BASSETT FURNITURE INDUSTRIES INC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   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 ”, “ aims ” and “ intends ” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include:   • the impact of the COVID-19 outbreak upon our ability to maintain normal operations at our retail stores and manufacturing facilities and the resulting effects any future interruption of those operations may have upon our financial condition, results of operations and liquidity, as well as the impact of the outbreak upon general economic conditions, including consumer spending and the strength of the housing market in the United States   • competitive conditions in the home furnishings industry   • overall retail traffic levels and consumer demand for home furnishings   • ability of our customers and consumers to obtain credit   • 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 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 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   • ability to efficiently manage the import supply chain to minimize business interruption   • concentration of domestic manufacturing, particularly of upholstery products, and the resulting exposure to business interruption from accidents, weather and other events and circumstances beyond our control   • general risks associated with providing freight transportation and other logistical services through our wholly owned subsidiary, Zenith Freight Lines, LLC   Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 28, 2020.   23 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (Dollars in thousands except share and per share data)   You should keep in mind that any forward-looking statement made by us in this report or elsewhere speaks only as of the date on which such forward-looking statement is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this discussion after the date hereof, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that the events described in any forward-looking statement made in this report or elsewhere, might not occur.   Overview   Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, 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 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 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.  In order to reach markets that cannot be effectively served by our retail store network, we also distribute our products through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We use a network of over 30 independent sales representatives who have stated geographical territories. These sales representatives are compensated based on a standard commission rate. We believe this blended strategy provides us the greatest ability to effectively distribute our products throughout the United States 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” line. 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 ships the product to one of our home delivery hubs or to a location specified by our licensees.  In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture (casegoods) and certain leather upholstery offerings from several foreign plants, primarily in Vietnam, Thailand and China. Over 75% of the products we currently sell are manufactured in the United States.   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. Zenith delivers best-of-class shipping and logistical support services that are uniquely tailored to the needs of Bassett and the furniture industry. Approximately 60% of Zenith’s revenue is generated from services provided to non-Bassett customers.   24 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 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 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. 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. 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 also plan to heavily emphasize our “Made in America” story and utilize locally harvested and organic materials when possible. 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 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 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 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” product. 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.   25 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 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 – 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     Change     Six Months Ended     Change       May 29, 2021     May 30, 2020     Dollars     Percent     May 29, 2021     May 30, 2020     Dollars     Percent                                                                                                     Sales revenue:                                                                                                 Furniture and accessories   $ 109,997       88.7 %   $ 53,000       83.1 %   $ 56,997       107.5 %   $ 211,652       89.0 %   $ 151,942       86.4 %   $ 59,710       39.3 % Logistical services     14,062       11.3 %     10,801       16.9 %     3,261       30.2 %     26,080       11.0 %     23,979       13.6 %     2,101       8.8 % Total sales revenue     124,059       100.0 %     63,801       100.0 %     60,258       94.4 %     237,732       100.0 %     175,921       100.0 %     61,811       35.1 % Cost of furniture and accessories sold     52,911       42.6 %     29,452       46.2 %     23,459       79.7 %     101,163       42.6 %     74,722       42.5 %     26,441       35.4 % SG&A expenses     50,001       40.3 %     37,730       59.1 %     12,271       32.5 %     97,843       41.2 %     90,027       51.2 %     7,816       8.7 % Cost of logistical services     12,768       10.3 %     12,643       19.8 %     125       1.0 %     24,326       10.1 %     24,986       14.2 %     (660 )     -2.6 % Other charges     -       0.0 %     15,205       28.7 %     (15,205 )     -100.0 %     -       0.0 %     15,205       10.0 %     (15,205 )     -100.0 %                                                                                                   Income (loss) from operations   $ 8,379       6.8 %   $ (31,229 )     -48.9 %   $ 39,608     N/M     $ 14,400       6.2 %   $ (29,019 )     -16.5 %   $ 43,419     N/M     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.   26 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (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   We have strategically aligned our business into three reportable segments as described below:   Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (Company-owned and licensee-owned retail stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations, which include Lane Venture, as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both Company- and licensee-owned stores. We eliminate the sales between our wholesale and retail segments as well as the imbedded profit in the retail inventory for the consolidated presentation in our financial statements. Also included in our wholesale segment are our short-term investments and our holdings of retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our condensed consolidated statements of operations.   Retail – 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.   Logistical services. Our logistical services segment reflects the operations of Zenith. In addition to providing shipping and warehousing services for the Company, Zenith also provides similar services to other customers, primarily in the furniture industry. Revenue from the performance of these services to other customers and the associated cost is included in logistical services revenue and cost of logistical services, respectively, in our condensed consolidated statements of operations.   27 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 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 May 29, 2021       Wholesale     Retail     Logistics     Eliminations       Consolidated   Sales revenue:                                           Furniture & accessories   $ 76,034     $ 62,483     $ -     $ (28,520 )  (1)   $ 109,997   Logistical services     -       -       22,244       (8,182 )  (2)     14,062   Total sales revenue     76,034       62,483       22,244       (36,702 )       124,059   Cost of furniture and accessories sold     50,858       30,319       -       (28,266 )  (3)     52,911   SG&A expense     19,817       30,512       -       (328 )  (4)     50,001   Cost of logistical services     -       -       20,950       (8,182 )  (5)     12,768   Income from operations   $ 5,359     $ 1,652     $ 1,294     $ 74       $ 8,379         Quarter Ended May 30, 2020       Wholesale     Retail     Logistics     Eliminations       Consolidated   Sales revenue:                                           Furniture & accessories   $ 33,128     $ 33,171     $ -     $ (13,299 )  (1)   $ 53,000   Logistical services     -       -       15,259       (4,458 )  (2)     10,801   Total sales revenue     33,128       33,171       15,259       (17,757 )       63,801   Cost of furniture and accessories sold     27,300       17,488       -       (15,336 )  (3)     29,452   SG&A expense     13,209       24,853       -       (332 )  (4)     37,730   Cost of logistical services     -       -       17,101       (4,458 )  (5)     12,643   Income (loss) from operations before other charges (6)   $ (7,381 )   $ (9,170 )   $ (1,842 )   $ 2,369       $ (16,024 )       Six Months Ended May 29, 2021       Wholesale     Retail     Logistics     Eliminations       Consolidated   Sales revenue:                                           Furniture & accessories   $ 146,298     $ 122,878     $ -     $ (57,524 )  (1)   $ 211,652   Logistical services     -       -       42,325       (16,245 )  (2)     26,080   Total sales revenue     146,298       122,878       42,325       (73,769 )       237,732   Cost of furniture and accessories sold     98,146       59,628       -       (56,611 )  (3)     101,163   SG&A expense     37,996       60,504       -       (657 )  (4)     97,843   Cost of logistical services     -       -       40,572       (16,246 )  (5)     24,326   Income from operations   $ 10,156     $ 2,746     $ 1,753     $ (255 )     $ 14,400         Six Months Ended May 30, 2020       Wholesale     Retail     Logistics     Eliminations       Consolidated   Sales revenue:                                           Furniture & accessories   $ 98,145     $ 99,017     $ -     $ (45,220 )  (1)   $ 151,942   Logistical services     -       -       36,574       (12,595 )  (2)     23,979   Total sales revenue     98,145       99,017       36,574       (57,815 )       175,921   Cost of furniture and accessories sold     71,177       50,394       -       (46,849 )  (3)     74,722   SG&A expense     31,636       59,042               (651 )  (4)     90,027   Cost of logistical services     -       -       37,581       (12,595 )  (5)     24,986   Income (loss) from operations before other charges (6)   $ (4,668 )   $ (10,419 )   $ (1,007 )   $ 2,280       $ (13,814 )   28 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (Dollars in thousands except share and per share data)   Notes to segment consolidation table:   (1) Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores. (2) Represents the elimination of logistical services billed to our wholesale segment. (3) Represents the elimination of purchases by our Company-owned BHF stores from our wholesale segment, as well as the change for the period in the elimination of intercompany profit in ending retail inventory. (4) Represents the elimination of rent paid by our retail stores occupying Company-owned real estate. (5) Represents the elimination of the cost of logistical services provided by Zenith to our wholesale segment. (6) 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     Six Months Ended       May 29, 2021     May 30, 2020     May 29, 2021     May 30, 2020                                     Income (loss) from operations before other charges   $ 8,379     $ (16,024 )   $ 14,400     $ (13,814 ) Less:                                 Asset impairment charges     -       12,184       -       12,184   Goodwill impairment charge     -       1,971       -       1,971   Litigation expense     -       1,050       -       1,050   Income (loss) from operations as reported   $ 8,379     $ (31,229 )   $ 14,400     $ (29,019 )   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.   29 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 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       Wholesale     Retail     Eliminations       Consolidated                                       Sales revenue: furniture & accessories   $ 76,034     $ 62,483     $ (28,520 )  (1)   $ 109,997   Cost of furniture and accessories sold     50,858       30,319       (28,266 )  (2)     52,911   Gross profit   $ 25,176     $ 32,164     $ (254 )  (3)   $ 57,086         Quarter Ended May 30, 2020       Non-GAAP Presentation               GAAP Presentation       Wholesale     Retail     Eliminations       Consolidated   Sales revenue: furniture & accessories   $ 33,128     $ 33,171     $ (13,299 )  (1)   $ 53,000   Cost of furniture and accessories sold     27,300       17,488       (15,336 )  (2)     29,452   Gross profit   $ 5,828     $ 15,683     $ 2,037    (3)   $ 23,548         Six Months Ended May 29, 2021       Non-GAAP Presentation               GAAP Presentation       Wholesale     Retail     Eliminations       Consolidated                                       Sales revenue: furniture & accessories   $ 146,298     $ 122,878     $ (57,524 )  (1)   $ 211,652   Cost of furniture and accessories sold     98,146       59,628       (56,611 )  (2)     101,163   Gross profit   $ 48,152     $ 63,250     $ (913 )  (3)   $ 110,489         Six Months Ended May 30, 2020       Non-GAAP Presentation               GAAP Presentation       Wholesale     Retail     Eliminations       Consolidated   Sales revenue: furniture & accessories   $ 98,145     $ 99,017     $ (45,220 )  (1)   $ 151,942   Cost of furniture and accessories sold     71,177       50,394       (46,849 )  (2)     74,722   Gross profit   $ 26,968     $ 48,623     $ 1,629    (3)   $ 77,220     Notes to the gross profit by segment table:   (1) Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores. (2) 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. (3) Represents the change for the period in the elimination of intercompany profit in ending retail inventory.   30 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (Dollars in thousands except share and per share data)   Wholesale Segment   Results for the wholesale segment for the periods ended May 29, 2021 and May 30, 2020 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 29, 2021     May 30, 2020     Dollars     Percent     May 29, 2021     May 30, 2020     Dollars     Percent                                                                                                     Net sales   $ 76,034       100.0 %   $ 33,128       100.0 %   $ 42,906       129.5 %   $ 146,298       100.0 %   $ 98,145       100.0 %   $ 48,153       49.1 % Gross profit*     25,176       33.1 %     5,828       17.6 %     19,348       332.0 %     48,152       32.9 %     26,968       27.5 %     21,184       78.6 % SG&A expenses     19,817       26.1 %     13,209       39.9 %     6,608       50.0 %     37,996       26.0 %     31,636       32.2 %     6,360       20.1 %                                                                                                   Income (loss) from operations   $ 5,359       7.0 %   $ (7,381 )     -22.3 %   $ 12,740     N/M     $ 10,156       6.9 %   $ (4,668 )     -4.8 %   $ 14,824     N/M     *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       May 29, 2021     May 30, 2020     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 25,960     $ 17,070     $ 43,030       56.6 %   $ 11,728     $ 7,506     $ 19,234       58.1 %   $ 23,796       123.7 % Bassett Leather     10,201       16       10,217       13.4 %     2,881       174       3,055       9.2 %     7,162       234.4 % Bassett Custom Wood     6,839       6,461       13,300       17.5 %     3,053       2,579       5,632       17.0 %     7,668       136.2 % Bassett Casegoods     4,514       4,973       9,487       12.5 %     2,167       3,040       5,207       15.7 %     4,280       82.2 % Total   $ 47,514     $ 28,520     $ 76,034       100.0 %   $ 19,829     $ 13,299     $ 33,128       100.0 %   $ 42,906       129.5 %       Six Months Ended       May 29, 2021     May 30, 2020     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 50,858     $ 35,526     $ 86,384       59.0 %   $ 31,905     $ 27,362     $ 59,267       60.4 %   $ 27,117       45.8 % Bassett Leather     17,756       45       17,801       12.2 %     7,047       708       7,755       7.9 %     10,046       129.5 % Bassett Custom Wood     12,176       12,666       24,842       17.0 %     8,254       8,668       16,922       17.2 %     7,920       46.8 % Bassett Casegoods     7,984       9,287       17,271       11.8 %     5,719       8,482       14,201       14.5 %     3,070       21.6 % Total   $ 88,774     $ 57,524     $ 146,298       100.0 %   $ 52,925     $ 45,220     $ 98,145       100.0 %   $ 48,153       49.1 %   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. 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 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.   31 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (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, 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 May 29, 2021 and May 30, 2020 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 29, 2021     May 30, 2020     Dollars     Percent     May 29, 2021     May 30, 2020     Dollars     Percent                                                                                                     Net sales   $ 62,483       100.0 %   $ 33,171       100.0 %   $ 29,312       88.4 %   $ 122,878       100.0 %   $ 99,017       100.0 %   $ 23,861       24.1 % Gross profit*     32,164       51.5 %     15,683       47.3 %     16,481       105.1 %     63,250       51.5 %     48,623       49.1 %     14,627       30.1 % SG&A expenses     30,512       48.8 %     24,853       74.9 %     5,659       22.8 %     60,504       49.2 %     59,042       59.6 %     1,462       2.5 % Income (loss) from operations   $ 1,652       2.6 %   $ (9,170 )     -27.6 %   $ 10,822     N/M     $ 2,746       2.2 %   $ (10,419 )     -10.5 %   $ 13,165       -126.4 %   *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     Change     Six Months Ended     Change       May 29, 2021     May 30, 2020     Dollars     Percent     May 29, 2021     May 30, 2020     Dollars     Percent                                                                                                     Bassett Custom Upholstery   $ 35,378       56.6 %   $ 17,620       53.1 %   $ 17,758       100.8 %   $ 69,839       56.8 %   $ 54,380       54.9 %   $ 15,459       28.4 % Bassett Leather     228       0.4 %     681       2.1 %     (453 )     -66.5 %     480       0.4 %     1,453       1.5 %     (973 )     -67.0 % Bassett Custom Wood     7,624       12.2 %     3,054       9.2 %     4,570       149.6 %     13,082       10.6 %     8,168       8.2 %     4,914       60.2 % Bassett Casegoods     10,704       17.1 %     6,809       20.5 %     3,895       57.2 %     21,781       17.7 %     19,951       20.1 %     1,830       9.2 % Accessories, mattresses and other (1)     8,549       13.7 %     5,007       15.1 %     3,542       70.7 %     17,696       14.4 %     15,065       15.2 %     2,631       17.5 % Total   $ 62,483       100.0 %   $ 33,171       100.0 %   $ 29,312       88.4 %   $ 122,878       100.0 %   $ 99,017       100.0 %   $ 23,861       24.1 %     (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.   32 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (Dollars in thousands except share and per share data)   Analysis of Results - Retail   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. 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 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 May 29, 2021 and May 30, 2020 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 29, 2021     May 30, 2020     Dollars     Percent     May 29, 2021     May 30, 2020     Dollars     Percent                                                                                                     Logistical services revenue   $ 22,244       100.0 %   $ 15,259       100.0 %   $ 6,985       45.8 %   $ 42,325       100.0 %   $ 36,574       100.0 %   $ 5,751       15.7 % Operating expenses     20,950       94.2 %     17,101       112.1 %     3,849       22.5 %     40,572       95.9 %     37,581       102.8 %     2,991       8.0 %                                                                                                   Income (loss) from operations   $ 1,294       5.8 %   $ (1,842 )     -12.1 %   $ 3,136     N/M     $ 1,753       4.1 %   $ (1,007 )     -2.8 %   $ 2,760     N/M     Analysis of Operations – Logistical Services   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. 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, partially offset by reduced interest income from our investments in CDs.   33 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (Dollars in thousands except share and per share data)   Income Taxes   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 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 Flows   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 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 May 29, 2021 and expect to remain in compliance through the end of fiscal 2021. The credit facility matures on January 31, 2022.   34 of 39     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 29, 2021 (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 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.   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 $17,199 at May 29, 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 28, 2020.   Off-Balance Sheet Arrangements   We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. In addition, we have guaranteed certain lease obligations of licensee operators for some of their store locations. See Note 12 to our condensed consolidated financial statements for further discussion of lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.   Contingencies   We are involved in various legal and environmental matters which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations. See Note 11 to our condensed consolidated financial statements for further information regarding certain contingencies as of May 29, 2021.