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 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   • 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 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 and advertising capabilities, as they are implemented   • 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   • 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 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. Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended November 26, 2022.   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.   22 of 34 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)     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 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 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.  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 (“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. 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. Our strategy is to distribute these products outside of our BHF store network through a network of over 10 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 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.   23 of 34 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. 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.   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 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 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.   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, to J.B. Hunt and the transaction was completed at the beginning of the second quarter of fiscal 2022. 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 (see Note 12 to the Condensed Consolidated Statements of Income).   24 of 34 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)     Results of Continuing Operations – 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     Change       February 25, 2023     February 26, 2022     Dollars     Percent                                                     Net sales of furniture and accessories   $ 107,698       100.0 %   $ 117,864       100.0 %   $ (10,166 )     -8.6 % Cost of furniture and accessories sold     50,501       46.9 %     60,471       51.3 %     (9,970 )     -16.5 % Gross profit     57,197       53.1 %     57,393       48.7 %     (196 )     -0.3 % SG&A expenses     54,495       50.6 %     50,915       43.2 %     3,580       7.0 %                                                   Income from operations   $ 2,702       2.5 %   $ 6,478       5.5 %   $ (3,776 )     -58.3 %   Analysis of Quarterly Results:   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   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:     ● 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 includes Lane Venture.     ● Retail –  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.   25 of 34 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)     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   To supplement the financial measures prepared in accordance with GAAP, we present gross profit by segment inclusive of the effects of intercompany sales by our wholesale segment to our retail segment. Because these intercompany transactions are not eliminated from our segment presentations and because we do not present gross profit as a measure of segment profitability in the accompanying condensed consolidated financial statements, the presentation of gross profit by segment is considered to be a non-GAAP financial measure. The reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP is presented below along with the effects of various other intercompany eliminations on our consolidated results of operations.       Quarter Ended February 25, 2023       Non-GAAP Presentation             GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations     Consolidated                                             Net sales of furniture and accessories   $ 69,884     $ 64,962     $ 2,951     $ (30,099 ) (1)   $ 107,698   Cost of furniture and accessories sold     48,278       30,586       1,433       (29,796 ) (2)     50,501   Gross profit     21,606       34,376       1,518       (303 )     57,197   SG&A expense     12,612       32,846       9,289       (252 ) (3)     54,495   Income from operations   $ 8,994     $ 1,530     $ (7,771 )   $ (51 )   $ 2,702         Quarter Ended February 26, 2022       Non-GAAP Presentation             GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations     Consolidated                                             Net sales of furniture and accessories   $ 83,485     $ 64,107     $ -     $ (29,728 ) (1)   $ 117,864   Cost of furniture and accessories sold     59,601       30,170       -       (29,300 ) (2)     60,471   Gross profit     23,884       33,937       -       (428 )     57,393   SG&A expense     13,682       31,315       6,245       (327 ) (3)     50,915   Income from operations   $ 10,202     $ 2,622     $ (6,245 )   $ (101 )   $ 6,478     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.   26 of 34 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)     Wholesale Segment   Results for the wholesale segment for the periods ended February 25, 2023 and February 26, 2022 are as follows:       Quarter Ended     Change       February 25, 2023     February 26, 2022     Dollars     Percent                                                     Net sales   $ 69,884       100.0 %   $ 83,485       100.0 %   $ (13,601 )     -16.3 % Gross profit (1)     21,606       30.9 %     23,884       28.6 %     (2,278 )     -9.5 % SG&A expenses     12,612       18.0 %     13,682       16.4 %     (1,070 )     -7.8 %                                                   Income from operations   $ 8,994       12.9 %   $ 10,202       12.2 %   $ (1,208 )     -11.8 %     (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       February 25, 2023     February 26, 2022     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 24,506     $ 19,344     $ 43,850       62.7 %   $ 31,929     $ 20,096     $ 52,025       62.3 %   $ (8,175 )     -15.7 % Bassett Leather     6,805       18       6,823       9.8 %     12,939       12       12,951       15.5 %     (6,128 )     -47.3 % Bassett Custom Wood     4,876       5,940       10,816       15.5 %     5,980       6,261       12,241       14.7 %     (1,425 )     -11.6 % Bassett Casegoods     3,598       4,797       8,395       12.0 %     2,909       3,359       6,268       7.5 %     2,127       33.9 % Total   $ 39,785     $ 30,099     $ 69,884       100.0 %   $ 53,757     $ 29,728     $ 83,485       100.0 %   $ (13,601 )     -16.3 %   Analysis of Quarterly Results – Wholesale   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. 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.   27 of 34 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)     Retail – Company-owned Stores Segment   Results for the retail segment for the periods ended February 25, 2023 and February 26, 2022 are as follows:       Quarter Ended     Change       February 25, 2023     February 26, 2022     Dollars     Percent                                                     Net sales   $ 64,962       100.0 %   $ 64,107       100.0 %   $ 855       1.3 % Gross profit (1)     34,376       52.9 %     33,937       52.9 %     439       1.3 % SG&A expenses     32,846       50.6 %     31,315       48.8 %     1,531       4.9 % Income (loss) from operations   $ 1,530       2.4 %   $ 2,622       4.1 %   $ (1,092 )     -41.6 %     (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       February 25, 2023     February 26, 2022     Dollars     Percent                                                     Bassett Custom Upholstery   $ 36,159       55.7 %   $ 37,818       59.0 %   $ (1,659 )     -4.4 % Bassett Leather     494       0.8 %     240       0.4 %     254       105.8 % Bassett Custom Wood     9,669       14.9 %     9,407       14.7 %     262       2.8 % Bassett Casegoods     10,050       15.5 %     8,292       12.9 %     1,758       21.2 % Accessories, mattresses and other (1)     8,590       13.2 %     8,350       13.0 %     240       2.9 % Total   $ 64,962       100.0 %   $ 64,107       100.0 %   $ 855       1.3 %     (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.   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.   28 of 34 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)     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     Change       February 25, 2023     February 26, 2022     Dollars     Percent                                     Net sales   $ 2,951     $ -     $ 2,951       100.0 % Gross profit     1,518       -       1,518       100.0 % SG&A expenses     9,289       6,245       3,044       48.7 % Net expenses   $ (7,771 )   $ (6,245 )   $ (1,526 )     24.4 %   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       Quarter Ended       February 26, 2022                     Logistical services revenue   $ 16,776       100.0 % Cost of logistical services     15,001       89.4 % Other loss, net     (63 )     -0.4 %                   Income from discontinued operations before tax   $ 1,712       10.2 %   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. 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. Hunt.   Other Items Affecting Net Income   Other Loss, Net   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.   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 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.   29 of 34 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)     Liquidity and Capital Resources   Cash Flows   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 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 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,     ● Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and     ● Minimum tangible net worth of $140,000.   We were in compliance with these covenants at February 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.   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 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 acquired in 2022 with a planned opening late in 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 $21,164 at February 25, 2023.   30 of 34 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   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 26, 2022.   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 10 to our condensed consolidated financial statements for further information regarding certain contingencies as of February 25, 2023.