and Capital Resources

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.

Cash provided by operations for the first quarter of fiscal 2021 was $4,984 compared to $5,243 used in operations for the first quarter of fiscal 2020, representing an increase in cash provided by operations of $10,277.

This increase in operating cash flow is primarily due to higher operating income along with a substantial increase in customer deposits taken against unfilled orders, partially offset by other changes in working capital including increased investment in inventory as we work to fulfill our order backlog.

Our overall cash position decreased by $766 during the first quarter of fiscal 2021, compared to an overall decrease of $7,498 during the first quarter of fiscal 2020, an improvement of $6,732 over the prior year period.

Partially offsetting the improvement in cash flows from operations, net cash used in investing activities during the first quarter of 2021 increased $1,112 to a net use of $1,189 compared to a net use of $77 for the prior year period.

This increase was primarily due to proceeds from the sale of our closed Gulfport store location included in the first quarter of 2020 partially offset by lower capital expenditures in the current year.

Net cash used in financing activities during the first quarter of 2021 increased $2,383 to a net use of $4,561 as compared to a net use of $2,178 for the prior year period, primarily due to a special dividend of $2,479 declared and paid during the first quarter of 2021.

Share repurchases totaled $534 during the first quarter of fiscal 2021 as compared to $766 repurchased during the first quarter of fiscal 2020.

As of February 27, 2021, $7,897 remains authorized under our existing share repurchase plan.

With cash and cash equivalents and short-term investments totaling $62,748 on hand at February 27, 2021, expected future operating cash flows and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.

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.

Our bank credit facility provides for a line of credit of up to $25,000.

At February 27, 2021, we had $3,181 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,819.

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.

We were in compliance with all covenants under the agreement as of February 27, 2021 and expect to remain in compliance through the end of fiscal 2021.

The credit facility matures on January 31, 2022.

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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.

The present value of our obligations for leases with terms in excess of one year at February 27, 2021 is $139,434 and is included in our accompanying condensed consolidated balance sheet at February 27, 2021.

We were contingently liable under licensee lease obligation guarantees in the amount of $2,064 at February 27, 2021.

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

See Note 10 to our condensed consolidated financial statements for additional details regarding our lease guarantees.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 29, 2020

FEBRUARY 27, 2021

(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:

Square Footage

Real estate occupied by Company-owned and operated stores, included in property and equipment, net

We have a substantial investment in real estate acquired for use as retail locations and occupied by Company-owned retail stores.

Such real estate is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and consists of eight properties with an aggregate square footage of 201,096 and a net book value of $17,211 at February 27, 2021.

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

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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.

See Note 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of February 27, 2021.

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