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:   • fluctuations in the cost and availability of raw materials, fuel, labor, delivery costs and sourced products, including those which may result from general price inflation, supply chain disruptions and the imposition of new or increased duties, tariffs, retaliatory tariffs and trade limitations with respect to foreign-sourced products   • competitive conditions in the home furnishings industry   • 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   • 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   • 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   • the impact of the COVID-19 pandemic and resulting supply chain disruptions 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 pandemic upon general economic conditions, including consumer spending and the strength of the housing market in the United States   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.   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.   Page 23 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   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 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 120-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 95 BHF stores at August 27, 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 and casual 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 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. 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.  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.   During the second quarter of fiscal 2022, we opened our first regional fulfillment center in Orlando, Florida where we are stocking our best sellers for much quicker delivery. This adds an element of immediacy to our proven platform of made to order custom furniture that has driven our strategy for the past two decades. We plan to roll this out nationwide over the near term and our next center recently opened near Baltimore, Maryland subsequent to the third quarter of fiscal 2022.   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 bedroom and dining offerings. Late in the third quarter of fiscal 2022, we purchased a facility which we had formerly leased in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture. With the purchase, we also obtained two additional buildings which will allow us to expand our footprint at that facility. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its manufacturing process. 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.   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 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 Bench Made line of custom upholstery and custom bedroom and 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 our in-store experience or the quality of our in-home makeover capabilities.   Page 24 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   We are engaged in a multi-year cross-functional digital transformation initiative with the first phase consisting of the examination and improvement of our underlying data management processes. During the second quarter of 2022, we implemented a comprehensive Product Information Management system which will allow us to enhance and standardize our product development and data management and governance processes during the second half of 2022. This will result in more consistent data that our merchandizing and sales teams can use in analyzing various product and sales trends in order to make better informed decisions. We are also in 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 that we believe will result in increased web traffic and sales.  We expect to spend between $3,000 and $4,000 this fiscal year on these efforts.   Company-owned Retail Stores   As we continually monitor the performance of our Company-owned retail store locations, we may occasionally determine that it is necessary to close underperforming stores in certain markets. During the first quarter of fiscal 2022 we closed one retail store in Ontario, California, and we closed our store in Wichita, Kansas, during the third quarter of fiscal 2022. During the fourth quarter of fiscal 2022 we closed our store in Farmingdale, New York and consolidated its operations with our existing store in nearby Westbury, New York. All of the above-mentioned closures occurred at or near the lease expirations.   During the second quarter of 2022, we acquired a 25,000 square foot store property in Tampa, Florida for $7,668. We are currently in the process of developing plans for store buildout and upfit with a planned opening date in the second quarter of 2023.   We also may occasionally identify opportunities to enhance our presence in existing markets by relocating existing stores to better locations within the same market. During the third quarter of fiscal 2022 we sold the store property of one of our Houston, Texas locations for $8,217, net of closing costs, which resulted in a gain of $4,595. For tax purposes, the sale of the Houston store and the purchase of the Tampa store will be treated as a 1031 exchange where the majority of the tax on the gain will be deferred. The store closure sale was completed early in the fourth quarter of fiscal 2022 at which time the store was officially closed. We expect to open a new leased store in a more upscale shopping area in the vicinity of the closed store in the second quarter of 2023. During the fourth quarter of fiscal 2022 at the end of the lease term, we expect to close our Dallas, Texas store located at the intersection of McKinney and Knox streets. We plan to open a replacement store in the nearby iconic Inwood Village shopping center during the fourth quarter of 2022.   As of August 27, 2022, we had 61 Corporate-owned stores operating and expect to end fiscal 2022 with 59 stores.   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 $86,939 in cash. On February 28, 2022 the transaction was completed with us receiving $85,521 after the payment of $418 in certain transaction costs and the funding of $1,000 held in escrow. The final purchase price was subject to a customary post-closing working capital adjustment, which was settled in the amount of $987 and paid back to J.B. Hunt during the third quarter of fiscal 2022. During the nine months ended August 27, 2022, we recognized a pre-tax gain of $53,061 on this transaction. As a result of the sale, the operations of our former logistical services segment, which consisted entirely of the operations of Zenith, are presented in the accompanying condensed consolidated statements of income and in the following discussion as discontinued operations.   Page 25 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Recent Development – Acquisition of Noa Home, Inc.   On September 2, 2022, we acquired the capital stock of Noa Home Inc. (“Noa”), a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa has operations in Canada, Australia, Singapore and the United Kingdom and had net revenues of approximately $15,300 (approximately C$19,100) for its most recent fiscal year ended February 28, 2022. The initial purchase price of approximately $5,900 (approximately C$7,700) included cash payments of approximately $1,500 (approximately C$2,000) paid to the co-founders of Noa and approximately $4,300 (approximately C$5,700) for the repayment of existing debt. The Noa co-founders will also have the opportunity to receive additional annual cash payments totaling approximately $1,000 per year (approximately C$1,330 per year) for the following three fiscal years based on established increases in net revenues and achieving certain internal EBITDA goals.   Results of Continuing Operations – Periods ended August 27, 2022 compared with the periods ended August 28, 2021:   Consolidated results of continuing operations for the three and nine months ended August 27, 2022 and August 28, 2021 are as follows:       Quarter Ended     Change     Nine Months Ended     Change       August 27, 2022     August 28, 2021     Dollars     Percent     August 27, 2022     August 28, 2021     Dollars     Percent                                                                                                     Net sales of furniture and accessories   $ 118,012       100.0 %   $ 104,870       100.0 %   $ 13,142       12.5 %   $ 364,582       100.0 %   $ 316,522       100.0 %   $ 48,060       15.2 % Cost of furniture and accessories sold     57,240       48.5 %     52,263       49.8 %     4,977       9.5 %     180,479       49.5 %     153,426       48.5 %     27,053       17.6 % Gross profit     60,772       51.5 %     52,607       50.2 %     8,165       15.5 %     184,103       50.5 %     163,096       51.5 %     21,007       12.9 % SG&A expenses     54,695       46.3 %     47,631       45.4 %     7,064       14.8 %     160,536       44.0 %     145,473       46.0 %     15,063       10.4 % Gain on sale of retail real estate     4,595       3.9 %     -       0.0 %     4,595       100.0 %     4,595       1.3 %     -       0.0 %     4,595       100.0 %                                                                                                   Income from operations   $ 10,672       9.0 %   $ 4,976       4.7 %   $ 5,696       114.5 %   $ 28,162       7.7 %   $ 17,623       5.5 %   $ 10,539       59.8 %   Analysis of Quarterly Results:   Total sales revenue for the three months ended August 27, 2022 increased $13,142 or 12.5% from the prior year period primarily due to a 21% increase in retail sales through the Company-owned stores and a 6% increase in wholesale shipments to the licensee store network.   Gross margins for the three months ended August 27, 2022 increased 130 basis points from 2021 primarily due to a greater portion of total sales coming from the Corporate retail segment, partially offset by lower margins in the retail segment due to increased clearance activity from four store closure sales during the quarter.   Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended August 27, 2022 increased 90 basis points from 2021 primarily due to increased sales and marketing expenses and increased logistics and warehouse costs, partially offset by greater leverage of fixed costs from increased sales volumes.   During the third quarter of fiscal 2022, we also recognized a gain of $4,595 from the sale of the real estate at a former retail location in Houston, Texas.   Analysis of Year-to-Date Results:   Total sales revenue for the nine months ended August 27, 2022 increased $48,060 or 15% from the prior year period primarily due to increases in wholesale shipments to both the open market and the BHF store network, along with a 16% increase in retail sales.   Gross margins for the nine months ended August 27, 2022 decreased 100 basis points from 2021 primarily due to rising raw material and inbound freight costs, including the impact of rising fuel prices, partially offset by greater fixed cost leverage from increased sales. 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. Although no increases are currently being contemplated, we will continue to monitor our costs to determine if additional increases are warranted.   Page 26 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   SG&A expenses as a percentage of sales for the nine months ended August 27, 2022 decreased 200 basis points from 2021 primarily due to improved leverage of fixed costs through higher sales levels.   During the first nine months of fiscal 2022, we also recognized a gain of $4,595 from the sale of the real estate at a former retail location in Houston, Texas.   Segment Information   We have strategically aligned our business into two 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.   Our former logistical services segment which represented the operations of Zenith is now presented as discontinued operations.   Page 27 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   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. In addition, certain special gains or charges are included in consolidated income from operations are not included in the measures of segment profitability. 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 August 27, 2022       Non-GAAP Presentation             Special       GAAP Presentation       Wholesale     Retail     Eliminations     Items       Consolidated                                               Net sales of furniture and accessories   $ 78,959     $ 70,886     $ (31,833 ) (1)   $ -       $ 118,012   Cost of furniture and accessories sold     54,501       34,166       (31,427 ) (2)     -         57,240   Gross profit     24,458       36,720       (406 )     -         60,772   SG&A expense     22,847       32,191       (343 ) (3)     -         54,695   Gain on sale of real estate     -       -       -       4,595   (4)       4,595   Income from operations   $ 1,611     $ 4,529     $ (63 )   $ 4,595       $ 10,672         Quarter Ended August 28, 2021       Non-GAAP Presentation             Special     GAAP Presentation       Wholesale     Retail     Eliminations     Items     Consolidated                                             Net sales of furniture and accessories   $ 73,073     $ 58,576     $ (26,779 ) (1)   $ -     $ 104,870   Cost of furniture and accessories sold     50,493       27,815       (26,045 ) (2)     -       52,263   Gross profit     22,580       30,761       (734 )     -       52,607   SG&A expense     18,114       29,844       (327 ) (3)     -       47,631   Income from operations   $ 4,466     $ 917     $ (407 )   $ -     $ 4,976         Nine Months Ended August 27, 2022       Non-GAAP Presentation             Special     GAAP Presentation       Wholesale     Retail     Eliminations     Items     Consolidated                                             Net sales of furniture and accessories   $ 249,945     $ 210,613     $ (95,976 ) (1)   $ -     $ 364,582   Cost of furniture and accessories sold     175,293       99,556       (94,370 ) (2)     -       180,479   Gross profit     74,652       111,057       (1,606 )     -       184,103   SG&A expense     66,222       95,303       (989 ) (3)     -       160,536   Gain on sale of real estate     -       -       -       4,595  (4)     4,595   Income from operations   $ 8,430     $ 15,754     $ (617 )   $ 4,595     $ 28,162         Nine Months Ended August 28, 2021       Non-GAAP Presentation               Special     GAAP Presentation       Wholesale     Retail     Eliminations       Items     Consolidated                                               Net sales of furniture and accessories   $ 219,371     $ 181,454     $ (84,303 ) (1)     $ -     $ 316,522   Cost of furniture and accessories sold     148,640       87,444       (82,658 ) (2)       -       153,426   Gross profit     70,731       94,010       (1,645 )       -       163,096   SG&A expense     56,109       90,347       (983 ) (3)       -       145,473   Income from operations   $ 14,622     $ 3,663     $ (662 )     $ -     $ 17,623     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 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 elimination of rent paid by our retail stores occupying Company-owned real estate.  the elimination of logisitcal services charged by Zenith to Bassett's wholesale segment as follows: (4)  Represents the gain on the sale of the real estate at a former retail location.   Page 28 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Wholesale Segment Results for the wholesale segment for the periods ended August 27, 2022 and August 28, 2021 are as follows:       Quarter Ended     Change     Nine Months Ended     Change       August 27, 2022     August 28, 2021     Dollars     Percent     August 27, 2022     August 28, 2021     Dollars     Percent                                                                                                     Net sales   $ 78,959       100.0 %   $ 73,073       100.0 %   $ 5,886       8.1 %   $ 249,945       100.0 %   $ 219,371       100.0 %   $ 30,574       13.9 % Gross profit (1)     24,458       31.0 %     22,580       30.9 %     1,878       8.3 %     74,652       29.9 %     70,731       32.2 %     3,921       5.5 % SG&A expenses     22,847       28.9 %     18,114       24.8 %     4,733       26.1 %     66,222       26.5 %     56,109       25.6 %     10,113       18.0 %                                                                                                   Income from operations   $ 1,611       2.0 %   $ 4,466       6.1 %   $ (2,855 )     -63.9 %   $ 8,430       3.4 %   $ 14,622       6.7 %   $ (6,192 )     -42.3 %     (1) 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 the Reconciliation of Segment Results to Consolidated Results of Operations above.   Wholesale sales by major product category are as follows:       Quarter Ended       August 27, 2022     August 28, 2021     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 30,885     $ 20,641     $ 51,526       65.3 %   $ 26,276     $ 16,572     $ 42,848       58.6 %   $ 8,678       20.3 % Bassett Leather     6,290       24       6,314       8.0 %     9,142       5       9,147       12.5 %     (2,833 )     -31.0 % Bassett Custom Wood     5,564       5,995       11,559       14.6 %     5,745       5,440       11,185       15.3 %     374       3.3 % Bassett Casegoods     4,387       5,173       9,560       12.1 %     5,131       4,762       9,893       13.5 %     (333 )     -3.4 % Total   $ 47,126     $ 31,833     $ 78,959       100.0 %   $ 46,294     $ 26,779     $ 73,073       100.0 %   $ 5,886       8.1 %       Nine Months Ended       August 27, 2022     August 28, 2021     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 96,636     $ 64,075     $ 160,711       64.3 %   $ 77,134     $ 52,102     $ 129,236       58.9 %   $ 31,475       24.4 % Bassett Leather     29,111       48       29,159       11.7 %     26,898       47       26,945       12.3 %     2,214       8.2 % Bassett Custom Wood     17,207       18,927       36,134       14.5 %     17,921       18,117       36,038       16.4 %     96       0.3 % Bassett Casegoods     11,015       12,926       23,941       9.6 %     13,115       14,037       27,152       12.4 %     (3,211 )     -11.8 % Total   $ 153,969     $ 95,976     $ 249,945       100.0 %   $ 135,068     $ 84,303     $ 219,371       100.0 %   $ 30,574       13.9 %   Analysis of Quarterly Results – Wholesale   Net sales for the three months ended August 27, 2022 increased $5,886 or 8.1% from the prior year period due primarily to a 17% increase in shipments to the BHF store network and a 16% increase in Lane Venture shipments. Shipments to the open market were flat. Gross margins for the three months ended August 27, 2022 were comparable to the prior year with a 10 basis point increase as we were able to recognize a greater portion of previously implemented price increases in current period sales. This was offset by lower margins in the Bassett Leather product line due to product discounting. As this product line is internationally sourced with extended lead times, we received significant amounts of inventory during the second and third quarters of 2022 just as product demand was weakening due to the market downturn in home furnishings. We expect reduced margins on this product line to continue over the next two quarters as we reduce the inventory to a more normal level. SG&A expenses as a percentage of sales increased 410 basis points primarily due to increased sales and marketing expenses, employee compensation costs and logistics and warehouse costs partially offset by greater leverage of fixed costs from increased sales volumes.   Page 29 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Analysis of Year-to-Date Results - Wholesale   Net sales for the nine months ended August 27, 2022 increased $30,574 or 14% from the prior year period due primarily to increases in shipments of 13% and 12% to both the BHF store network and to the open market, respectively. Gross margins for the nine months ended August 27, 2022 declined 230 basis points compared to the prior year period as we experienced significant increases in material and other production costs, partially offset by greater leverage of fixed costs due to higher sales volumes. SG&A expenses as a percentage of sales increased 90 basis points primarily due to increased sales and marketing expenses, employee compensation costs and logistics and warehouse costs partially offset by greater leverage of fixed costs from increased sales volumes.   Wholesale Backlog   Since the beginning of the COVID pandemic in early 2020, Bassett and most of the home furnishings industry have been faced with logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. Many of these issues have subsided due to the industry slowdown in demand for home furnishings that started during the second quarter of 2022. As a result of the slowdown, our incoming order rates have decreased resulting in decreases in our wholesale backlogs. While wholesale orders for the third quarter of 2022 decreased 22% against the prior year period, they were comparable to the pre-pandemic level of the third quarter of 2019. At August 27, 2022, the wholesale backlog totaled $41,693 as compared to $60,134 at May 28, 2022, $78,135 at February 26, 2022, $90,057 at November 27, 2021, and 92,839 at August 28, 2021. At February 29, 2020, the end of our last fiscal quarter prior to the impact of the COVID pandemic upon our operations and the overall economy, our wholesale backlog was $14,617.   Retail – Company-owned Stores Segment   Results for the retail segment for the periods ended August 27, 2022 and August 28, 2021 are as follows:       Quarter Ended     Change     Nine Months Ended     Change       August 27, 2022     August 28, 2021     Dollars     Percent     August 27, 2022     August 28, 2021     Dollars     Percent                                                                                                     Net sales   $ 70,886       100.0 %   $ 58,576       100.0 %   $ 12,310       21.0 %   $ 210,613       100.0 %   $ 181,454       100.0 %   $ 29,159       16.1 % Gross profit (1)     36,720       51.8 %     30,761       52.5 %     5,959       19.4 %     111,057       52.7 %     94,010       51.8 %     17,047       18.1 % SG&A expenses     32,191       45.4 %     29,844       50.9 %     2,347       7.9 %     95,303       45.3 %     90,347       49.8 %     4,956       5.5 % Income (loss) from operations   $ 4,529       6.4 %   $ 917       1.6 %   $ 3,612     N/M     $ 15,754       7.5 %   $ 3,663       2.0 %   $ 12,091       330.1 %   (1) 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 the Reconciliation of Segment Results to Consolidated Results of Operations above.   Retail sales by major product category are as follows:       Quarter Ended     Change     Nine Months Ended     Change       August 27, 2022     August 28, 2021     Dollars     Percent     August 27, 2022     August 28, 2021     Dollars     Percent                                                                                                     Bassett Custom Upholstery   $ 39,054       55.1 %   $ 32,362       55.2 %   $ 6,692       20.7 %   $ 122,248       58.0 %   $ 102,201       56.3 %   $ 20,047       19.6 % Bassett Leather     867       1.2 %     302       0.5 %     565       187.1 %     1,399       0.7 %     782       0.4 %     617       78.9 % Bassett Custom Wood     11,357       16.0 %     7,674       13.1 %     3,683       48.0 %     32,001       15.2 %     20,756       11.4 %     11,245       54.2 % Bassett Casegoods     10,404       14.7 %     10,394       17.7 %     10       0.1 %     27,884       13.2 %     32,175       17.7 %     (4,291 )     -13.3 % Accessories, mattresses and other (1)     9,204       13.0 %     7,844       13.4 %     1,360       17.3 %     27,081       12.9 %     25,540       14.1 %     1,541       6.0 % Total   $ 70,886       100.0 %   $ 58,576       100.0 %   $ 12,310       21.0 %   $ 210,613       100.0 %   $ 181,454       100.0 %   $ 29,159       16.1 %     (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.   Page 30 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Quarterly Analysis of Results - Retail   Net sales for the three months ended August 27, 2022 increased $12,310 or 21% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 9.4% from the third quarter of 2021. Gross margins for the three months ended August 27, 2022 decreased by 70 basis points as compared to the prior year period, primarily due to increased clearance activity from four store closure sales during the quarter. Selling, general and administrative expenses as a percentage of sales for the three months ended August 27, 2022 decreased 550 basis points primarily due to greater leverage on fixed costs from higher sales volumes.   Year-to-Date Analysis of Results - Retail   Net sales for the nine months ended August 27, 2022 increased $29,159 or 16% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 8.4% from the first nine months of 2021. Gross margins for the nine months ended August 27, 2022 increased by 90 basis points as compared to the prior year period, primarily driven by improved pricing strategies and lower levels of promotional activity, partially offset by increased clearance activity from five store closing events during the year. Selling, general and administrative expenses for the nine months ended August 27, 2022 as a percentage of sales decreased by 450 basis points as compared to the first nine months of 2021 primarily due to greater leverage on fixed costs from higher sales volumes.   Retail Backlog   As previously discussed, since the beginning of the COVID pandemic in early 2020, Bassett and most of the home furnishings industry have been faced with logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. Many of these issues have subsided due to the industry slowdown in demand for home furnishings that started during the second quarter of 2022. As a result of the slowdown, our written sales for the second and third quarters decreased by 13% and 8.4%, respectively, as compared to the corresponding periods of 2021. Written sales for the second and third quarters of 2022 are comparable to the corresponding periods in 2019. At August 27, 2022, retail backlog totaled $59,981 as compared to $71,073 at May 28, 2022, $84,685 at February 26, 2022, $82,894 at November 27, 2021, and $73,489 at August 28, 2021. At February 29, 2020, the end of our last fiscal quarter prior to the impact of the COVID pandemic upon our operations and the overall economy, our retail backlog was $29,775.   Discontinued Operations – Logistical Services   Results for the operations of Zenith, which was sold to J.B. Hunt at the beginning of the second quarter, for the periods ended August 27, 2022 and August 28, 2021 are as follows:       Quarter Ended     Change     Nine Months Ended     Change       August 27, 2022     August 28, 2021     Dollars     Percent     August 27, 2022     August 28, 2021     Dollars     Percent                                                                                                     Logistical services revenue   $ -       0.0 %   $ 14,036       100.0 %   $ (14,036 )     -100.0 %   $ 16,776       100.0 %   $ 40,116       100.0 %   $ (23,340 )     -58.2 % Cost of logistical services     -       0.0 %     14,522       103.5 %     (14,522 )     -100.0 %     15,001       89.4 %     38,849       96.8 %     (23,848 )     -61.4 % Other loss, net     -       0.0 %     (79 )     -0.6 %     79       -100.0 %     (63 )             (188 )                                                                                                                           Income from discontinued operations before tax   $ -       0.0 %   $ (565 )     -4.0 %   $ 565       -100.0 %   $ 1,712       10.2 %   $ 1,079       2.7 %   $ 633       58.7 %   The amounts shown above represent the results of Zenith’s business transactions with third parties. Because the sale of Zenith was closed on the first business day of the second fiscal quarter of 2022, operating results for that period are insignificant.   Zenith also charged Bassett $9,121 for logistical services provided to our wholesale segment during the nine months ended August 27, 2022, and $7,164 and $23,409 for the three and nine months ended August 28, 2021. 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. Subsequent to the sale, we have incurred $10,307 and $19,852 of expense during the three and nine months ended August 27, 2022, respectively, for the performance of logistical services by J.B. Hunt.   Page 31 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Other Items Affecting Net Income   Other Loss, Net   Other loss, net, for the three and nine months ended August 27, 2022 was $594 and $1,850, respectively, compared to $268 and $828 for the three and nine months ended August 28, 2021, a net increase of $336 over the prior year quarter and $1,022 over the prior year to date. The net change was primarily due to higher net costs of Company-owned life insurance.   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 rate was 22.8% and 25.6% for the three and nine months ended August 27, 2022, respectively, and 27.2% and 27.3% for the three and nine months ended August 28, 2021, respectively. These effective rates differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including those associated with Company-owned life insurance, and tax of $550 for the nine months ended August 27, 2022 associated with non-deductible goodwill written off in connection with our sale of Zenith, and tax deficiencies of $117 during the nine months ended August 28, 2021 arising from stock-based compensation.   Liquidity and Capital Resources   Cash Flows   Cash used in operations for the first nine months of fiscal 2022 was $12,295 compared to cash provided by operations of $13,677 for the first nine months of fiscal 2021, representing a decrease of $25,972 in cash flows from operations. Cash provided by the operating activities of our discontinued operations was $1,681 for the first nine months of fiscal 2022 compared to $3,231 for the prior year period, a decline of $1,550 as Zenith only operated during the first quarter of fiscal 2022. Excluding the decline in operating cash flow from discontinued operations, cash flows from continuing operations declined $24,422 from the prior year period. Cash flows from operating activities during the first nine months of fiscal 2022 included the payment of $20,722 in estimated taxes (net of refunds) compared with only $626 for the prior year period, the increase primarily related to the taxable gain on the sale of Zenith. In addition, cash flows from the collection of retail customer deposits declined $22,522 compared to the first nine months of 2021 as the pace of written orders has slowed compared to the prior year and we continue to reduce our retail order backlog. Changes in working capital for the first nine months of fiscal 2022 were favorably impacted by slower growth in our investment in inventory as compared to the prior year period.   Our overall cash position increased by $32,496 during the first nine months of fiscal 2022, compared to a decline of $7,188 during the first nine months of fiscal 2021, an increase of $39,684 from the prior year period. Excluding the overall cash flow from discontinued operations, overall cash flow from continuing operations increased $38,146 over the prior year period. Offsetting the decline in cash flows from operations, net cash flows from investing activities during the first nine months of fiscal 2022 increased $82,279 to $74,066 of cash provided by investing activities compared to net cash used in investing activities of $8,213 for the prior year period. This increase was primarily due to net proceeds of $84,534 received from the sale of Zenith and net proceeds of $8,217 received from the sale of retail real estate in Houston, Texas, partially offset by a $10,125 increase in capital expenditures over the prior year, including our purchase of our new retail store site in Tampa, Florida. Net cash used in financing activities during the first nine months of 2022 increased $16,623 to a net use of $29,275 as compared to a net use of $12,652 for the prior year period, primarily due to a special dividend of $14,494 declared and paid during the second quarter of 2022 and a $4,697 increase in share repurchases to $10,263 during the first nine months of fiscal 2022 as compared to $5,566 repurchased during the first nine months of fiscal 2021. On March 9, 2022, our Board of Directors increased the amount authorized under our existing share repurchase plan to $40,000, of which $30,857 remains available for future purchases as of August 27, 2022. With cash and cash equivalents and short-term investments totaling $84,585 on hand at August 27, 2022, 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.   Page 32 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)   Debt and Other Obligations   Our bank credit facility provides for a line of credit of up to $25,000. At August 27, 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 at August 27, 2022. 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 charges 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 August 27, 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 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 used in our wholesale manufacturing operations. 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 August 27, 2022 is $104,899 and is included in our accompanying condensed consolidated balance sheet at August 27, 2022. We were contingently liable under licensee lease obligation guarantees in the amount of $1,871 at August 27, 2022. Remaining terms under these lease guarantees range from approximately one to three years. See Note 10 to our condensed consolidated financial statements for additional details regarding our lease guarantees.   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, including a site in Tampa, Florida recently purchased for $7,668 which is expected to open for business during the second quarter of fiscal 2023. 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 203,465 and a net book value of $21,168 at August 27, 2022.   During the third quarter of fiscal 2022, sold one of our Company-owned store locations in Houston, Texas for $8,217 net of closing costs. The sale closed on June 24, 2022, and we expect to vacate the premises early in the fourth quarter of fiscal 2022. This sale, together with our recent purchase of real property in Tampa, Florida, will be treated as an exchange of like-kind property under Section 1031 of the Internal Revenue Code of 1986, as amended, for the purpose of deferring the taxable gain of approximately $4,300 arising from the sale of the Houston property.   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 27, 2021.   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 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.   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 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of August 27, 2022.   Page 33 of 36     PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES AUGUST 27, 2022 (Dollars in thousands except share and per share data)