What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-03-31 compared with 2021-09-30 · 152 added, 297 removed, 138 unchanged (76% of the section changed)

16 unchanged sentences

competitive conditions in the home furnishings industry

overall retail traffic levels and consumer demand for home furnishings

overall retail traffic levels in stores and on the web and consumer demand for home furnishings

ability of our customers and consumers to obtain credit

1 unchanged sentence

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

fluctuations in the cost and availability of raw materials, fuel, labor, delivery costs 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

4 unchanged sentences

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 27, 2021.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 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.

2 unchanged sentences

In light of these risks and uncertainties, you should keep in mind that the events described in any forward-looking statement made in this report or elsewhere, might not occur.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

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 also sell our products through our website at www.bassettfurniture.com .

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 August 28, 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 96 BHF stores at February 26, 2022, 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.

In order for the Bassett brand 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.

3 unchanged sentences

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

Salespeople are referred to as “Design Consultants”

Sales people are referred to as “Design Consultants”

and are trained to evaluate customer needs and provide comprehensive solutions for their home decor. 

Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home 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”

In 2018, we added outdoor furniture to our offerings with the acquisition of the Lane Venture brand.

Our strategy is to distribute these products outside of our BHF store network through a network of over 15 independent sales representatives.

Using Lane Venture as a platform, we 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 have factories in Newton, North Carolina that manufacture both stationary and motion upholstered furniture for inside the home along with our outdoor furniture offerings.

We also have factories in Martinsville and Bassett, Virginia that assemble and finish our custom dining offerings.

We currently lease a facility in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture.

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 65% of Zenith’s revenue is generated from services provided to non-Bassett customers.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 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 14% for the nine months ended August 28, 2021 as compared to the comparable period in 2020.

Customer acquisition resulting from our digital outreach strategies has significantly increased our traffic to the website since 2019.

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.

While our Bench Made line of Custom Upholstery and Custom Dining products 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 to best serve our customers online, in the store or wherever our customer might be.

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.

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

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

We are engaged in a multi-year cross-functional digital transformation initiative which has begun by examining, enhancing and standardizing our product development and data management and governance processes.

This will result in more consistent underlying data that our merchandising and sales teams can use in analyzing various product and sales trends for making better informed decisions.

It will also provide a uniform view of product data that can be leveraged by our website, retail locations and wholesale partners.

We expect to complete this initial phase in mid-2022 at which time we will begin the process of implementing a new eCommerce platform that we plan to introduce in 2023. 

The new web platform will leverage world class features including enhanced customer research capabilities and streamlined navigation. 

We expect to spend between $3,000 and $4,000 this fiscal year on these efforts.

During the first quarter of fiscal 2022 we closed one retail store in Ontario, California upon the expiration of the lease for that location.

Sale of the Assets of Zenith Freight Lines, LLC

During the first quarter of 2022, we entered into a definitive agreement to sell substantially all of the assets of our wholly-owned subsidiary, Zenith Freight Lines, LLC (“Zenith”) to J.B.

Hunt Transport Services, Inc.

(“J.B.

Hunt”) for approximately $86,900 in cash.

On February 28, 2022 the transaction was completed with us receiving approximately $85,500 after the payment of $400 in certain transaction costs and the funding of $1,000 held in escrow.

The final purchase price is subject to a customary post-closing working capital adjustment.

In the second quarter of 2022, we will recognize a substantial gain on this transaction.

As a result, the operations of our logistical services segment, which consists entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income and in the following discussion as discontinued operations.

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.

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 nine months ended August 29, 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 nine months 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 nine months of fiscal 2021 increased 51% as compared to the comparable period in 2020.

In addition, wholesale orders for the first nine months of fiscal 2021 represented a 38% increase as compared to pre-pandemic levels of the first nine months of fiscal 2019.

However, various supply chain disruptions and logistical challenges have created significant delays in order fulfillment resulting in abnormally high backlogs.

The significant adverse economic impact of the pandemic upon our results of operations was limited to fiscal 2020, however we continue to experience the logistical challenges faced by the entire home furnishings industry resulting from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increasing backlogs.

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

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 and into fiscal 2022 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 the recent resurgence in COVID-19 cases due to the Delta variant, as well as any future 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 are ongoing and order cancellations could result if the present delays in order fulfillment continue.

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

We expect that wholesale gross margins will be slightly impacted during the first half of fiscal 2022 as we cycle through the backlog.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

Results of Operations –

Periods ended August 28, 2021 compared with the periods ended August 29, 2020:

Consolidated results of operations for the three and nine months ended August 28, 2021 and August 29, 2020 are as follows:

Results of Continuing Operations –

Periods ended February 26, 2022 compared with the periods ended February 27, 2021:

Consolidated results of continuing operations for the three months ended February 26, 2022 and February 27, 2021 are as follows:

Quarter Ended

Nine Months Ended

August 28, 2021

August 29, 2020

August 28, 2021

August 29, 2020

Sales revenue:

Furniture and accessories

Logistical services

Total sales revenue

February 26, 2022

February 27, 2021

Net sales of furniture and accessories

Cost of furniture and accessories sold

SG&A expenses

Cost of logistical services

Other charges

Income (loss) from operations

Total sales revenue for the three and nine months ended August 28, 2021 increased $27,347 and $89,158, 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 nine months of fiscal 2021.

Cost of furniture and accessories sold as a percentage of total revenue for the three and nine months ended August 28, 2021 increased over prior year periods primarily due to rising raw material and inbound freight costs, partially offset by improved leverage on fixed costs for the first nine months 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 nine months ended August 28, 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.

This was partially offset by increased operating costs in the logistical services segment.

Other charges of $15,205 incurred during the nine months ended August 29, 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.

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 nine months ended August 31, 2019, sales of furniture and accessories were $98,369 and $301,550, respectively.

Sales of furniture and accessories for the three and nine months ended August 28, 2021 increased $6,501 or 6.6% and $14,972 or 5.0%, 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 fifteen 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 seven Company-owned stores since the end of the second quarter of 2019.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

(Dollars in thousands except share and per share data)

Income from operations

Total sales revenue for the three months ended February 26, 2022 increased $16,209 from the prior year periods primarily due to a 28% increase in wholesale shipments to the open market, along with a 6.1% increase in retail sales.

Gross margins for the three months ended February 26, 2022 decreased 380 basis points from 2021 primarily due to rising raw material and inbound freight costs, including the impact of rising fuel prices.

While these rising costs have been somewhat mitigated by price increases implemented since the first quarter of 2021, the increase in order backlogs and order fulfillment times limited our ability to match revised pricing to manufacturing costs.

Another wholesale price increase will be implemented during the second quarter of fiscal 2022, and we will continue to monitor our costs to determine if additional price increases are warranted.

Segment Information

We have strategically aligned our business into three reportable segments as described below:

We have strategically aligned our business into two reportable segments as described below:

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.

6 unchanged sentences

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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

(Dollars in thousands except share and per share data)

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

Quarter Ended August 28, 2021

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income (loss) from operations

Quarter Ended August 29, 2020

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income (loss) from operations

Nine Months Ended August 28, 2021

Sales revenue:

Furniture & accessories

Logistical services

Total sales revenue

Cost of furniture and accessories sold

Cost of logistical services

Income from operations

Nine Months Ended August 29, 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

AUGUST 28, 2021

(Dollars in thousands except share and per share data)

Notes to segment consolidation table:

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

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

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.

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

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

Goodwill Impairment Charge

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

As a result, during the nine months ended August 29, 2020 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 nine months ended August 29, 2020 we accrued $1,050 for the estimated costs to resolve certain wage and hour violation claims that had been asserted against the Company.

Our former logistical services segment which represented the operations of Zenith is now presented as discontinued operations.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(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 August 28, 2021

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Quarter Ended August 29, 2020

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Cost of furniture and accessories sold

Nine Months Ended August 28, 2021

Reconciliation of Segment Results to Consolidated Results of Operations

To supplement the financial measures prepared in accordance with GAAP, we present gross profit by segment inclusive of the effects of intercompany sales by our wholesale segment to our retail segment.

Because these intercompany transactions are not eliminated from our segment presentations and because we do not present gross profit as a measure of segment profitability in the accompanying condensed consolidated financial statements, the presentation of gross profit by segment is considered to be a non-GAAP financial measure.

The reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is presented below along with the effects of various other intercompany eliminations on our consolidated results of operations.

Quarter Ended February 26, 2022

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Net sales of furniture and accessories

Cost of furniture and accessories sold

Nine Months Ended August 29, 2020

Income from operations

Quarter Ended February 27, 2021

Non-GAAP Presentation

GAAP Presentation

Sales revenue:

furniture & accessories

Net sales of furniture and accessories

Cost of furniture and accessories sold

Notes to the gross profit by segment table:

Income from operations

Notes to segment consolidation table:

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

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

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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

Wholesale Segment

Results for the wholesale segment for the periods ended August 28, 2021 and August 29, 2020 are as follows:

Results for the wholesale segment for the periods ended February 26, 2022 and February 27, 2021 are as follows:

Quarter Ended

Nine Months Ended

August 28, 2021

August 29, 2020

August 28, 2021

August 29, 2020

February 26, 2022

February 27, 2021

Gross profit (1)

SG&A expenses

Income (loss) from operations

Income 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.

Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.

Wholesale sales by major product category are as follows:

Quarter Ended

August 28, 2021

August 29, 2020

Bassett Custom Upholstery

Bassett Leather

Bassett Custom Wood

Bassett Casegoods

Nine Months Ended

August 28, 2021

August 30, 2020

February 26, 2022

February 27, 2021

Bassett Custom Upholstery

3 unchanged sentences

Analysis of Results - Wholesale

Net sales for the three and nine months ended August 28, 2021 increased $17,630 and $65,783, 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 nine months 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 $92,839 at August 28, 2021 as compared to $54,874 at November 28, 2020 and $37,408 at August 29, 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 months ended August 28, 2021 declined 220 basis points compared to the prior year period as we have experienced significant increases in material costs primarily in the upholstery operation, partially offset by greater leverage on fixed costs due to higher sales volumes.

For the nine months ended August 29, 2021, gross margins improved primarily due to improved leverage on fixed costs 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 nine months ended August 28, 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.

Net sales for the three months ended February 26, 2022 increased $13,221 from the prior year period due primarily to a 28% increase in shipments to the open market along with a 6.9% increase in shipments to the BHF store network.

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

During the first quarter of fiscal 2022, we made progress in decreasing these backlogs and expect them to continue decreasing as our ability to manufacture and ship product has improved.

At February 26, 2022, wholesale backlog totaled $78,135 as compared to $90,057 at November 27, 2021, $67,469 at February 27, 2021 and $14,617 at February 29, 2020.

Gross margins for the three months ended February 26, 2022 declined 420 basis points compared to the prior year period as we have experienced significant increases in material costs primarily in the upholstery operation, partially offset by greater leverage on fixed costs due to higher sales volumes.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

For the three and nine months ended August 31, 2019, wholesale sales were $62,690 and $198,602, respectively.

Wholesale sales for the three and nine months ended August 28, 2021 increased $10,383 or 16.6% and $20,769, or 10.5%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

Shipments to the BHF store network declined 5.7% for the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2019 while shipments for the first nine months of fiscal 2021 declined 4.9% from the first nine months 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 seven 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 48% and 36% for the three and nine months ended August 28, 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 34% for both the three and nine months ended August 28, 2021, respectively, over the comparable fiscal 2019 periods.

In addition, wholesale orders for the three and nine months ended August 28, 2021, increased 33% and 38%, respectively, over the corresponding quarter and year-to-date periods of fiscal 2019.

Wholesale orders from independent dealers increased 69% and 84% for the three and nine 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 13% and 11% over the quarter and year-to-date periods of 2019, respectively, in spite of having seven fewer stores in the fleet during 2021.

Lane Venture orders increased by 64% and 82%, respectively, for those same periods.

Retail –

Company-owned Stores Segment

Results for the retail segment for the periods ended August 28, 2021 and August 29, 2020 are as follows:

Results for the retail segment for the periods ended February 26, 2022 and February 27, 2021 are as follows:

Quarter Ended

Nine Months Ended

August 28, 2021

August 29, 2020

August 28, 2021

August 29, 2020

February 26, 2022

February 27, 2021

Gross profit (1)

2 unchanged sentences

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.

Refer to the reconciliation of gross profit by segment to consolidated gross profit presented under the Reconciliation of Segment Results to Consolidated Results of Operations above.

Retail sales by major product category are as follows:

Quarter Ended

Nine Months Ended

August 28, 2021

August 29, 2020

August 28, 2021

August 29, 2020

February 26, 2022

February 27, 2021

Bassett Custom Upholstery

4 unchanged sentences

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

AUGUST 28, 2021

(Dollars in thousands except share and per share data)

Analysis of Results - Retail

Net sales for the three and nine months ended August 28, 2021 increased $10,432 and $34,293, 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 nine months 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 $80,977 at August 28, 2021 as compared to $57,041 at November 28, 2020 and $47,904 at August 29, 2020.

Net sales for the three months ended February 26, 2022 increased $3,712 from the prior year period.

Written sales (the value of sales orders taken but not delivered) declined 2.4% from the first quarter of 2021.

Retail backlog at February 26, 2022 was $84,685 as compared to $82,894 at November 27, 2021, 64,806 at February 27, 2021 and $29,775 at February 29, 2020.

Gross margins for the three and nine months ended August 28, 2021 increased by 290 and 250 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 nine months ended August 28, 2021 as a percentage of sales decreased significantly as compared to the comparable periods of 2020.

This was driven by workforce reductions, overall cost containment activities and greater leverage on fixed costs from higher sales volumes.

In addition, over the course of fiscal 2020 we closed seven unprofitable store locations, three of which were closed subsequent to the second 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 nine months ended August 31, 2019, retail sales were $66,539 and $198,736, respectively.

Compared to fiscal 2019, retail sales for the three and nine months ended August 28, 2021, decreased $7,963 or 12% and $17,282, or 8.7%, 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 seven fewer stores in operation.

Written sales increased 2.6% and 6.7% for the three and nine months ended August 28, 2021, respectively, over the corresponding periods of fiscal 2019 in spite of having seven fewer stores in operation.

Logistical Services Segment

Results for our logistical services segment for the periods ended August 28, 2021 and August 29, 2020 are as follows:

Quarter Ended

Nine Months Ended

August 28, 2021

August 29, 2020

August 28, 2021

August 29, 2020

Logistical services revenue

Operating expenses

Income (loss) from operations

Analysis of Operations –

Logistical Services

Net revenues for the three and nine months ended August 28, 2021 increased $3,352 and $9,103, 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. 

Zenith incurred an operating loss of $486 for the third quarter of fiscal 2021 compared to an operating profit of $1,022 the prior year period primarily due to significantly higher warehousing labor costs as Zenith has been challenged to find and retain freight-handling personnel in the warehousing operation.

For the year to date, operating profit was $1,267 compared to only $15 for the prior year period, when 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 in the efficiency of our middle mile trucking operations in fiscal 2021 were partially offset by the rising cost of labor in our warehousing operations.

Gross margins for the three months ended February 26, 2022 increased by 180 basis points, primarily driven by improved pricing strategies, lower levels of promotional activity and increased margins on clearance activity.

Selling, general and administrative expenses for the three months ended February 26, 2022 as a percentage of sales decreased as compared to the first quarter of 2021 primarily due to greater leverage on fixed costs from higher sales volumes.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

Discontinued Operations –

Logistical Services

Results for the operations of Zenith, which was sold to J.B.

Hunt subsequent to the end of the first quarter, for the periods ended February 26, 2022 and February 27, 2021 are as follows:

Quarter Ended

February 26, 2022

February 27, 2021

Logistical services revenue

Cost of logistical services

Other loss, net

Income from discontinued operations before tax

The amounts shown above represent the results of Zenith’s business transactions with third parties.

The increase in income from discontinued operations for the three months ended February 26, 2022 as compared to the prior year period is primarily due to freight and warehousing rate increases which Zenith primarily implemented during the fourth quarter of fiscal 2021.

During the three months ended February 26, 2022 and February 27, 2021, Zenith also charged Bassett $9,121 and $8,063, respectively, for logistical services provided to our wholesale segment.

These shipping and handling costs are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

We have entered into a service agreement with J.B.

Hunt for the continuation of these services for a period of seven years following the sale of Zenith.

Other Items Affecting Net Income

Other Income (Loss), Net

Other loss, net, for the three months ended August 28, 2021 was $347 compared to other income, net, of $697 for the three months ended August 29, 2020, a net change of $1,044.

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

Other loss, net, for the nine months ended August 28, 2021 was $1,016 compared to $430 for the nine months ended August 29, 2020, a decrease of $586.

The net change was primarily due to a $914 gain recognized in the prior year period for a death benefit from Company-owned life insurance partially offset by valuation charges associated with sublease rent receivables which had been incurred in the prior year as a result of the pandemic.

Other Loss, Net

Other loss, net, for the three months ended February 26, 2022 was $629 compared to $299 for the three months ended February 27, 2021, a net increase of $330.

The net change was primarily due to higher net costs 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 three and nine months ended August 28, 2021 of 27.2% 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 deficiencies of $117 during the nine months ended August 28, 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 nine months ended August 29, 2020 were 36.8% and (36.5%), respectively, which differ from the federal statutory rate of 21% primarily due to the effects of carrying back our 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.

Our effective tax rates for the three months ended February 26, 2022 and February 27, 2021 of 26.3% and 29.4%, respectively, differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including charges of $135 during the three months ended February 27, 2021 related to the vesting of stock awards.

Liquidity and Capital Resources

Cash provided by operations for the first nine months of fiscal 2021 was $13,676 compared to $17,483 for the first nine months of fiscal 2020, representing a decrease of $3,807.

This decrease in operating cash flow is primarily due to significantly increased investment in inventory as we work to fulfill our order backlog and cope with ongoing supply chain disruptions, partially offset by increased customer deposits associated with the increase in retail backlogs.

Our overall cash position decreased by $7,188 during the first nine months of fiscal 2021, compared to an overall increase of $11,342 during the first nine months of fiscal 2020, a decline of $18,530 from the prior year period.

In addition to the decline in cash flows from operations, net cash used in investing activities during the first nine months of 2021 increased $7,012 to a net use of $8,213 compared to net cash used in investing activities of $1,201 for the prior year period.

This increase was primarily due to increased capital expenditures in the current year while the prior year period also included proceeds from the sale of our closed Gulfport store location.

Net cash used in financing activities during the first nine months of 2021 increased $7,711 to a net use of $12,651 as compared to a net use of $4,940 for the prior year period, primarily due to increased share repurchases of $5,566 during the first nine months of fiscal 2021 as compared to $1,542 repurchased during the first nine months of fiscal 2020 along with a special dividend of $2,479 declared and paid during the first nine months of 2021.

As of August 28, 2021, $19,348 remains authorized under our existing share repurchase plan.

With cash and cash equivalents and short-term investments totaling $56,326 on hand at August 28, 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 three months of fiscal 2022 was $2,866 compared to $4,984 for the first three months of fiscal 2021, representing a decrease of $2,118. Cash provided by the operating activities of our discontinued operations was $1,681 for the first three months of fiscal 2022 compared to $2,841 for the prior year period, a decline of $1,160. 

Excluding the decline in operating cash flow from discontinued operations, cash provided by continuing operations declined $958 from the prior year period.

This decrease in operating cash flow is primarily due to changes in working capital as we settled accounts payable in the first quarter of 2022 arising from increases in inventory during fiscal 2021 as well as increases in accounts receivable arising from strong sales in our wholesale segment.

Our overall cash position decreased by $2,494 during the first three months of fiscal 2022, compared to a decline of $766 during the first three months of fiscal 2021, a decline of $1,728 from the prior year period.

Excluding the decline in cash flow from discontinued operations, overall cash flow from continuing operations declined $409 from the prior year period.

In addition to the decline in cash flows from operations, net cash used in investing activities during the first three months of 2022 increased $1,691 to a net use of $2,880 compared to net cash used in investing activities of $1,189 for the prior year period.

This increase was primarily due to increased capital expenditures in the current year.

Net cash used in financing activities during the first three months of 2022 decreased $2,081 to a net use of $2,480 as compared to a net use of $4,561 for the prior year period, primarily due to a special dividend of $2,479 declared and paid during the first quarter of 2021 partially offset by increased share repurchases of $765 during the first three months of fiscal 2022 as compared to $534 repurchased during the quarter of fiscal 2021.

On March 9, 2022 our Board of Directors increased the amount authorized under our existing share repurchase plan to $40,000.

With cash and cash equivalents and short-term investments totaling $49,595 on hand at February 26, 2022, expected future operating cash flows, pre-tax cash proceeds of approximately $85,500 subsequently received from the sale of Zenith before a special dividend of $1.50 per share, and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 28, 2021

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

1 unchanged sentence

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

At August 28, 2021, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069.

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 August 28, 2021 and expect to remain in compliance through the end of fiscal 2021.

The credit facility matures on January 31, 2022.

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

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

The present value of our obligations for leases with terms in excess of one year at August 28, 2021 is $139,056 and is included in our accompanying condensed consolidated balance sheet at August 28, 2021.

We were contingently liable under licensee lease obligation guarantees in the amount of $1,959 at August 28, 2021.

At February 26, 2022, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069.

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

The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.5% and is unsecured.

Our bank will charge a fee of 0.25% on the daily unused balance of the line, payable quarterly.

Under the terms of the facility, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis:

Consolidated fixed charge coverage ratio of not less than 1.4 times,

Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and

Minimum tangible net worth of $140,000.

We were in compliance with these covenants at February 26, 2022 and expect to remain in compliance for the foreseeable future.

The credit facility will mature on January 27, 2025, at which time any amounts outstanding under the facility will be due.

We also lease local delivery trucks used in our retail segment.

The present value of our obligations for leases with terms in excess of one year at February 26, 2022 is $115,861 and is included in our accompanying condensed consolidated balance sheet at February 26, 2022.

Lease obligations associated with discontinued obligations totaled $22,834 at February 26, 2022.

These leases were subsequently transferred to J.B.

Hunt in connection with the sale of Zenith.

We were contingently liable under licensee lease obligation guarantees in the amount of $1,854 at February 26, 2022.

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

2 unchanged sentences

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 $17,071 at August 28, 2021.

Critical Accounting Policies and Estimates

4 unchanged sentences

See Note 10 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.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

FEBRUARY 26, 2022

(Dollars in thousands except share and per share data)

Contingencies

1 unchanged sentence

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 August 28, 2021.

See Note 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of February 26, 2022.

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