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 increased interest rates • the profitability of the stores (independent licensees and Company-owned retail stores) which may result in future store closings • the risk of additional asset impairment charges arising from the ongoing efforts to consolidate our retail warehouses. • 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 of additional charges arising from our decision to close Noa Home Inc. (“Noa Home”) during the second half of fiscal 2024. • 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 25, 2023. 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. 20 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Our fiscal year, which ends on the last Saturday of November, periodically results in a 53-week year instead of the normal 52 weeks. The current fiscal year ending November 30, 2024 is a 53-week year, with the additional week being included in our first fiscal quarter. Accordingly, the information presented below includes 27 weeks of operations for the six months ended June 1, 2024 as compared to 26 weeks included in the quarter ended May 27, 2023. 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 newly redesigned website at www.bassettfurniture.com . We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 122-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 88 BHF stores at June 1, 2024, 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. Salespeople 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 have been 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 also introduced a new web platform in August of 2023 that leverages world class features including enhanced customer research capabilities and streamlined navigation. Since the debut of the new site, we have seen increased engagement with the brand through a greater number of page views per customer along with more time spent on the site. We have also seen an increase in average order value that has resulted in increased e-commerce revenue. We plan to implement several enhancements to the site in 2024 that we believe will improve the overall customer experience and brand presentation. While we have made it easier to purchase on-line, we will not compromise our in-store experience or the quality of our in-home makeover capabilities. During the fourth quarter of fiscal 2022 we acquired Noa Home, a mid-priced e-commerce furniture retailer headquartered in Montreal, Canada. Noa Home has operations in Canada, Singapore, the United States and the United Kingdom. After nearly two years of operating losses, we concluded during the second quarter of 2024 that Noa Home was not likely to achieve profitability at any time in the foreseeable future and have decided to cease operations by selling the inventory in an orderly fashion over the next several months. In the second quarter of 2024 we have recognized non-cash charges totaling $2,401 related to the impairment of certain long-lived assets of Noa Home and the establishment of a reserve against Noa Home’s remaining inventory. 21 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (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. 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. In 2022, we purchased a facility which we had formerly leased in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture. 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 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. Retail Stores During the first quarter of 2024 we opened two new Corporate-owned stores located in Tampa, Florida and Houston, Texas. As of June 1, 2024, we had 58 Corporate-owned stores operating. One licensee-owned store in La Jolla, California was closed during the first quarter of 2024. As of June 1, 2024 there were 30 licensee-owned stores in operation. Results of Operations – Periods ended June 1, 2024 compared with the periods ended May 27, 2023: Consolidated results of operations for the three and six months ended June 1, 2024 and May 27, 2023 are as follows: Quarter Ended Change Six Months Ended Change June 1, 2024 May 27, 2023 Dollars Percent June 1, 2024* May 27, 2023 Dollars Percent Net sales of furniture and accessories $ 83,410 100.0 % $ 100,519 100.0 % $ (17,109 ) -17.0 % $ 169,964 100.0 % $ 208,217 100.0 % $ (38,253 ) -18.4 % Cost of furniture and accessories sold 39,650 47.5 % 47,686 47.4 % (8,036 ) -16.9 % 78,337 46.1 % 98,187 47.2 % (19,850 ) -20.2 % Gross profit 43,760 52.5 % 52,833 52.6 % (9,073 ) -17.2 % 91,627 53.9 % 110,030 52.8 % (18,403 ) -16.7 % SG&A expenses 46,707 56.0 % 51,366 51.1 % (4,659 ) -9.1 % 96,931 57.0 % 105,861 50.8 % (8,930 ) -8.4 % Asset impairment charges 5,515 6.6 % - 0.0 % 5,515 100.0 % 5,515 3.2 % - 0.0 % 5,515 100.0 % Gain on revaluation of contingent consideration - 0.0 % 1,013 1.0 % (1,013 ) -100.0 % - 0.0 % 1,013 0.5 % (1,013 ) -100.0 % Income (loss) from operations $ (8,462 ) -10.1 % $ 2,480 2.5 % $ (10,942 ) N/M $ (10,819 ) -6.4 % $ 5,182 2.6 % $ (16,001 ) N/M *27 weeks for fiscal 2024 as compared with 26 weeks for fiscal 2023. Analysis of Quarterly Results: Total sales revenue for the three months ended June 1, 2024 decreased $17,109 or 17% from the prior year period due primarily to a 15% decline in wholesale sales and a 17% decrease in retail sales through the Company-owned stores. Gross margins for the three months ended June 1, 2024 decreased 10 basis points from the prior year period primarily due to increased inventory valuation charges of $1,729 in the wholesale segment, $472 in the retail segment and $500 in the Noa Home operation. Excluding these charges, our consolidated gross margin would have been 55.7%. Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended June 1, 2024 increased 490 basis points from 2023 primarily due to the deleverage of fixed costs caused by lower sales volumes. 22 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Analysis of Year-to-Date Results: Total sales revenue for the six months ended June 1, 2024 decreased $38,253 or 18% from the prior year period primarily due to a 19% decline in wholesale sales and a 17% decrease in retail sales through the Company-owned stores. Gross margins for the six months ended June 1, 2024 increased 110 basis points over the prior year period. Included in the current year gross margin are increased inventory valuation charges of $1,729 in the wholesale segment, $472 in the retail segment and $500 in the Noa Home operation. Excluding these charges, our consolidated gross margin would have been 55.5%. Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the six months ended June 1, 2024 increased 620 basis points from 2023 primarily due to the deleverage of fixed costs caused by lower sales volumes. Reconciliation of Gross Profit as Reported to Adjusted Gross Profit: Quarter Ended Six Months Ended June 1, 2024 May 27, 2023 June 1, 2024 May 27, 2023 Percent of Percent of Percent of Percent of Amount Net Sales Amount Net Sales Amount Net Sales Amount Net Sales Gross profit as reported $ 43,760 52.5 % $ 52,833 52.6 % $ 91,627 53.9 % $ 110,030 52.8 % Additional inventory valuation charges 2,701 3.2 % 1,003 1.0 % 2,701 1.6 % 1,003 0.5 % Adjusted gross profit $ 46,461 55.7 % $ 53,836 53.6 % $ 94,328 55.5 % $ 111,033 53.3 % Segment Information We have strategically aligned our business into two 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. In addition to the two reportable segments described above, we include our remaining business activities and assets in a reconciling category known as Corporate and other. This category 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. In addition to property and equipment and various other assets associated with the shared corporate functions, the identifiable assets of Corporate and other include substantially all of our cash and our investments in CDs. We consider our corporate functions to be other business activities and have aggregated them with any of our operating segments that do not meet the requirements to be reportable segments. As of and for the periods ended June 1, 2024 and May 27, 2023, the only such operating segment included in Corporate and other is Noa Home, which was acquired on September 2, 2022. All sales reported in our Corporate and other category are attributable to Noa Home, which generates substantially all of its sales outside of the United States. During the second quarter we concluded that Noa Home was not likely to achieve profitability in the foreseeable future and have decided to cease operations by selling the inventory in an orderly fashion over the next several months. 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. 23 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Reconciliation of Segment Results to Consolidated Income (Loss) Before Income Taxes 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 as well as non-operating income and expenses are included in consolidated income (loss) before income taxes 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 June 1, 2024 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 52,609 $ 50,468 $ 1,084 $ (20,751 ) (1) $ - $ - $ 83,410 Cost of furniture and accessories sold 35,906 23,779 946 (20,981 ) (2) - - 39,650 Gross profit 16,703 26,689 138 230 - - 43,760 SG&A expense 11,016 28,911 7,080 (300 ) (3) - - 46,707 Asset impairment charges - - - - 5,515 (4) - 5,515 Income (loss) from operations 5,687 (2,222 ) (6,942 ) 530 (5,515 ) - (8,462 ) Interest income - - - - - 627 627 Other loss, net - - - - - (276 ) (276 ) Income (loss) before income taxes $ 5,687 $ (2,222 ) $ (6,942 ) $ 530 $ (5,515 ) $ 351 $ (8,111 ) Quarter Ended May 27, 2023 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating 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 (5) - 1,013 Income (loss) from operations 7,005 755 (6,949 ) 656 1,013 - 2,480 Interest income - - - - - 569 569 Other loss, net - - - - - (505 ) (505 ) Income (loss) before income taxes $ 7,005 $ 755 $ (6,949 ) $ 656 $ 1,013 $ 64 $ 2,544 24 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Six Months Ended June 1, 2024 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 107,310 $ 104,222 $ 2,946 $ (44,514 ) (1) $ - $ - $ 169,964 Cost of furniture and accessories sold 72,616 48,519 1,755 (44,553 ) (2) - - 78,337 Gross profit 34,694 55,703 1,191 39 - - 91,627 SG&A expense 22,248 59,537 15,728 (582 ) (3) - - 96,931 Asset impairment charges - - - - 5,515 (4) - 5,515 Income from operations 12,446 (3,834 ) (14,537 ) 621 (5,515 ) - (10,819 ) Interest income - - - - - 1,383 1,383 Other loss, net - - - - - (380 ) (380 ) Income (loss) before income taxes $ 12,446 $ (3,834 ) $ (14,537 ) $ 621 $ (5,515 ) $ 1,003 $ (9,816 ) Six Months Ended May 27, 2023 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 131,658 $ 125,740 $ - $ (49,181 ) (1) $ - $ 208,217 Cost of furniture and accessories sold 91,157 59,232 - (52,202 ) (2) - 98,187 Gross profit 40,501 66,508 - 3,021 - 110,030 SG&A expense 24,502 64,223 17,637 (501 ) (3) - 105,861 Gain revaluation of contingent consideration - - - - 1,013 (5) 1,013 Income from operations 15,999 2,285 (17,637 ) 3,522 1,013 - 5,182 Interest income - - - - - 721 721 Other loss, net - - - - - (1,072 ) (1,072 ) Income (loss) before income taxes $ 15,999 $ 2,285 $ (17,637 ) $ 3,522 $ 1,013 $ (351 ) $ 4,831 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 asset impairment charges of $2,887 and $727 in our retail and wholesale segments, respectively, a $1,827 charge for the impairment of the Noa Home trade name intangible asset, and a $74 charge for the impairment of Noa Home customized software. (5) Represents the gain resulting from the write-down of the contingent consideration payable on the acquisition of Noa Home. 25 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Wholesale Segment Results for the wholesale segment for the three and six months ended June 1, 2024 and May 27, 2023 are as follows: Quarter Ended Change Six Months Ended Change June 1, 2024 May 27, 2023 Dollars Percent June 1, 2024* May 27, 2023 Dollars Percent Net sales $ 52,609 100.0 % $ 61,774 100.0 % $ (9,165 ) -14.8 % $ 107,310 100.0 % $ 131,658 100.0 % $ (24,348 ) -18.5 % Gross profit (1) 16,703 31.7 % 18,896 30.6 % (2,193 ) -11.6 % 34,694 32.3 % 40,501 30.8 % (5,807 ) -14.3 % SG&A expenses 11,016 20.9 % 11,891 19.2 % (875 ) -7.4 % 22,248 20.7 % 24,502 18.6 % (2,254 ) -9.2 % Income from operations $ 5,687 10.8 % $ 7,005 11.3 % $ (1,318 ) -18.8 % $ 12,446 11.6 % $ 15,999 12.2 % $ (3,553 ) -22.2 % (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. *27 weeks for fiscal 2024 as compared with 26 weeks for fiscal 2023. Wholesale sales by major product category are as follows: Quarter Ended June 1, 2024 May 27, 2023* Total Change External Intercompany Total External Intercompany Total Dollars Percent Bassett Custom Upholstery $ 21,921 $ 13,009 $ 34,930 66.4 % $ 24,156 $ 15,912 $ 40,068 64.9 % $ (5,138 ) -12.8 % Bassett Leather 3,563 392 3,955 7.5 % 6,078 255 6,333 10.3 % (2,378 ) -37.5 % Bassett Custom Wood 3,427 4,108 7,535 14.3 % 4,201 4,527 8,728 14.1 % (1,193 ) -13.7 % Bassett Casegoods 2,947 3,242 6,189 11.8 % 3,009 3,636 6,645 10.8 % (456 ) -6.9 % Total $ 31,858 $ 20,751 $ 52,609 100.0 % $ 37,444 $ 24,330 $ 61,774 100.0 % $ (9,165 ) -14.8 % Six Months Ended June 1, 2024 May 27, 2023* Total Change External Intercompany Total External Intercompany Total Dollars Percent Bassett Custom Upholstery $ 42,222 $ 27,777 $ 69,999 65.2 % $ 48,659 $ 35,256 $ 83,915 63.7 % $ (13,916 ) -16.6 % Bassett Leather 7,522 927 8,449 7.9 % 12,883 273 13,156 10.0 % (4,707 ) -35.8 % Bassett Custom Wood 7,185 9,001 16,186 15.1 % 9,079 10,467 19,546 14.8 % (3,360 ) -17.2 % Bassett Casegoods 5,867 6,809 12,676 11.8 % 6,608 8,433 15,041 11.4 % (2,365 ) -15.7 % Total $ 62,796 $ 44,514 $ 107,310 100.0 % $ 77,229 $ 54,429 $ 131,658 100.0 % $ (24,348 ) -18.5 % *27 weeks for fiscal 2024 as compared with 26 weeks for fiscal 2023. Analysis of Quarterly Results – Wholesale Net sales for the three months ended June 1, 2024 decreased $9,165 or 15% from the prior year period due primarily to a 19% decrease in shipments to the open market, a 16% decrease in shipments to our retail store network partially offset by a 2% increase in Lane Venture shipments. Gross margins for the three months ended June 1, 2024 increased 110 basis points over the prior year primarily due to the expected improvement in the Bassett Leather business. 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. This improvement was partially offset by decreased margins in our Bassett Custom Wood business due to increased inventory valuation charges as a result of a plant consolidation and the reduction in the number of active suites in the product line and deleverage of fixed manufacturing costs due to lower sales volumes. We also recorded increased inventory valuation charges in our Bassett Casegoods business as we plan to be more aggressive in selling certain slow-moving products. Total additional inventory valuation charges for the wholesale segment were $1,729. SG&A expenses as a percentage of sales increased 170 basis points primarily due to reduced leverage of fixed costs from decreased sales. 26 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Analysis of Year-to-Date Results – Wholesale Net sales for the three months ended June 1, 2024 decreased $24,348 or 19% from the prior year period due primarily to a 19% decrease in shipments to the open market, a 19% decrease in shipments to our retail store network and an 11% decrease in Lane Venture shipments. Gross margins for the three months ended June 1, 2024 increased 150 basis points over the prior year primarily due to the expected improvement in the Bassett Leather business. 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. This increase was partially offset by significantly higher costs than are currently being realized on current product receipts. Margins in our Bassett Casegoods business also improved as expected primarily due to shipping more product that contained lower in-bound freight costs partially offset by increased inventory valuation charges as we plan to be more aggressive in selling certain slow-moving products. These improvements were partially offset by decreased margins in our Bassett Custom Wood business due to increased inventory valuation charges as a result of a plant consolidation and the reduction in the number of active suites in the product line and deleverage of fixed manufacturing costs due to lower sales volumes. Total additional inventory valuation charges for the wholesale segment were $1,729. SG&A expenses as a percentage of sales increased 210 basis points primarily due to reduced leverage of fixed costs from decreased sales. Wholesale Backlog Wholesale backlog at June 1, 2024 was $19,373 as compared to $18,478 at November 25, 2023 and $19,693 at May 27, 2023. Retail – Company-owned Stores Segment Results for the retail segment for the periods ended June 1, 2024 and May 27, 2023 are as follows: Quarter Ended Change Six Months Ended Change June 1, 2024 May 27, 2023 Dollars Percent June 1, 2024* May 27, 2023 Dollars Percent Net sales $ 50,468 100.0 % $ 60,778 100.0 % $ (10,310 ) -17.0 % $ 104,222 100.0 % $ 125,740 100.0 % $ (21,518 ) -17.1 % Gross profit (1) 26,689 52.9 % 32,131 52.9 % (5,442 ) -16.9 % 55,703 53.4 % 66,508 52.9 % (10,805 ) -16.2 % SG&A expenses 28,911 57.3 % 31,376 51.6 % (2,465 ) -7.9 % 59,537 57.1 % 64,223 51.1 % (4,686 ) -7.3 % Income (loss) from operations $ (2,222 ) -4.4 % $ 755 1.2 % $ (2,977 ) -394.3 % $ (3,834 ) -3.7 % $ 2,285 1.8 % $ (6,119 ) -267.8 % (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. *27 weeks for fiscal 2024 as compared with 26 weeks for fiscal 2023. 27 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Retail sales by major product category are as follows: Quarter Ended Change Six Months Ended Change June 1, 2024 May 27, 2023 Dollars Percent June 1, 2024* May 27, 2023 Dollars Percent Bassett Custom Upholstery $ 27,256 54.0 % $ 34,711 57.1 % $ (7,455 ) -21.5 % $ 57,059 54.7 % $ 70,870 56.4 % $ (13,811 ) -19.5 % Bassett Leather 1,117 2.2 % 577 0.9 % 540 93.6 % 1,944 1.9 % 1,071 0.9 % 873 81.5 % Bassett Custom Wood 8,522 16.9 % 9,798 16.1 % (1,276 ) -13.0 % 16,720 16.0 % 19,467 15.5 % (2,747 ) -14.1 % Bassett Casegoods 6,390 12.7 % 7,771 12.8 % (1,381 ) -17.8 % 13,775 13.2 % 17,821 14.2 % (4,046 ) -22.7 % Accessories, mattresses and other (1) 7,183 14.2 % 7,921 13.0 % (738 ) -9.3 % 14,724 14.1 % 16,511 13.1 % (1,787 ) -10.8 % Total $ 50,468 100.0 % $ 60,778 100.0 % $ (10,310 ) -17.0 % $ 104,222 100.0 % $ 125,740 100.0 % $ (21,518 ) -17.1 % (1) Includes the sale of goods other than Bassett-branded products, such as accessories and bedding, and also includes the sale of furniture protection plans. *27 weeks for fiscal 2024 as compared with 26 weeks for fiscal 2023. Analysis of Quarterly Results - Retail Net sales for the three months ended June 1, 2024 decreased $10,310 or 17% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 2.5% from the second quarter of 2023. Gross margin for the three months ended June 1, 2024 were flat with the prior period as higher margins on in-line goods were offset by lower margins on clearance goods and $472 of additional inventory valuation charges due to our strategy to be more aggressive in selling clearance goods to better control inventory levels. SG&A expenses as a percentage of sales for the three months ended June 1, 2024 increased 570 basis points primarily due to decreased leverage of fixed costs from lower sales volumes. Analysis of Year-to-Date Results - Retail Net sales for the six months ended June 1, 2024 decreased $21,518 or 17% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 3.0% from the first half of 2023. Gross margin for the six months ended June 1, 2024 improved 50 basis points over the prior period primarily due to higher margins on in-line goods partially offset by lower margins on clearance goods and $472 of additional inventory valuation charges due to our strategy to be more aggressive in selling clearance goods to better control inventory levels. SG&A expenses as a percentage of sales for the six months ended June 1, 2024 increased 600 basis points primarily due to decreased leverage of fixed costs from lower sales volumes. Retail Backlog Retail backlog at June 1, 2024 was $31,545 compared to $30,902 at November 25, 2023 and $32,894 at May 27, 2023. 28 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Corporate and Other In addition to the two reportable segments discussed above, we include our remaining business activities and assets in a reconciling category known as Corporate and other, which includes the shared costs of various corporate functions along with any operating segments that do not meet the requirements to be reportable segments. Therefore, Noa Home is included within the Corporate and other reconciling category and accounts for all of the sales and gross profit within this reconciling category. Revenues, costs and expenses of Corporate and other for the periods ended June 1, 2024 and May 27, 2023 are as follows: Quarter Ended Change Six Months Ended Change June 1, 2024 May 27, 2023 Dollars Percent June 1, 2024* May 27, 2023 Dollars Percent Net sales $ 1,084 $ 2,297 $ (1,213 ) -52.8 % $ 2,946 $ 5,248 $ (2,302 ) -43.9 % Gross profit 138 1,398 (1,260 ) -90.1 % 1,191 2,917 (1,726 ) -59.2 % SG&A expenses 7,080 8,347 (1,267 ) -15.2 % 15,728 17,637 (1,909 ) -10.8 % Net expenses $ (6,942 ) $ (6,949 ) $ 7 -0.1 % $ (14,537 ) $ (14,720 ) $ 183 -1.2 % *27 weeks for fiscal 2024 as compared with 16 weeks for fiscal 2023. Analysis of Quarterly Results – Corporate and Other The decreases in sales and gross profit from the prior year period were primarily due to a shift during the second quarter of 2023 where Noa Home reduced advertising spending to improve advertising efficiency which resulted in lower overall sales but with greater leverage on advertising spending coupled with Noa Home’s exit of the Australia market during the first quarter of 2024. Included in the gross profit is an inventory valuation charge of $500 due to our decision to cease operations by selling the remaining inventory in an orderly fashion over the next several months. The $1,267 decrease in SG&A expenses was primarily due to decreased corporate overhead spending from better expense management coupled with lower advertising and warehouse expenses for Noa Home. Analysis of Year-to-Date Results – Corporate and Other The decreases in sales and gross profit from the prior year period were primarily due to a shift in the second quarter of 2023 where Noa Home reduced advertising spending to improve advertising efficiency which resulted in lower overall sales but with greater leverage on advertising spending coupled with Noa Home’s exit of the Australia market during the first quarter of 2024. Included in the gross profit is an inventory valuation charge of $500 due to our decision to cease operations by selling the remaining inventory in an orderly fashion over the next several months. The $1,909 decrease in SG&A expenses was primarily due to decreased advertising and warehouse spending by Noa Home coupled with lower corporate overhead spending from better expense management. Other Gains and Losses Fiscal 2024 During the three and six months ended June 1, 2024, we recognized non-cash charges for asset impairments totaling $5,515 which consisted of the following: ● $2,887 in our retail segment which included $1,978 related to the impairment of leasehold improvements and $750 from the impairment of right-of-use assets at certain underperforming retail stores, as well as $159 for the impairment of right-of-use assets at certain warehouse locations resulting from the consolidation of our retail warehouses. ● $727 for the impairment of plant and equipment in our wholesale segment related to the consolidation of our domestic wood production facilities. ● $1,901 for the impairment of long-lived assets at Noa Home. During the second quarter we concluded that Noa Home was not likely to achieve profitability in the foreseeable future and have decided to cease operations by selling the remaining inventory in an orderly fashion over the next several months. $1,827 of these charges are for the full impairment of the Noa Home trade name intangible asset, and $74 relates to the full impairment of customized software used in the Noa Home operations. 29 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Fiscal 2023 During the three and six months ended May 27, 2023, we recognized a non-cash gain of $1,013 resulting from the write-down of our contingent consideration obligation to the former owners of Noa Home. Subsequent to the acquisition of Noa Home on September 2, 2022, the parties concluded that the revenue and EBITDA targets originally set forth in the purchase agreement by which the Noa Home co-founders were to earn the contingent consideration were likely not to be met within the originally anticipated time frame and therefore agreed to replace the contingent consideration payable that was recognized at the acquisition date with two fixed payments of C$200 each. The first payment was made in June of 2023 and the second payment will be made in December of 2024. Other Items Affecting Net Income (Loss) Interest Income Interest income for the three and six months ended June 1, 2024 was $627 and $1,383, respectively, compared to $569 and $721 for the three and six months, respectively, ended May 27, 2023. The net change from the prior year period was primarily due to higher interest income on our cash equivalents and investments in certificates of deposit. Other Loss, Net Other loss, net, for the three and six months ended June 1, 2024 was $276 and $380, respectively, compared to $505 and $1,072 for the three and six months, respectively, ended May 27, 2023. The net change from the prior year periods was primarily due to lower costs associated with Company-owned life insurance. Income Taxes We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rate was 11.2% and 14.5% for the three and six months ended June 1, 2024, respectively. The effective rates for the three and six months ended June 1, 2024 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 Inc. (“Noa Home”), the effects of state income taxes and various permanent differences. Our effective tax rate was 18.4% and 27.1% for the three and six months ended May 27, 2023, respectively. 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 9), 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. Liquidity and Capital Resources Cash Flows Cash used in operations for the first half of fiscal 2024 was $1,919 compared to cash provided by operations of $6,413 for the first half of fiscal 2023, representing a decrease of $8,332 in cash flows from operations. This decrease was primarily the result of changes in working capital due to the timing impact of expenditures as a result of an additional week in the first quarter of 2024 coupled with lower net income. For the quarter ended June 1, 2024, cash provided by operating activities was $5,820 which was comparable to the quarter ended May 27, 2023. Our overall cash position declined $9,761 during the first half of 2024. However, we generated net cash of $2,037 for the quarter ended June 1, 2024. During the first half of fiscal 2024, we spent $3,683 on purchases of property and equipment primarily consisting of the upfit of the new Tampa, Florida and Houston, Texas stores that opened in the first quarter of 2024, final payments on the Austin, Texas store remodel and expenditures related to various information technology and manufacturing plant projects. We also paid $3,153 in dividends during the first half of 2024. During the second quarter of 2024 we resumed purchasing shares under our stock repurchase program and repurchased $489 during the first six months of 2024 compared to $3,450 repurchased in the prior year period. We expect capital expenditures for the full year to range from $8 million to $10 million. As of June 1, 2024, $21,333 remains available for future purchases under our stock repurchase plan. With cash and cash equivalents and short-term investments totaling $60,460 on hand at June 1, 2024, 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. 30 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data) Debt and Other Obligations On May 15, 2024, we entered into the Credit Facility with our bank. This credit facility provides for a line of credit of up to $25,000. At June 1, 2024, we had $6,013 outstanding under standby letters of credit against our line. The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.75% and is secured by our accounts receivable and inventory. Our bank charges a fee of 0.25% on the daily unused balance of the line, payable quarterly. Under the terms of the Credit Facility, Consolidated Minimum Tangible Net Worth shall at no time be less than $120,000. In addition, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis and commencing as of the end of the first fiscal quarter after the first date that the used commitment (the sum of any outstanding advances plus standby letters of credit) equals or exceeds $8,250: ● Consolidated Fixed Charge Coverage Ratio of not less than 1.2 times and ● Consolidated Lease Adjusted Leverage to EBITDAR Ratio not to exceed 3.35 times. Since our used commitment was less than $8,250 at June 1, 2024, we were not required to test the Consolidated Fixed Charge Coverage Ratio or the Consolidated Lease Adjusted Leverage to EBITDAR Ratio. Had we been required to test those ratios, we would not have been able to achieve the required levels for either ratio. Consequently, our availability under the Credit Facility is currently limited to an additional $2,237. We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of one 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 June 1, 2024 is $109,167 and is included in our accompanying condensed consolidated balance sheet at June 1, 2024. We were contingently liable under licensee lease obligation guarantees in the amount of $5,322 at June 1, 2024. The remaining terms under these lease guarantees extend for six 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. 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 $24,442 at June 1, 2024. 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 25, 2023. 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 9 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 June 1, 2024. 31 of 35 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES JUNE 1, 2024 (Dollars in thousands except share and per share data)