What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-03-30 compared with 2022-09-29 · 155 added, 227 removed, 178 unchanged (68% of the section changed)

14 unchanged sentences

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

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 shortages 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

1 unchanged sentence

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;

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

the risk that we may not achieve the strategic benefits of our acquisition of Noa Home Inc.

effectiveness and security of our information 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

2 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

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

the impact of a resurgence of the COVID-19 pandemic or any other similar health emergency and any 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.

4 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.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(Dollars in thousands except share and per share data)

4 unchanged sentences

Our rich 121-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. 

With 92 BHF stores at February 25, 2023, 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. 

8 unchanged sentences

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.

During the second quarter of fiscal 2022, we opened our first regional fulfillment center (“RFC”) 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.

During the fourth quarter of 2022, we opened our second RFC near Baltimore, Maryland.

In the first quarter of 2023, we opened three more RFCs in Conover, North Carolina, Grand Prairie, Texas and Riverside, California.

We plan to evaluate the performance of these five RFCs before considering any additional locations.

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

8 unchanged sentences

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.

Over 75% of our wholesale revenues are derived from products that are manufactured in the United States using a mix of domestic and globally sourced components and raw materials.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(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.

5 unchanged sentences

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.

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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.

During the second quarter of 2022, we implemented a comprehensive Product Information Management system which allows us to enhance and standardize our product development and data management and governance processes.

This results 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 the second half of 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 approximately $2,000 on these efforts in 2023.

During the fourth quarter of fiscal 2022 we acquired Noa Home (see Note 3 to the Consolidated Financial Statements for additional information regarding the acquisition).

A mid-priced e-commerce furniture retailer headquartered in Montreal, Canada, Noa Home has operations in Canada, Australia, Singapore and the United Kingdom.

With a lean staffing model, the Noa Home team has built an operational blueprint that has the potential for significant growth.

We believe the acquisition will provide Bassett with a greater online presence and will allow us to attract more digitally native consumers.

While still in the planning phase, we expect to introduce the Noa Home brand in the United States during 2023.

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.

During 2022, we closed three stores with the operations of one those stores being consolidated into another store in the same market.

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.

We also may occasionally identify opportunities to enhance our presence in existing markets by relocating stores to better locations within the same market.

During 2022, we sold the store property of one of our Houston, Texas locations and leased a new 9,600 square foot store property in a more upscale shopping area in the vicinity of the former location.

We are in the process of upfitting the store and expect to open in late 2023.

During late 2022 at the end of the lease term, we closed our Dallas, Texas store located at the intersection of McKinney and Knox streets.

We opened a new 11,600 square foot store in the nearby iconic Inwood Village shopping center during the first quarter of 2023.

In 2022, we acquired a 25,000 square foot property in Tampa, Florida.

We will begin upfitting the property early in April with a planned opening date in late 2023.

As of February 25, 2023, we had 59 Corporate-owned stores operating.

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.

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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, to J.B.

Hunt and the transaction was completed at the beginning of the second quarter of fiscal 2022.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(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:

Period ended February 25, 2023 compared with the period ended February 26, 2022:

Consolidated results of continuing operations for the three months ended February 25, 2023 and February 26, 2022 are as follows:

Quarter Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

February 25, 2023

February 26, 2022

Net sales of furniture and accessories

1 unchanged sentence

SG&A expenses

Gain on sale of retail real estate

Income from operations

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.

Total sales revenue for the three months ended February 25, 2023 decreased $10,166 or 8.6% from the prior year period primarily due to a 16% decline in wholesale sales partially offset by a 1.3% increase in retail sales through the Company-owned stores and the addition of Noa Home in 2023.

Gross margins for the three months ended February 25, 2023 increased 440 basis points from 2022 primarily due to higher margins in the wholesale segment along with a greater portion of total sales coming from the Corporate retail segment.

These increases were partially offset by lower margins in the retail segment.

Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended February 25, 2023 increased 740 basis points from 2022 primarily due to a greater portion of total sales coming from the Corporate retail segment along with the deleverage of fixed costs caused by lower sales volumes.

Segment Information

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

Beginning with the three months ended February 25, 2023, we have strategically aligned our business into three reportable segments as defined in ASC 280, Segment Reporting , and 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.

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.

Our wholesale segment includes our wood and upholstery operations, which includes Lane Venture.

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.

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 Company-owned stores.

Our retail segment consists of Company-owned stores and includes the revenues, expenses, assets and liabilities and capital expenditures directly related to these stores and the Company-owned distribution network utilized to deliver products to our retail customers.

Corporate and other – Corporate and other includes the shared costs of corporate functions such as treasury and finance, information technology, accounting, human resources, legal and others, including certain product development and marketing functions benefitting both wholesale and retail operations.

We consider our corporate functions to be other business activities and have aggregated them with our other insignificant operating segment, the recently acquired Noa Home.

Inter-company net sales elimination represents the elimination of wholesale sales to our Company-owned stores.

Inter-company income elimination includes the embedded wholesale profit in the Company-owned store inventory that has not been realized.

These profits will be recorded when merchandise is delivered to the retail consumer.

The inter-company income elimination also includes rent paid by our retail stores occupying Company-owned real estate.

Prior to the current period, the functions included in Corporate and other were included in our wholesale segment reportable segment, and Noa Home was included in our retail reportable segment for the fourth quarter of fiscal 2022 following its acquisition on September 2, 2022.

We believe that the new alignment of our reporting segments provides our chief operating decision maker with clearer information with which to assess the operating results of our wholesale segment.

Noa Home does not meet the requirements to be a separate reportable segment.

The segment information presented below for the three months ended February 26, 2022 has been restated to reflect the new alignment of our reportable segments.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(Dollars in thousands except share and per share data)

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

Reconciliation of Segment Results to Consolidated Results of Operations

1 unchanged sentence

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

GAAP Presentation

Net sales of furniture and accessories

Cost of furniture and accessories sold

Gain on sale of real estate

Income from operations

Quarter Ended August 28, 2021

Non-GAAP Presentation

GAAP Presentation

Net sales of furniture and accessories

Cost of furniture and accessories sold

Income from operations

Nine Months Ended August 27, 2022

Quarter Ended February 25, 2023

Non-GAAP Presentation

GAAP Presentation

Corporate & Other

Net sales of furniture and accessories

Cost of furniture and accessories sold

Gain on sale of real estate

Income from operations

Nine Months Ended August 28, 2021

Quarter Ended February 26, 2022

Non-GAAP Presentation

GAAP Presentation

Corporate & Other

Net sales of furniture and accessories

3 unchanged sentences

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 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:

Represents the gain on the sale of the real estate at a former retail location.

Page 28 of 36

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 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(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:

Results for the wholesale segment for the periods ended February 25, 2023 and February 26, 2022 are as follows:

Quarter Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

February 25, 2023

February 26, 2022

Gross profit (1)

5 unchanged sentences

Quarter Ended

August 27, 2022

August 28, 2021

Bassett Custom Upholstery

Bassett Leather

Bassett Custom Wood

Bassett Casegoods

Nine Months Ended

August 27, 2022

August 28, 2021

February 25, 2023

February 26, 2022

Bassett Custom Upholstery

3 unchanged sentences

Analysis of Quarterly Results –

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.

Net sales for the three months ended February 25, 2023 decreased $13,601 or 16% from the prior year period due primarily to a 29% decrease in shipments to the open market, a 20% decrease in Lane Venture shipments and a 3.4% decrease in shipments to our retail store network.

Gross margins for the three months ended February 25, 2023 improved 230 basis points over the prior year 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.

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Also, the ocean freight costs associated with the majority of the product received was at significantly higher costs than are currently being realized on current product receipts.

We expect reduced margins on this product line to continue through the third quarter of 2023 as we reduce the inventory to a more normal level.

SG&A expenses as a percentage of sales increased 160 basis points primarily due to reduced leverage of fixed costs from decreased sales along with higher warehousing and shipping costs.

Wholesale Backlog

Wholesale backlog at February 25, 2023 was $24,895 as compared to $35,336 at November 26, 2022 and $78,135 at February 26, 2022.

While wholesale orders for the first quarter of 2023 decreased 18% against the prior year period, they were 5.6% higher than the pre-pandemic level of the first quarter of 2020.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(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:

Results for the retail segment for the periods ended February 25, 2023 and February 26, 2022 are as follows:

Quarter Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

February 25, 2023

February 26, 2022

Gross profit (1)

5 unchanged sentences

Quarter Ended

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

February 25, 2023

February 26, 2022

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.

Page 30 of 36

Quarterly Analysis of Results - Retail

Net sales for the three months ended February 25, 2023 increased $855 or 1.3% from the prior year period.

Written sales (the value of sales orders taken but not delivered) declined 16% from the first quarter of 2022.

Gross margins for the three months ended February 25, 2023 were flat compared to the prior period as increased promotional activity in the current quarter coupled with higher in-bound freight costs were offset by lower unit costs as measured on a last-in, first-out basis.

Selling, general and administrative expenses as a percentage of sales for the three months ended February 25, 2023 increased 180 basis points primarily due to increased advertising costs to drive more customer engagement, higher consumer financing costs from higher interest rates and increased warehousing and delivery costs.

Retail Backlog

Retail backlog at February 25, 2023 was $41,763 compared to $51,041 at November 26, 2022 and $84,645 at February 26, 2022.

Although the retail backlog continues to be elevated as compared to pre-pandemic levels, we expect a more normalized and sustainable level by the end of the second quarter of 2023.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(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.

Corporate and Other

Revenues, costs and expenses of corporate and other for the three months ended February 25, 2023 and February 22, 2022 are as follows:

Quarter Ended

February 25, 2023

February 26, 2022

SG&A expenses

The increases in sales and gross profit over the prior year period were due to the acquisition of Noa Home on September 2, 2022.

The $3,044 increase in SG&A expenses was primarily due to the addition of Noa Home coupled with increased corporate marketing and information technology expenses primarily in connection with our digital transformation initiatives.

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

Nine Months Ended

August 27, 2022

August 28, 2021

August 27, 2022

August 28, 2021

February 26, 2022

Logistical services revenue

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Income from discontinued operations before tax

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.

The first quarter of 2022 was the final period during which Zenith operated as a consolidated subsidiary of Bassett.

During the three months ended February 26, 2022, Zenith generated a pre-tax profit of $1,712 on sales to third party customers of $16,776.

Zenith also charged Bassett $9,121 for logistical services provided to our wholesale segment during the three months ended February 26, 2022.

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.

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PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

(Dollars in thousands except share and per share data)

Upon the sale of Zenith, we entered into a service agreement with J.B.

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

We incurred $8,434 of expense during the three months ended February 25, 2023 for logistical services performed by J.B.

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.

Other loss, net, for the three months ended February 25, 2023 and February 26, 2022 was $415 and $629, respectively, a net decrease of $214 from the prior year period.

The net change was primarily due to higher interest income on our investment in certificates of deposit.

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 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

Our effective tax rate was 36.8% and 26.3% for the three months ended February 25, 2023 and February 26, 2022, respectively.

These effective rates differ from the federal statutory rate of 21% primarily due to increases in the valuation allowance placed on deferred tax assets associated with Noa Home, the effects of state income taxes and various permanent differences.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

AUGUST 27, 2022

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(Dollars in thousands except share and per share data)

Liquidity and Capital Resources

Cash provided by operations for the first quarter of fiscal 2023 was $563 compared to cash provided by operations of $2,866 for the first quarter of fiscal 2022, representing a decrease of $2,303 in cash flows from operations.

Cash provided by the operating activities of our discontinued operations was $1,681 for the first quarter of fiscal 2022.

Excluding the decline in operating cash flow from discontinued operations, cash flows from continuing operations declined $622 for the first quarter of fiscal 2023 from the prior year period.

This decline was primarily the result of lower income from continuing operations and reduced customer deposits from lower written retail sales, partially offset by reduced investment in inventory.

Our overall cash position decreased by $6,733 during the first quarter of fiscal 2023, compared to a decline of $2,484 during the first quarter of fiscal 2022, an increased net use of $4,239 from the prior year period.

Excluding the overall cash flow from discontinued operations, overall cash flow from continuing operations decreased $3,074 from the prior year period.

In addition to the decline in cash flows from operations, net cash used in investing activities during the first quarter of fiscal 2023 increased $1,024 to $3,904 compared to net cash used in investing activities of $2,880 for the prior year period.

This increase was primarily due to higher capital expenditures over the prior year primarily consisting of expenditures related to our digital transformation project, upfit of the recently opened Inwood store in Dallas, TX and the remodel of two other stores in the Dallas, TX market.

We expect capital expenditures for the full year to range from $17 million to $20 million.

Net cash used in financing activities during the first quarter of 2022 increased $883 to a net use of $3,363 as compared to a net use of $2,480 for the prior year period, primarily due to a $1,079 increase in share repurchases to $1,844 during the first quarter of fiscal 2023 as compared to $765 repurchased during the first quarter of fiscal 2022.

As of February 25, 2023, $24,154 remains available for future purchases under our stock repurchase plan.

With cash and cash equivalents and short-term investments totaling $72,617 on hand at February 25, 2023, expected future operating cash flows and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.

Debt and Other Obligations

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

At 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.

At February 25, 2023, we had $3,731 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,269.

In addition, we had outstanding standby letters of credit with another bank totaling $250 at February 25, 2023.

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:

Under the terms of the bank credit 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,

1 unchanged sentence

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.

We were in compliance with these covenants at February 25, 2023 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.

1 unchanged sentence

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.

The present value of our obligations for leases with terms in excess of one year at February 25, 2023 is $113,120 and is included in our accompanying condensed consolidated balance sheet at February 25, 2023.

We were contingently liable under a licensee lease obligation guarantee in the amount of $1,889 at February 25, 2023.

The remaining term under this lease guarantee extends for five 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.

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 acquired in 2022 with a planned opening late in fiscal 2023.

PART I-FINANCIAL INFORMATION-CONTINUED

BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

FEBRUARY 25, 2023

(Dollars in thousands except share and per share data)

Critical Accounting Policies and Estimates

7 unchanged sentences

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

See Note 9 to our condensed consolidated financial statements for further information regarding certain contingencies as of 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)

See Note 10 to our condensed consolidated financial statements for further information regarding certain contingencies as of February 25, 2023.

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