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 affordable credit due to rising interest rates   • 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   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 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 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 91 BHF stores at May 27, 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.   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. Digital outreach strategies have become the primary vehicle for brand advertising and customer acquisition. As a result, 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 fiscal 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. 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 expect to spend approximately $4,500 on these efforts in 2023, approximately $2,400 of which has been spent through May 27, 2023.   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.   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. We are currently in the process of expanding Noa Home’s North American product assortment and plan to introduce the Noa Home brand in the United States in the fourth quarter of 2023 through a limited geography test.   23 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   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 independent sales representatives each of which have a stated geographic territory. 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 products to move from inside the home to outside the home to capitalize on the growing trend of outdoor living. In the second quarter of 2023, we debuted the Bassett Outdoor contract line at the HD Expo Show in Las Vegas targeting the hospitality segment.   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.   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.     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. We are also in the process of closing our northeast clearance center and our store located in Birmingham, Alabama. 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 are in the process of upfitting the space with a planned opening date in the third quarter of 2023.   As of May 27, 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 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Results of Continuing Operations – Periods ended May 27, 2023 compared with the periods ended May 28, 2022:   Consolidated results of continuing operations for the three and six months ended May 27, 2023 and May 28, 2022 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 27, 2023     May 28, 2022     Dollars     Percent     May 27, 2023     May 28, 2022     Dollars     Percent                                                                                                     Net sales of furniture and accessories   $ 100,519       100.0 %   $ 128,706       100.0 %   $ (28,187 )     -21.9 %   $ 208,217       100.0 %   $ 246,570       100.0 %   $ (38,353 )     -15.6 % Cost of furniture and accessories sold     47,686       47.4 %     62,767       48.8 %     (15,081 )     -24.0 %     98,187       47.2 %     123,239       50.0 %     (25,052 )     -20.3 % Gross profit     52,833       52.6 %     65,939       51.2 %     (13,106 )     -19.9 %     110,030       52.8 %     123,331       50.0 %     (13,301 )     -10.8 % SG&A expenses     51,366       51.1 %     54,927       42.7 %     (3,561 )     -6.5 %     105,861       50.8 %     105,841       42.9 %     20       0.0 % Gain on revaluation of contingent consideration     1,013       1.0 %     -       0.0 %     1,013       100.0 %     1,013       0.5 %     -       0.0 %     1,013       100.0 % Income from operations   $ 2,480       2.5 %   $ 11,012       8.6 %   $ (8,532 )     -77.5 %   $ 5,182       2.5 %   $ 17,490       7.0 %   $ (12,308 )     -70.4 %   Analysis of Quarterly Results:   Total sales revenue for the three months ended May 27, 2023 decreased $28,187 or 22% from the prior year period primarily due to a 29% decline in wholesale sales along with a 20% decrease in retail sales through the Company-owned stores, partially offset by the addition of Noa Home in 2023.   Gross margins for the three months ended May 27, 2023 increased 140 basis points from 2022 primarily due to higher margins in the wholesale segment along with the realization during the second quarter of 2023 of deferred gross profit on intercompany sales made during the preceding quarter due to the decline in retail inventory levels since the end of the first quarter.   Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended May 27, 2023 increased 840 basis points from 2022 primarily due to the deleverage of fixed costs caused by lower sales volumes.   During the second quarter of 2023 we recognized a gain of $1,013 resulting from the write-down of our contingent consideration obligation associated with the acquisition of Noa Home. See Note 3 to the condensed consolidated financial statements.   Analysis of Year-to-Date Results:   Total sales revenue for the six months ended May 27, 2023 decreased $38,353 or 16% from the prior year period primarily due to a 23% decline in wholesale sales along with a 10% decrease in retail sales through the Company-owned stores partially offset by the addition of Noa Home in 2023.   Gross margins for the six months ended May 27, 2023 increased 280 basis points from 2022 primarily due to higher margins in the wholesale segment along with a greater portion of total sales coming from the Company-owned stores retail segment.    SG&A expenses as a percentage of sales for the six months ended May 27, 2023 increased 790 basis points from 2022 primarily due to the deleverage of fixed costs caused by lower sales volumes along with a greater portion of total sales coming from the Company-owned stores retail segment.   During the first half of 2023 we recognized a gain of $1,013 resulting from the write-down of our contingent consideration obligation associated with the acquisition of Noa Home. See Note 3 to the condensed consolidated financial statements.   25 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Segment Information     Beginning in fiscal 2023, we 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 beginning of fiscal 2023, 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 and six months ended May 28, 2022 has been restated to reflect the new alignment of our reportable segments.   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. 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.   26 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)       Quarter Ended May 27, 2023       Non-GAAP Presentation                         GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations       Special Items       Consolidated                                                         Net sales of furniture and accessories   $ 61,774     $ 60,778     $ 2,297     $ (24,330 )(1)     $ -       $ 100,519   Cost of furniture and accessories sold     42,878       28,647       899       (24,738 )(2)       -         47,686   Gross profit     18,896       32,131       1,398       408         -         52,833   SG&A expense     11,891       31,376       8,347       (248 )(3)       -         51,366   Gain revaluation of contingent consideration     -       -       -       -         1,013 (4)       1,013   Income from operations   $ 7,005     $ 755     $ (6,949 )   $ 656       $ 1,013       $ 2,480         Quarter Ended May 28, 2022       Non-GAAP Presentation                         GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations       Special Items       Consolidated                                                         Net sales of furniture and accessories   $ 87,501     $ 75,620     $ -     $ (34,415 )     $ -       $ 128,706   Cost of furniture and accessories sold     61,149       35,522       -       (33,904 )       -         62,767   Gross profit     26,352       40,098       -       (511 )       -         65,939   SG&A expense     14,887       32,805       7,549       (314 )       -         54,927   Income from operations   $ 11,465     $ 7,293     $ (7,549 )   $ (197 )     $ -       $ 11,012         Six Months Ended May 27, 2023       Non-GAAP Presentation                                 GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations       Special Items       Consolidated                                                         Net sales of furniture and accessories   $ 131,658     $ 125,740     $ 5,248     $ (54,429 )(1)     $ -       $ 208,217   Cost of furniture and accessories sold     91,157       59,232       2,331       (54,533 )(2)       -         98,187   Gross profit     40,501       66,508       2,917       104         -         110,030   SG&A expense     24,502       64,223       17,637       (501 )(3)       -         105,861   Gain revaluation of contingent consideration     -       -       -       -         1,013 (4)       1,013   Income from operations   $ 15,999     $ 2,285     $ (14,720 )   $ 605       $ 1,013       $ 5,182         Six Months Ended May 28, 2022       Non-GAAP Presentation                               GAAP Presentation       Wholesale     Retail     Corporate & Other     Eliminations       Special Items     Consolidated                                                       Net sales of furniture and accessories   $ 170,986     $ 139,727     $ -     $ (64,143 )(1)     $ -     $ 246,570   Cost of furniture and accessories sold     120,751       65,692       -       (63,204 )(2)       -       123,239   Gross profit     50,235       74,035       -       (939 )       -       123,331   SG&A expense     28,568       64,120       13,794       (641 )(3)       -       105,841   Income from operations   $ 21,667     $ 9,915     $ (13,794 )   $ (298 )     $ -     $ 17,490     27 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Notes to segment consolidation table:     (1)  Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.   (2)  Represents the elimination of 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.   (4)  Represents the gain resulting from the write-down of the contingent consideration payable on the acquisition of Noa Home.     Wholesale Segment   Results for the wholesale segment for the three and six months ended May 27, 2023 and May 28, 2022 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 27, 2023     May 28, 2022     Dollars     Percent     May 27, 2023     May 28, 2022     Dollars     Percent                                                                                                     Net sales   $ 61,774       100.0 %   $ 87,501       100.0 %   $ (25,727 )     -29.4 %   $ 131,658       100.0 %   $ 170,986       100.0 %   $ (39,328 )     -23.0 % Gross profit (1)     18,896       30.6 %     26,352       30.1 %     (7,456 )     -28.3 %     40,501       30.8 %     50,235       29.4 %     (9,734 )     -19.4 % SG&A expenses     11,891       19.2 %     14,887       17.0 %     (2,996 )     -20.1 %     24,502       18.6 %     28,568       16.7 %     (4,066 )     -14.2 % Income from operations   $ 7,005       11.3 %   $ 11,465       13.1 %   $ (4,460 )     -38.9 %   $ 15,999       12.2 %   $ 21,667       12.7 %   $ (5,668 )     -26.2 %     (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       May 27, 2023     May 28, 2022     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 24,156     $ 15,912     $ 40,068       64.9 %   $ 33,838     $ 23,339     $ 57,177       65.3 %   $ (17,109 )     -29.9 % Bassett Leather     6,078       255       6,333       10.3 %     9,859       11       9,870       11.3 %     (3,537 )     -35.8 % Bassett Custom Wood     4,201       4,527       8,728       14.1 %     5,660       6,671       12,331       14.1 %     (3,603 )     -29.2 % Bassett Casegoods     3,009       3,636       6,645       10.8 %     3,729       4,394       8,123       9.3 %     (1,478 )     -18.2 % Total   $ 37,444     $ 24,330     $ 61,774       100.0 %   $ 53,086     $ 34,415     $ 87,501       100.0 %   $ (25,727 )     -29.4 %       Six Months Ended       May 27, 2023     May 28, 2022     Total Change       External     Intercompany     Total     External     Intercompany     Total     Dollars     Percent   Bassett Custom Upholstery   $ 48,659     $ 35,256     $ 83,915       63.7 %   $ 65,750     $ 43,435     $ 109,185       63.9 %   $ (25,270 )     -23.1 % Bassett Leather     12,883       273       13,156       10.0 %     22,821       23       22,844       13.4 %     (9,688 )     -42.4 % Bassett Custom Wood     9,079       10,467       19,546       14.8 %     11,643       12,932       24,575       14.4 %     (5,029 )     -20.5 % Bassett Casegoods     6,608       8,433       15,041       11.4 %     6,629       7,753       14,382       8.4 %     659       4.6 % Total   $ 77,229     $ 54,429     $ 131,658       100.0 %   $ 106,843     $ 64,143     $ 170,986       100.0 %   $ (39,328 )     -23.0 %   28 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Analysis of Quarterly Results – Wholesale   Net sales for the three months ended May 27, 2023 decreased $10,665 or 29% from the prior year period due primarily to a 30% decrease in shipments to the open market, a 28% decrease in shipments to our retail store network and a 19% decrease in Lane Venture shipments. Gross margins for the three months ended May 27, 2023 improved 50 basis points over the prior year primarily due to increased margins in our Custom Upholstery business as we were able to recognize a greater portion of previously implemented price increases in current period sales coupled with improved overall product warranty and returns experience and overall lower unit costs as measured on a last-in, first-out (LIFO) basis. These margin improvements were partially offset by lower margins in the Bassett Leather business due to increased product discounting and excess and obsolete reserve charges. As the Bassett Leather 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 improved margins over the remainder of 2023. Margins in the Bassett Casegoods business were lower due primarily to realizing the high freight costs incurred during mid-2022 in the income statement for the current period. We expect improved margins over the remainder of 2023. Lastly, margins for Bassett Custom Wood products were lower due to lower sales volume. SG&A expenses as a percentage of sales increased 220 basis points primarily due to reduced leverage of fixed costs from decreased sales.   Analysis of Year-to-Date Results – Wholesale   Net sales for the six months ended May 27, 2023 decreased $39,328 or 23% from the prior year period due primarily to a 29% decrease in shipments to the open market, a 17% decrease in shipments to our retail store network and a 19% decrease in Lane Venture shipments. Gross margins for the six months ended May 27, 2023 improved 240 basis points over the prior year primarily due to increased margins in our Custom Upholstery business as we were able to recognize a greater portion of previously implemented price increases in current period sales coupled with improved overall product warranty and returns experience and overall lower unit costs as measured on a last-in, first-out (LIFO) basis. These margin improvements were partially offset by lower margins in the Bassett Leather business due to increased product discounting and excess and obsolete reserve charges. As the Bassett Leather 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 improved margins over the remainder of 2023.  Margins in the Bassett Casegoods business were lower due primarily to realizing the high freight costs incurred during mid-2022 in the income statement for the current period. We expect improved margins over the remainder of 2023. Lastly, margins for Bassett Custom Wood products were lower due to lower sales volume. SG&A expenses as a percentage of sales increased 190 basis points primarily due to reduced leverage of fixed costs from decreased sales.   Wholesale Backlog   Wholesale backlog at May 27, 2023 was $19,693 as compared to $35,336 at November 26, 2022 and $60,134 at May 28, 2022.   29 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Retail – Company-owned Stores Segment   Results for the retail segment for the periods ended May 27, 2023 and May 28, 2022 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 27, 2023     May 28, 2022     Dollars     Percent     May 27, 2023     May 28, 2022     Dollars     Percent                                                                                                     Net sales   $ 60,778       100.0 %   $ 75,620       100.0 %   $ (14,842 )     -19.6 %   $ 125,740       100.0 %   $ 139,727       100.0 %   $ (13,987 )     -10.0 % Gross profit (1)     32,131       52.9 %     40,098       53.0 %     (7,967 )     -19.9 %     66,508       52.9 %     74,035       53.0 %     (7,527 )     -10.2 % SG&A expenses     31,376       51.6 %     32,805       43.4 %     (1,429 )     -4.4 %     64,223       51.1 %     64,120       45.9 %     103       0.2 % Income (loss) from operations   $ 755       1.2 %   $ 7,293       9.6 %   $ (6,538 )     -89.6 %   $ 2,285       1.8 %   $ 9,915       7.1 %   $ (7,630 )     -77.0 %     (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     Six Months Ended     Change       February 25, 2023     May 28, 2022     Dollars     Percent     May 27, 2023     May 28, 2022     Dollars     Percent                                                                                                     Bassett Custom Upholstery   $ 34,711       57.1 %   $ 45,376       60.0 %   $ (10,665 )     -23.5 %   $ 70,870       56.4 %   $ 83,194       59.5 %   $ (12,324 )     -14.8 % Bassett Leather     577       0.9 %     292       0.4 %     285       97.6 %     1,071       0.9 %     532       0.4 %     539       101.3 % Bassett Custom Wood     9,798       16.1 %     11,237       14.9 %     (1,439 )     -12.8 %     19,467       15.5 %     20,644       14.8 %     (1,177 )     -5.7 % Bassett Casegoods     7,771       12.8 %     9,188       12.2 %     (1,417 )     -15.4 %     17,821       14.2 %     17,480       12.5 %     341       2.0 % Accessories, mattresses and other (1)     7,921       13.0 %     9,527       12.6 %     (1,606 )     -16.9 %     16,511       13.1 %     17,877       12.8 %     (1,366 )     -7.6 % Total   $ 60,778       100.0 %   $ 75,620       100.0 %   $ (14,842 )     -19.6 %   $ 125,740       100.0 %   $ 139,727       100.0 %   $ (13,987 )     -10.0 %     (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.     Analysis of Quarterly Results - Retail   Net sales for the three months ended May 27, 2023 decreased $14,842 or 20% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 17% from the second quarter of 2022. Gross margin for the three months ended May 27, 2023 was essentially flat compared to the prior period as increased promotional activity and lower margins from store closure sales in the current quarter were offset by lower unit costs as measured on a LIFO basis. SG&A expenses as a percentage of sales for the three months ended May 27, 2023 increased 820 basis points primarily due to decreased leverage of fixed costs from lower sales volumes coupled with increased warehousing and delivery costs.   Analysis of Year-to-Date Results - Retail   Net sales for the six months ended May 27, 2023 decreased $13,987 or 10% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 16% from the first half of 2022. Gross margin for the six months ended May 27, 2023 was essentially flat compared to the prior period as increased promotional activity was offset by lower unit costs as measured on a LIFO basis. SG&A expenses as a percentage of sales for the six months ended May 27, 2023 increased 180 primarily due to decreased leverage of fixed costs from lower sales volumes coupled with increased warehousing and delivery costs.   Retail Backlog   Retail backlog at May 27, 2023 was $32,894 compared to $51,041 at November 26, 2022 and $71,073 at May 28, 2022.   30 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Corporate and Other   Revenues, costs and expenses of corporate and other for the three and six months ended May 27, 2023 and May 28, 2022 are as follows:       Quarter Ended     Change     Six Months Ended     Change       May 27, 2023     May 28, 2022     Dollars     Percent     May 27, 2023     May 28, 2022     Dollars     Percent                                                                     Net sales   $ 2,297     $ -     $ 2,297       100.0 %   $ 5,248     $ -     $ 5,248       100.0 % Gross profit     1,398       -       1,398       100.0 %     2,917       -       2,917       100.0 % SG&A expenses     8,347       7,549       798       10.6 %     17,637       13,794       3,843       27.9 % Net expenses   $ (6,949 )   $ (7,549 )   $ 600       -7.9 %   $ (14,720 )   $ (13,794 )   $ (926 )     6.7 %   Analysis of Quarterly Results – Corporate and Other   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 $798 increase in SG&A expenses was primarily due to the addition of Noa Home and increased corporate consulting expenses associated with our digital transformation efforts and the development of a new store prototype design partially offset by lower corporate incentive compensation expenses.   Analysis of Year-to-Date Results – Corporate and Other   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 $3,843 increase in SG&A expenses was primarily due to the addition of Noa Home and increased corporate consulting expenses associated with our digital transformation efforts and the development of a new store prototype design partially offset by lower corporate incentive compensation expenses.     Discontinued Operations – Logistical Services       Quarter Ended     Six Months Ended       May 28, 2022     May 28, 2022                                     Logistical services revenue   $ -       0.0 %   $ 16,776       100.0 % Cost of logistical services     -       0.0 %     15,001       89.4 % Other loss, net     -       0.0 %     (63 )     -0.4 % Income from discontinued operations before tax   $ -       0.0 %   $ 1,712       10.2 %   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 for logistical services provided to our wholesale segment in the amount of $9,121 during the six months ended May 28, 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 expense for logistical services performed by J.B. Hunt of $6,717 and $14,094 during the three and six months ended May 27, 2023, respectively, and $9,546 for the three and six months ended May 28, 2022, respectively.   31 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   Other Items Affecting Net Income   Other Income (Loss), Net   Other income (loss), net, for the three and six months ended May 27, 2023 was $64 and $(351), respectively, compared to $(627) and $(1,256) for the three and six months ended May 28, 2022. The net change from the prior year periods was primarily due to higher interest income on our cash equivalents and investments 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 18.6% and 27.0% for the three and six months ended May 27, 2023, respectively, and 26.0% for both the three and six months ended May 28, 2022. The effective rates for the three and six months ended May 27, 2023 differ from the federal statutory rate of 21% primarily due to the non-taxable gain on revaluation of contingent consideration associated with the acquisition of Noa Home (see Note 3), increases in the valuation allowance placed on deferred tax assets associated with Noa Home and the effects of state income taxes and various permanent differences. For the three and six months ended May 28, 2022, the effective rates differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including tax of $522 associated with the non-deductible goodwill written off in connection with the sale of Zenith and included in income tax on discontinued operations.   Liquidity and Capital Resources     Cash Flows   Cash provided by operations for the first half of fiscal 2023 was $6,413 compared to cash used in operations of $8,946 for the first half of fiscal 2022, representing an increase of $15,359 in cash flows from operations. Cash provided by the operating activities of our discontinued operations was $1,681 for the first half of fiscal 2022. Excluding the decline in operating cash flow from discontinued operations, cash flows from continuing operations increased $17,040 for the first half of fiscal 2023 from the prior year period. This increase was primarily the result of significantly lower investment in inventory partially offset by lower income from continuing operations and other changes in working capital.   Our overall cash position declined $7,022 during the first half of 2023 compared to an increase of $37,236 for the first half of 2022, which had included the proceeds from the sale of Zenith. During the first half of fiscal 2023, we spent $7,405 on purchases of property and equipment primarily consisting of expenditures related to our digital transformation project, upfit of the new Tampa, FL store that is expected to open in the third quarter of 2023 and the recently opened Inwood store in Dallas, TX and the remodel of two other stores in the Dallas, TX market. We also paid $2,832 in dividends during the six months ended May 27, 2023, a $14,338 decrease from the corresponding period in 2022 as the prior year included a $1.50 per share special dividend. Finally, we repurchased 209,337 shares spending $3,450 during the current year, a $5,192 decrease compared to the prior period. We expect capital expenditures for the full year to range from $16 million to $19 million. As of May 27, 2023, $22,550 remains available for future purchases under our stock repurchase plan. With cash and cash equivalents and short-term investments totaling $72,328 on hand at May 27, 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 May 27, 2023, we had $3,731 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,269. 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 May 27, 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.   32 of 41   PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 27, 2023 (Dollars in thousands except share and per share data)   We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings 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 May 27, 2023 is $108,665 and is included in our accompanying condensed consolidated balance sheet at May 27, 2023. We were contingently liable under a licensee lease obligation guarantee in the amount of $1,897 at May 27, 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 $21,027 at May 27, 2023.     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 May 27, 2023.