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 fourth quarter 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. 21 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 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 40 weeks of operations for the nine months ended August 31, 2024 as compared to 39 weeks included in the quarter ended August 26, 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 87 BHF stores at August 31, 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. We 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. 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 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. 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. 22 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Retail Stores During the first quarter of 2024 we opened two new Corporate-owned stores located in Tampa, Florida and Houston, Texas. As of August 31, 2024, we had 58 Corporate-owned stores operating. One licensee-owned store in La Jolla, California was closed during the first quarter of 2024 and two licensee-owned stores in Seattle, Washington were closed during the third quarter of 2024. As of August 31, 2024 there were 29 licensee-owned stores in operation. Cybersecurity Incident On July 10, 2024, we detected unauthorized occurrences on a portion of our information technology (IT) systems. Upon detecting the unauthorized occurrences, we immediately began taking steps to contain, assess and remediate the cybersecurity incident, including beginning an investigation with leading external cybersecurity specialists, activating our incident response plan, and shutting down some systems. As a result of these and other measures, we believe the threat actor was ejected from our IT systems on July 10, 2024. After we shut down some of our systems, we experienced disruption to certain of our operations, including interrupted manufacturing at our domestic plants and delayed order fulfillment for our retail network and delay of some wholesale shipments. Within a few days of the incident, we were able to resume retail order fulfillment and caught up on fulfilling wholesale orders that were delayed as a result of the cybersecurity incident. We have fully restored the IT systems and data and our investigation has not found evidence that any of our core operating systems for manufacturing, wholesale and retail order processing and fulfillment, or financial reporting were impacted. While we believe the impacts were not material to our financial condition and results of operations for the fiscal year, we estimate that between $1,000 and $2,000 of sales were lost due to the shutdown during the cybersecurity incident. During the third quarter of 2024, we also incurred legal and remediation costs related to the incident of approximately $98 which are included in selling, general and administrative expenses. In addition, cost of goods sold for the three and nine months ended August 31, 2024 includes $609 for wages paid to hourly production employees during the work stoppage resulting from the cybersecurity incident. Because no inventory was produced during the temporary shutdown of our manufacturing operations, these wages were charged directly to expense. We will be seeking reimbursement of costs, expenses and losses stemming from the cybersecurity incident by submitting claims to our cybersecurity insurers. While the timing and amount of any such reimbursements is not known at this time, we are currently in the process of documenting our claim and expect to resolve the final amount during the fourth fiscal quarter of 2024. 23 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Results of Operations – Periods ended August 31, 2024 compared with the periods ended August 26, 2023: Consolidated results of operations for the three and nine months ended August 31, 2024 and August 26, 2023 are as follows: Quarter Ended Change Nine Months Ended Change August 31, 2024 August 26, 2023 Dollars Percent August 31, 2024* August 26, 2023 Dollars Percent Net sales of furniture and accessories $ 75,619 100.0 % $ 87,217 100.0 % $ (11,598 ) -13.3 % $ 245,583 100.0 % $ 295,434 100.0 % $ (49,851 ) -16.9 % Cost of furniture and accessories sold 35,526 47.0 % 42,173 48.4 % (6,647 ) -15.8 % 113,863 46.4 % 140,360 47.5 % (26,497 ) -18.9 % Gross profit 40,093 53.0 % 45,044 51.6 % (4,951 ) -11.0 % 131,720 53.6 % 155,074 52.5 % (23,354 ) -15.1 % SG&A expenses 45,210 59.8 % 48,848 56.0 % (3,638 ) -7.4 % 142,141 57.9 % 154,709 52.4 % (12,568 ) -8.1 % Loss on contract abandonment 1,240 1.6 % - 0.0 % 1,240 100.0 % 1,240 0.5 % - 0.0 % 1,240 100.0 % Asset impairment charges - 0.0 % - 0.0 % - 100.0 % 5,515 2.2 % - 0.0 % 5,515 100.0 % Gain on revaluation of contingent consideration - 0.0 % - 0.0 % - -100.0 % - 0.0 % 1,013 0.3 % (1,013 ) -100.0 % Income (loss) from operations $ (6,357 ) -8.4 % $ (3,804 ) -4.4 % $ (2,553 ) -67.1 % $ (17,176 ) -7.0 % $ 1,378 0.5 % $ (18,554 ) N/M *40 weeks for fiscal 2024 as compared with 39 weeks for fiscal 2023. Analysis of Quarterly Results: Total sales revenue for the three months ended August 31, 2024 decreased $11,598 or 13% from the prior year period due primarily to a 16% decline in wholesale sales and a 10% decrease in retail sales through the Company-owned stores. In addition, we estimate that between $1,000 and $2,000 of sales were lost due to the shutdown during the cybersecurity incident. Gross margins for the three months ended August 31, 2024 increased 140 basis points over the prior year period primarily due to improved margins in both the retail and wholesale segments, partially offset by $609 of unproductive labor costs incurred during the temporary shutdown resulting from the cybersecurity incident. Excluding these unproductive labor costs, our consolidated gross margin would have been 53.8%. Selling, general and administrative (“SG&A”) expenses as a percentage of sales for the three months ended August 31, 2024 increased 380 basis points from 2023 primarily due to the deleverage of fixed costs caused by lower sales volumes. Analysis of Year-to-Date Results: Total sales revenue for the nine months ended August 31, 2024 decreased $49,851 or 17% from the prior year period primarily due to a 18% decline in wholesale sales and a 15% decrease in retail sales through the Company-owned stores. Gross margins for the nine months ended August 31, 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, and unproductive labor costs of $609 incurred during the temporary shutdown resulting from the cybersecurity incident. Excluding these charges, our consolidated gross margin would have been 55.0%. SG&A expenses as a percentage of sales for the nine months ended August 31, 2024 increased 550 basis points from 2023 primarily due to the deleverage of fixed costs caused by lower sales volumes. 24 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Reconciliation of Gross Profit as Reported to Adjusted Gross Profit: Quarter Ended Nine Months Ended August 31, 2024 August 26, 2023 August 31, 2024 August 26, 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 $ 40,093 53.0 % $ 45,044 51.6 % $ 131,720 53.6 % $ 155,074 52.5 % Wages paid during cyber incident shutdown 609 0.8 % - 0.0 % 609 0.2 % - 0.0 % Additional inventory valuation charges - 0.0 % 893 1.0 % 2,701 1.1 % 1,896 0.6 % Adjusted gross profit $ 40,702 53.8 % $ 45,937 52.7 % $ 135,030 55.0 % $ 156,970 53.1 % 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 August 31, 2024 and August 26, 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 of 2024 we concluded that Noa Home was not likely to achieve profitability in the foreseeable future and 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. 25 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 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 August 31, 2024 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 47,828 $ 47,256 $ 988 $ (20,453 ) (1) $ - $ - $ 75,619 Cost of furniture and accessories sold 33,147 22,285 504 (20,410 ) (2) - - 35,526 Gross profit 14,681 24,971 484 (43 ) - - 40,093 SG&A expense 10,241 27,811 7,447 (289 ) (3) - - 45,210 Loss on contract abandonment - - - - 1,240 (4) - 1,240 Income (loss) from operations 4,440 (2,840 ) (6,963 ) 246 (1,240 ) - (6,357 ) Interest income - - - - - 692 692 Other loss, net - - - - - (109 ) (109 ) Income (loss) before income taxes $ 4,440 $ (2,840 ) $ (6,963 ) $ 246 $ (1,240 ) $ 583 $ (5,774 ) Quarter Ended August 26, 2023 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 56,660 $ 52,264 $ 1,796 $ (23,503 ) (1) $ - $ - $ 87,217 Cost of furniture and accessories sold 39,536 25,318 881 (23,562 ) (2) - - 42,173 Gross profit 17,124 26,946 915 59 - - 45,044 SG&A expense 10,784 29,982 8,335 (253 ) (3) - - 48,848 Income (loss) from operations 6,340 (3,036 ) (7,420 ) 312 - - (3,804 ) Interest income - - - - - 923 923 Other loss, net - - - - - (309 ) (309 ) Income (loss) before income taxes $ 6,340 $ (3,036 ) $ (7,420 ) $ 312 $ - $ 614 $ (3,190 ) 26 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Nine Months Ended August 31, 2024 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 155,138 $ 151,478 $ 3,934 $ (64,967 ) (1) $ - $ - $ 245,583 Cost of furniture and accessories sold 105,763 70,805 2,239 (64,944 ) (2) - - 113,863 Gross profit 49,375 80,673 1,695 (23 ) - - 131,720 SG&A expense 32,489 87,347 23,195 (890 ) (3) - - 142,141 Loss on contract abandonment - - - - 1,240 (4) - 1,240 Asset impairment charges - - - - 5,515 (5) - 5,515 Income from operations 16,886 (6,674 ) (21,500 ) 867 (6,755 ) - (17,176 ) Interest income - - - - - 2,075 2,075 Other loss, net - - - - - (489 ) (489 ) Income (loss) before income taxes $ 16,886 $ (6,674 ) $ (21,500 ) $ 867 $ (6,755 ) $ 1,586 $ (15,590 ) Nine Months Ended August 26, 2023 Non-GAAP Presentation GAAP Presentation Wholesale Retail Corporate & Other Eliminations Special Items Non-Operating Consolidated Net sales of furniture and accessories $ 188,318 $ 178,004 $ 7,044 $ (70,888 ) (1) $ - $ 295,434 Cost of furniture and accessories sold 130,693 84,550 3,212 (78,095 ) (2) - 140,360 Gross profit 57,625 93,454 3,832 7,207 - 155,074 SG&A expense 35,286 94,205 25,972 (754 ) (3) - 154,709 Gain on revaluation of contingent consideration - - - - 1,013 (6) 1,013 Income from operations 22,339 (751 ) (22,140 ) 7,961 1,013 - 1,378 Interest income - - - - - 1,644 1,644 Other loss, net - - - - - (1,381 ) (1,381 ) Income (loss) before income taxes $ 22,339 $ (751 ) $ (22,140 ) $ 7,961 $ 1,013 $ 263 $ 1,641 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 charge for accruing the remaining minimum payments under a contract for logistical services in Riverside, CA which we no longer utilize. (5) 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. (6) Represents the gain resulting from the write-down of the contingent consideration payable on the acquisition of Noa Home. 27 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Wholesale Segment Results for the wholesale segment for the three and nine months ended August 31, 2024 and August 26, 2023 are as follows: Quarter Ended Change Nine Months Ended Change August 31, 2024 August 26, 2023 Dollars Percent August 31, 2024* August 26, 2023 Dollars Percent Net sales $ 47,828 100.0 % $ 56,660 100.0 % $ (8,832 ) -15.6 % $ 155,138 100.0 % $ 188,318 100.0 % $ (33,180 ) -17.6 % Gross profit (1) 14,681 30.7 % 17,124 30.2 % (2,443 ) -14.3 % 49,375 31.8 % 57,625 30.6 % (8,250 ) -14.3 % SG&A expenses 10,241 21.4 % 10,784 19.0 % (543 ) -5.0 % 32,489 20.9 % 35,286 18.7 % (2,797 ) -7.9 % Income from operations $ 4,440 9.3 % $ 6,340 11.2 % $ (1,900 ) -30.0 % $ 16,886 10.9 % $ 22,339 11.9 % $ (5,453 ) -24.4 % (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. *40 weeks for fiscal 2024 as compared with 39 weeks for fiscal 2023. Wholesale sales by major product category are as follows: Quarter Ended August 31, 2024 August 26, 2023* Total Change External Intercompany Total External Intercompany Total Dollars Percent Bassett Custom Upholstery $ 17,854 $ 13,069 $ 30,923 64.7 % $ 19,985 $ 15,170 $ 35,155 62.0 % $ (4,232 ) -12.0 % Bassett Leather 3,730 535 4,265 8.9 % 6,743 278 7,021 12.4 % (2,756 ) -39.3 % Bassett Custom Wood 2,748 3,638 6,386 13.4 % 3,564 4,564 8,128 14.3 % (1,742 ) -21.4 % Bassett Casegoods 3,043 3,211 6,254 13.1 % 2,865 3,491 6,356 11.2 % (102 ) -1.6 % Total $ 27,375 $ 20,453 $ 47,828 100.0 % $ 33,157 $ 23,503 $ 56,660 100.0 % $ (8,832 ) -15.6 % Nine Months Ended August 31, 2024 August 26, 2023* Total Change External Intercompany Total External Intercompany Total Dollars Percent Bassett Custom Upholstery $ 60,046 $ 40,845 $ 100,891 65.0 % $ 68,641 $ 50,427 $ 199,068 63.2 % $ (18,177 ) -15.3 % Bassett Leather 11,254 1,462 12,716 8.2 % 19,630 550 20,180 10.7 % (7,464 ) -37.0 % Bassett Custom Wood 9,933 12,639 22,572 14.5 % 12,642 15,031 27,673 14.7 % (5,101 ) -18.4 % Bassett Casegoods 8,938 10,021 18,959 12.2 % 9,473 11,924 21,397 11.4 % (2,438 ) -11.4 % Total $ 90,171 $ 64,967 $ 155,138 100.0 % $ 110,386 $ 77,932 $ 188,318 100.0 % $ (33,180 ) -17.6 % *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 August 31, 2024 decreased $8,832 or 16% from the prior year period due primarily to a 22% decrease in shipments to the open market, a 13% decrease in shipments to our retail store network and a 6% decrease in Lane Venture shipments. Gross margins for the three months ended August 31, 2024 increased 50 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 lower margins in the Bassett Custom Upholstery business due to deleverage of fixed costs from lower sales volumes and $609 of unproductive labor costs, or 1.3% of sales, incurred during the temporary shutdown resulting from the cybersecurity incident. SG&A expenses as a percentage of sales increased 240 basis points primarily due to reduced leverage of fixed costs from decreased sales. 28 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Analysis of Year-to-Date Results – Wholesale Net sales for the nine months ended August 31, 2024 decreased $33,180 or 18% from the prior year period due primarily to a 20% decrease in shipments to the open market, a 17% decrease in shipments to our retail store network and a 9% decrease in Lane Venture shipments. Gross margins for the nine months ended August 31, 2024 increased 120 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 lower margins in the Bassett Custom Upholstery business due to deleverage of fixed costs from lower sales volumes. SG&A expenses as a percentage of sales increased 220 basis points primarily due to reduced leverage of fixed costs from decreased sales. Wholesale Backlog Wholesale backlog at August 31, 2024 was $18,481 as compared to $18,478 at November 25, 2023 and $19,895 at August 26, 2023. Retail – Company-owned Stores Segment Results for the retail segment for the periods ended August 31, 2024 and August 26, 2023 are as follows: Quarter Ended Change Nine Months Ended Change August 31, 2024 August 26, 2023 Dollars Percent August 31, 2024* August 26, 2023 Dollars Percent Net sales $ 47,256 100.0 % $ 52,264 100.0 % $ (5,008 ) -9.6 % $ 151,478 100.0 % $ 178,004 100.0 % $ (26,526 ) -14.9 % Gross profit (1) 24,971 52.8 % 26,946 51.6 % (1,975 ) -7.3 % 80,673 53.3 % 93,454 52.5 % (12,781 ) -13.7 % SG&A expenses 27,811 58.9 % 29,982 57.4 % (2,171 ) -7.2 % 87,347 57.7 % 94,205 52.9 % (6,858 ) -7.3 % Income (loss) from operations $ (2,840 ) -6.0 % $ (3,036 ) -5.8 % $ 196 -6.5 % $ (6,674 ) -4.4 % $ (751 ) -0.4 % $ (5,923 ) 788.7 % (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. *40 weeks for fiscal 2024 as compared with 39 weeks for fiscal 2023. 29 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Retail sales by major product category are as follows: Quarter Ended Change Nine Months Ended Change August 31, 2024 August 26, 2023 Dollars Percent August 31, 2024* August 26, 2023 Dollars Percent Bassett Custom Upholstery $ 25,631 54.2 % $ 30,177 57.7 % $ (4,546 ) -15.1 % $ 82,690 54.6 % $ 101,047 56.8 % $ (18,357 ) -18.2 % Bassett Leather 1,229 2.6 % 337 0.6 % 892 264.7 % 3,173 2.1 % 1,408 0.8 % 1,765 125.4 % Bassett Custom Wood 7,617 16.1 % 7,697 14.7 % (80 ) -1.0 % 24,336 16.1 % 27,164 15.3 % (2,828 ) -10.4 % Bassett Casegoods 5,909 12.5 % 7,027 13.4 % (1,118 ) -15.9 % 19,684 13.0 % 24,848 14.0 % (5,164 ) -20.8 % Accessories, mattresses and other (1) 6,870 14.5 % 7,026 13.4 % (156 ) -2.2 % 21,595 14.3 % 23,537 13.2 % (1,942 ) -8.3 % Total $ 47,256 100.0 % $ 52,264 100.0 % $ (5,008 ) -9.6 % $ 151,478 100.0 % $ 178,004 100.0 % $ (26,526 ) -14.9 % (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. *40 weeks for fiscal 2024 as compared with 39 weeks for fiscal 2023. Analysis of Quarterly Results - Retail Net sales for the three months ended August 31, 2024 decreased $5,008 or 9.6% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 4.8% from the third quarter of 2023. Gross margin for the three months ended August 31, 2024 improved 120 basis points over the prior period due to higher margins on both in-line and clearance goods. In addition, we were running two store closure sales in 2023 that reduced the gross margin for the third quarter of 2023. SG&A expenses as a percentage of sales for the three months ended August 31, 2024 increased 150 basis points primarily due to decreased leverage of fixed costs from lower sales volumes partially offset by reduced advertising and fixed delivery costs. Analysis of Year-to-Date Results - Retail Net sales for the nine months ended August 31, 2024 decreased $26,526 or 15% from the prior year period. Written sales (the value of sales orders taken but not delivered) declined 3.6% from the first nine months of 2023. Gross margin for the nine months ended August 31, 2024 improved 80 basis points over the prior period primarily due to higher margins on both in-line and clearance goods partially offset by $472 of additional inventory valuation charges in the second quarter of 2024 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 nine months ended August 31, 2024 increased 480 basis points primarily due to decreased leverage of fixed costs from lower sales volumes. Retail Backlog Retail backlog at August 31, 2024 was $33,251 compared to $30,902 at November 25, 2023 and $32,702 at August 26, 2023. 30 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 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 August 31, 2024 and August 26, 2023 are as follows: Quarter Ended Change Nine Months Ended Change August 31, 2024 August 26, 2023 Dollars Percent June 1, 2024* August 26, 2023 Dollars Percent Net sales $ 988 $ 1,796 $ (808 ) -45.0 % $ 3,934 $ 7,044 $ (3,110 ) -44.2 % Gross profit 484 915 (431 ) -47.1 % 1,695 3,832 (2,137 ) -55.8 % SG&A expenses 7,447 8,335 (888 ) -10.7 % 23,195 25,972 (2,777 ) -10.7 % Net expenses $ (6,963 ) $ (7,420 ) $ 457 -6.2 % $ (21,500 ) $ (22,140 ) $ 640 -2.9 % *40 weeks for fiscal 2024 as compared with 39 weeks for fiscal 2023. Analysis of Quarterly Results – Corporate and Other Sales and gross profit declined from the prior year period as we began our wind-down of Noa Home’s operations and continued to sell the remaining inventory over the next several months. The $888 decrease in SG&A expenses was primarily due to reduced advertising and warehouse costs for Noa Home as a result of the on-going wind-down of operations and decreased corporate overhead spending from better expense management, partially offset by costs incurred in connection with the cybersecurity incident. Analysis of Year-to-Date Results – Corporate and Other Sales and gross profit declined from the prior year period as we began our wind-down of Noa Home’s operations and continued to sell the remaining inventory over the next several months. Included in the gross profit is an inventory valuation charge of $500 recognized during the second quarter of 2024 due to our decision to cease operations at Noa Home. The $2,777 decrease in SG&A expenses was primarily due to decreased advertising and warehouse costs for Noa Home as a result of the on-going wind-down of operations and decreased corporate overhead spending from better expense management. Other Gains and Losses Fiscal 2024 During the three and nine months ended August 31, 2024, we recognized a charge of $1,240 to accrue the remaining minimum charges under a logistical services contract with a vendor in Riverside, California. We ceased utilizing those services during the third quarter of 2024 and expect to pay the minimum monthly charge through January of 2026. During the nine months ended August 31. 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 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. 31 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) Fiscal 2023 During the nine months ended August 26, 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 nine months ended August 31, 2024 was $692 and $2,075, respectively, compared to $923 and $1,644 for the three and nine months, respectively, ended August 26, 2023. The third quarter decline from the prior year period is primarily due to lower balances of interest-bearing cash and cash equivalents, while for the nine months ended August 31, 2024 the rates earned on our cash and cash equivalents and investments in CDs averaged higher than the preceding year. Other Loss, Net Other loss, net, for the three and nine months ended August 31, 2024 was $276 and $380, respectively, compared to $505 and $1,072 for the three and nine months, respectively, ended August 26, 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 22.0% and 17.3% for the three and nine months ended August 31, 2024, respectively. The effective rates for the three and nine months ended August 31, 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, the effects of state income taxes and various permanent differences. Our effective tax rate was 18.8% and 43.3% for the three and nine months ended August 26, 2023, respectively. The effective rates for the three and nine months ended August 26, 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, 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 nine months of fiscal 2024 was $2,323 compared to cash provided by operations of $10,249 for the first nine of fiscal 2023, representing a decrease of $12,572 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. Our overall cash position declined $14,078 during the first nine months of 2024. During the first nine months of fiscal 2024, we spent $4,720 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, update of the façade of the Greensboro, North Carolina store location and expenditures related to various information technology and manufacturing plant projects. We also paid $4,909 in dividends during the first nine months of 2024. During the second quarter of 2024 we resumed purchasing shares under our stock repurchase program and repurchased $1,127 during the first nine months of 2024 compared to $4,056 repurchased in the prior year period. We expect capital expenditures for the full year to range from $6 million to $8 million. As of August 31, 2024, $20,696 remains available for future purchases under our stock repurchase plan. With cash and cash equivalents and short-term investments totaling $56,163 on hand at August 31, 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. 32 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 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 August 31, 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 August 31, 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 August 31, 2024 is $104,133 and is included in our accompanying condensed consolidated balance sheet at August 31, 2024. We were contingently liable under licensee lease obligation guarantees in the amount of $5,226 at August 31, 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 $24,306 at August 31, 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. 33 of 37 PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES INCORPORATED AND SUBSIDIARIES AUGUST 31, 2024 (Dollars in thousands except share and per share data) 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 August 31, 2024.