What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-07-01 compared with 2021-04-01 · 220 added, 101 removed, 177 unchanged (64% of the section changed)

32 unchanged sentences

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

7 unchanged sentences

Our rich 119-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.

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. 

With 97 BHF stores at May 29, 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. 

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. 

11 unchanged sentences

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. 

Our logistics team then 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.

10 unchanged sentences

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 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.

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.

Customer acquisition resulting from our digital outreach strategies increased our traffic to the website by 52% for the six months ended May 29, 2021 as compared to the comparable period in 2020.

The migration to digital brand research has 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, most of these items must be purchased in a store as they are not conducive to web transactions due to the number of options available.

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.

While we work to make it easier to purchase either in store or on-line, we will not compromise on our in-store experience or the quality of our in-home makeover capabilities.

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

2 unchanged sentences

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.

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

We also plan to heavily emphasize our “Made in America”

3 unchanged sentences

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.

On March 11, 2020, the World Health Organization declared the 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.

2 unchanged sentences

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.

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 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.

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 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.

The disruption to our operations caused by the COVID-19 pandemic resulted in a significant loss for the three and six months ended May 30, 2020.

By the end of the third quarter of fiscal 2020 we had reopened all stores and resumed manufacturing activity, allowing us to return to profitability beginning with the third quarter of fiscal 2020 and continuing through the first half of fiscal 2021.

Since restarting our 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 first half of fiscal 2021 increased 90% as compared to the comparable period in 2020.

In addition, wholesale orders for the first half of fiscal 2021 represented a 36% increase as compared to pre-pandemic levels of the first half of fiscal 2019.

However, supply chain disruptions causing shortages of various raw materials, including fabric, foam and plywood, coupled with logistical challenges have created significant delays in order fulfillment resulting in abnormally high backlogs.

In addition, inflationary pressures throughout the supply chain have resulted in us implementing multiple wholesale price increases over the last few months.

We expect that wholesale gross margins will be slightly impacted during the remainder of fiscal 2021 as we cycle through the backlog.

To address our growing backlog, we have opened another upholstery manufacturing facility in Newton, NC, adjacent to our existing 500,000 square foot complex.

Production from this additional 123,000 square foot facility began in early June and is dedicated to our opening price point “Everyday Value”

The added space will also allow us to expand our Bench Made motion program, previously referred to as Magnificent Motion, that has exceeded our sales projections since its debut in early 2020.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

We continue to closely monitor the COVID-19 pandemic and its lingering impact on the economy, the consumer and our business.

While the rate of incoming orders at both our wholesale and retail segments remains 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 gradual decreases in wholesale and retail backlogs over the remainder of fiscal 2021 driven by an anticipated lower rate of future incoming orders coupled with increased manufacturing and shipping activity.

Whereas the progress in mass vaccination programs in the U.S.

has prompted state and local governments to substantially lift most remaining restrictions on commercial retail activity, it is nevertheless possible that a resurgence in COVID-19 cases due to new variants of the coronavirus entering the U.S.

could prompt a return to tighter restrictions in certain areas of the country.

Furthermore, pandemic-related labor shortages and supply chain disruptions remain unresolved and order cancellations could result if the present delays in order fulfillment continue for an extended period of time.

Therefore, uncertainty remains regarding the ongoing impact of the COVID-19 outbreak upon our financial condition and future results of operations.

Results of Operations –

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:

Periods ended May 29, 2021 compared with the periods ended May 30, 2020:

Consolidated results of operations for the three and six months ended May 29, 2021 and May 30, 2020 are as follows:

Quarter Ended

February 27, 2021

February 29, 2020

Six Months Ended

Sales revenue:

Furniture and accessories

Logistics revenue

Logistical services

Total sales revenue

1 unchanged sentence

SG&A expenses

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.

Cost of logistical services

Other charges

Income (loss) from operations

Total sales revenue for the three and six months ended May 29, 2021 increased $60,258 and $61,811, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic on our operations during fiscal 2020, which forced a nearly total shut-down of our manufacturing and retail operations from late March through early May of last year, followed by an exceptionally strong recovery in demand for home furnishings that has continued into the first half of fiscal 2021.

Cost of furniture and accessories sold as a percentage of total revenue for the three and six months ended May 29, 2021 improved significantly over prior year periods, primarily due to improved leverage on fixed costs during the second quarter of fiscal 2021 versus the prior year period when our operations were temporarily shut down due to the pandemic.

SG&A expenses as a percentage of sales for the three and six months ended May 29, 2021 decreased significantly from comparable fiscal 2020 periods due to increased leverage of fixed costs due to higher sales volume coupled with the fact that we have been able to maintain various expense reductions implemented in the second and third quarters of fiscal 2020 in response to the COVID-19 pandemic.

Other charges of $15,205 incurred during the three and six months ended May 30, 2020 included $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 in May of 2020, a non-cash charge of $1,971 for the impairment of goodwill associated with our wood reporting unit within our wholesale segment, and $1,050 of litigation costs relating to certain wage and hour violation claims that had been asserted against the Company.

These claims have since been settled at no additional cost.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Dollars in thousands except share and per share data)

Because of the significant adverse impact that the COVID-19 pandemic had on our operations during the second quarter of fiscal 2020, we believe that a better understanding of the revenue growth that has resulted from our product and marketing initiatives is obtained by comparing our current year revenues to the pre-pandemic levels of fiscal 2019.

For the three and six months ended June 1, 2019, sales of furniture and accessories were $95,842 and $203,181, respectively.

Compared to fiscal 2019, sales of furniture and accessories for the three and six months ended May 29, 2021 increased $14,173 or 14.8% and $8,471 or 4.2%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

This growth as compared to fiscal 2019 is attributable not only to the exceptionally strong demand for home furnishings that has benefited our industry over the past twelve months, but also due to increases in our wholesale business through growth in our Lane Venture line of outdoor furniture, the introduction of our Bassett Outdoor line of outdoor furniture sold through our BHF store network, and the expansion of our wholesale customer base of independent dealers partially offset by lower retail sales from the closure of six Company-owned stores since the end of the second quarter of 2019.

Segment Information

4 unchanged sentences

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

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

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

Retail –

4 unchanged sentences

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 income.

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

Revenue from the performance of these services to other customers and the associated cost is included in logistical services revenue and cost of logistical services, respectively, in our condensed consolidated statements of operations.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

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 February 27, 2021

Quarter Ended May 29, 2021

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income from operations

Quarter Ended February 29, 2020

Quarter Ended May 30, 2020

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Income (loss) from operations

Cost of logistical services

Income (loss) from operations before other charges (6)

Six Months Ended May 29, 2021

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income from operations

Six Months Ended May 30, 2020

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income (loss) from operations before other charges (6)

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Dollars in thousands except share and per share data)

Notes to segment consolidation table:

2 unchanged sentences

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

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

Represents the elimination of rent paid by our retail stores occupying Company-owned real estate.

Represents the elimination of the cost of logistical services provided by Zenith to our wholesale segment.

Excludes the effects of goodwill and asset impairment charges as well as litigation costs which are not allocated to our segments. Refer to the reconciliation to income (loss) from operations presented under Non-GAAP Financial Information below.

Non-GAAP Financial Information

To supplement the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including income (loss) from operations before other charges and gross profit on wholesale sales of furniture and accessories by segment inclusive of intercompany sales.

The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below.

Income (Loss) from Operations before Other Charges

The following table reconciles income (loss) from operations before other charges as shown above for our consolidated segment results with income (loss) from operations as reported for GAAP:

Quarter Ended

February 27, 2021

February 29, 2020

Intercompany logistical services

Intercompany rents

Total SG&A expense elimination

Six Months Ended

Income (loss) from operations before other charges

Asset impairment charges

Goodwill impairment charge

Litigation expense

Income (loss) from operations as reported

Asset Impairment Charges

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

Goodwill Impairment Charge

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

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

Litigation Expense

During the three and six months ended May 30, 2020 we accrued $1,050 for the estimated costs to resolve certain wage and hour violation claims that had been asserted against the Company.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

Gross Profit by Segment

In the following analysis of results for our wholesale and retail segments, we present a measure of gross profit on sales which is inclusive of intercompany sales from our wholesale segment to our retail segment.

We believe that this is a key metric by which to evaluate the performance of each segment and is consistent with management’s view of our operating results.

The following table reconciles the sales, cost of sales and gross profit presented for each of the wholesale and retail segments to the consolidated amounts for sales, cost of sales and the implied gross profit in accordance with GAAP.

Quarter Ended May 29, 2021

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Quarter Ended May 30, 2020

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Six Months Ended May 29, 2021

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Six Months Ended May 30, 2020

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Notes to the gross profit by segment table:

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

Represents the change for the period in the elimination of intercompany profit in ending retail inventory.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Dollars in thousands except share and per share data)

Wholesale Segment

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

Results for the wholesale segment for the periods ended May 29, 2021 and May 30, 2020 are as follows:

Quarter Ended

February 27, 2021

February 29, 2020

Six Months Ended

Gross profit*

SG&A expenses

Income from operations

Analysis of Results - Wholesale

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.

In addition, orders from the Bassett Home Furnishings store network increased 14% while Lane Venture orders increased by 75%.

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.

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:

Income (loss) from operations

*Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions.

Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under Non-GAAP Financial Information above.

Wholesale sales by major product category are as follows:

Quarter Ended

February 27, 2021

February 29, 2020

Bassett Custom Upholstery

2 unchanged sentences

Bassett Casegoods

Six Months Ended

Bassett Custom Upholstery

Bassett Leather

Bassett Custom Wood

Bassett Casegoods

Analysis of Results - Wholesale

Net sales for the three and six months ended May 29, 2021 increased $42,906 and $48,153, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic on our operations during fiscal 2020, which forced a nearly total shut-down of our manufacturing and retail operations from late March through early May of last year, followed by an exceptionally strong recovery in demand for home furnishings that has continued into the first half of fiscal 2021.

The increase in orders resulting from this surge in demand, coupled with continuing supply chain disruptions in the wake of the pandemic, has resulted in a wholesale backlog of $86,693 at May 29, 2021 as compared to $54,874 at November 28, 2020 and $17,270 at May 30, 2020.

Gross margins for the three and six months ended May 29, 2021 improved significantly over prior year periods, primarily due to improved leverage on fixed costs during the second quarter of fiscal 2021 versus the prior year period when our operations were temporarily shut down due to the pandemic.

SG&A expenses as a percentage of sales for the three and six months ended May 29, 2021 decreased significantly from the comparable fiscal 2020 periods 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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 27, 2021

(Dollars in thousands except share and per share data)

For the three and six months ended June 1, 2019, wholesale sales were $63,131 and $135,912, respectively.

Compared to fiscal 2019, wholesale sales for the three and six months ended May 29, 2021 increased $12,903 or 20.4% and $10,386, or 7.6%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

Shipments to the BHF store network grew 4.8% for the second quarter of fiscal 2021 over the second quarter of fiscal 2019 while shipments for the first half of fiscal 2021 declined 1.5% from the first half of fiscal 2019.

Growth in shipments to the BHF store network of the Bassett Outdoor line of outdoor furniture, introduced in fiscal 2020, was offset by lower retail sales from the closure of six Company-owned stores since the end of the second quarter of 2019.

Shipments to the open market (independent dealers outside of the BHF store network) increased 52.1% and 36.2% for the three and six months ended May 29, 2021, respectively, over the comparable fiscal 2019 periods primarily due to increases from existing dealers along with an expansion of the dealer base.

Shipments of our Lane Venture line of outdoor furniture increased 39.5% and 41.8% for the three and six months ended May 29, 2021, respectively, over the comparable fiscal 2019 periods.

In addition, wholesale orders for the three and six months ended May 29, 2021, increased 51% and 36%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

Wholesale orders from independent dealers increased 126% and 93% for the three and six month periods driven by increases from existing dealers along with an expansion of the dealer base.

Also, orders from the Bassett Home Furnishings store network increased 7.8% and 2.0% over the quarter and year-to-date periods of 2019, respectively, in spite of having six fewer stores in the fleet during 2021.

Lane Venture orders increased by 92% and 95%, respectively, for those same periods.

Retail –

Company-owned Stores Segment

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

Results for the retail segment for the periods ended May 29, 2021 and May 30, 2020 are as follows:

Quarter Ended

February 27, 2021

February 29, 2020

Six Months Ended

Gross profit*

SG&A expenses

Income (loss) from operations

*Gross profit at the segment level is considered a Non-GAAP financial measure due to the included effects of intercompany transactions.

Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under Non-GAAP Financial Information above.

Retail sales by major product category are as follows:

Quarter Ended

Six Months Ended

Bassett Custom Upholstery

Bassett Leather

Bassett Custom Wood

Bassett Casegoods

Accessories, mattresses and other (1)

Includes the sale of goods other than Bassett-branded products, such as accessories and bedding, and also includes the sale of furniture protection plans.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Dollars in thousands except share and per share data)

Analysis of Results - Retail

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.

Net sales for the three and six months ended May 29, 2021 increased $29,312 and $23,861, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic on our operations in fiscal 2020, which forced a nearly total shut-down of our retail operations from late March through early May of that year, followed by an exceptionally strong recovery in demand for home furnishings that has continued into the first half of fiscal 2021.

The increase in written sales (the value of sales orders taken but not delivered) resulting from this surge in demand has resulted in a retail backlog of $73,489 at May 29, 2021 as compared to $57,041 at November 28, 2020 and $28,949 at May 30, 2020.

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.

Gross margins for the three and six months ended May 29, 2021 increased by 420 and 240 basis points, respectively, primarily driven by lower levels of promotional activity coupled with improved margins on clearance activity.

SG&A expenses for the three and six months ended May 29, 2021 as a percentage of sales decreased significantly as compared to the comparable periods 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.

Because of the significant adverse impact that the COVID-19 pandemic had on our operations during the second quarter of fiscal 2020, we believe that a better understanding of the retail revenue trend that has resulted from our product and marketing initiatives is obtained by comparing our current year revenues to the pre-pandemic levels of fiscal 2019.

For the three and six months ended June 1, 2019, retail sales were $62,568 and $132,197, respectively.

Compared to fiscal 2019, retail sales for the three and six months ended May 29, 2021, decreased $85 or 0.1% and $9,319, or 7.0%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

Sales increases from the introduction of the Bassett Outdoor product line were offset by sales decreases from six fewer stores in operation.

Written sales increased 13.8% and 8.1% for the three and six months ended May 29, 2021, respectively, over the corresponding periods of fiscal 2019 in spite of having six fewer stores in operation.

Logistical Services Segment

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

Results for our logistical services segment for the periods ended May 29, 2021 and May 30, 2020 are as follows:

Quarter Ended

February 27, 2021

February 29, 2020

Six Months Ended

Logistical services revenue

Operating expenses

Income from operations

Income (loss) from operations

Analysis of Operations –

Logistical Services

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.

Net revenues for the three and six months ended May 29, 2021 increased $6,985 and $5,751, respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic on our operations in fiscal 2020, which forced a near total shut-down of furniture retail operations throughout the country from late March through early May of last year. 

Operating profit has also increased significantly over the prior year periods, as we were forced during the second quarter of 2020 to run some of our trucks at substantially lower than optimal load levels resulting in inefficiencies and provided freight services for customers outside of the furniture industry in order to maintain some level of revenue and retain our drivers.

These improvements have been partially offset in the current year 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 Items Affecting Net Income

Other Loss, Net

Other loss, net, for the three months ended May 29, 2021 was $332 compared to $765 for the three months ended May 30, 2020, a decrease of $433.

The net change was primarily due to lower net costs of Company-owned life insurance in the current year coupled with valuation charges associated with sublease rent receivables which had been incurred in the prior year as a result of the pandemic.

Other loss, net, for the six months ended May 29, 2021 was $669 compared to $1,127 for the six months ended May 30, 2020, a decrease of $458.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

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.

Our effective tax rates for the three and six months ended May 29, 2021 of 25.8% and 27.3%, respectively, differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including tax benefits (deficiencies) of $18 and ($117) during the three and six months ended May 29, 2021, respectively, arising from stock-based compensation.

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 allowed net operating losses from the 2018, 2019 and 2020 tax years to be carried back up to five years.

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

Liquidity and Capital Resources

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.

Cash provided by operations for the first half of fiscal 2021 was $12,050 compared to $5,747 used in operations for the first half of fiscal 2020, representing an increase in cash provided by operations of $17,797.

This increase in operating cash flow is primarily due to the significant increase in operating income as compared to the second quarter of fiscal 2020 when nearly all operations were temporarily suspended due to the pandemic, along with a substantial current year increase in customer deposits taken against unfilled orders.

These improvements were partially offset by other changes in working capital led by increased investment in inventory as we work to fulfill our order backlog.

Our overall cash position decreased by $23 during the first half of fiscal 2021, compared to an overall decrease of $8,252 during the first half of fiscal 2020, an improvement of $8,229 over the prior year period.

Partially offsetting the improvement in cash flows from operations, net cash used in investing activities during the first half of 2021 increased $3,824 to a net use of $3,722 compared to net cash provided by investing activities of $102 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 half of 2020 along with increased capital expenditures in the current year.

Net cash used in financing activities during the first half of 2021 increased $5,744 to a net use of $8,351 as compared to a net use of $2,607 for the prior year period, primarily due to a special dividend of $2,479 declared and paid during the first half of 2021, along with share repurchases of $2,925 during the first half of fiscal 2021 as compared to $1,241 repurchased during the first half of fiscal 2020.

As of May 29, 2021, $5,506 remains authorized under our existing share repurchase plan.

With cash and cash equivalents and short-term investments totaling $63,491 on hand at May 29, 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 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.

At May 29, 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.

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.

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.

We were in compliance with all covenants under the agreement as of May 29, 2021 and expect to remain in compliance through the end of fiscal 2021.

The credit facility matures on January 31, 2022.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Dollars in thousands except share and per share data)

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 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.

The present value of our obligations for leases with terms in excess of one year at May 29, 2021 is $143,910 and is included in our accompanying condensed consolidated balance sheet at May 29, 2021.

We were contingently liable under licensee lease obligation guarantees in the amount of $2,073 at May 29, 2021.

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

See Note 12 to our condensed consolidated financial statements for additional details regarding our lease guarantees.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

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 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

7 unchanged sentences

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

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

See Note 11 to our condensed consolidated financial statements for further information regarding certain contingencies as of May 29, 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