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 prior fiscal year endingNovember 30, 2019 was a 53-week year, with the additional week being included in the first fiscal quarter. Accordingly, the information presented below includes 26 weeks of operations for the six months endedMay 30, 2020 as compared to 27 weeks included in the six months endedJune 1, 2019 .
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 ofBassett 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:
• the impact of the COVID-19 outbreak upon our ability to maintain normal
operations at our retail stores and manufacturing facilities and the resulting
effects any future interruption of those operations may have upon our financial
condition, results of operations and liquidity, as well as the impact of the
outbreak upon general economic conditions, including consumer spending and the
strength of the housing market inthe United States
• competitive conditions in the home furnishings industry
• overall retail traffic levels and consumer demand for home furnishings
• ability of our customers and consumers to obtain credit
• Bassett store openings and store closings and the profitability of the stores
(independent licensees and Company-owned retail stores)
• ability to implement our Company-owned retail strategies and realize the
benefits from such strategies, including our initiatives to expand and improve
our digital marketing capabilities, as they are implemented
• fluctuations in the cost and availability of raw materials, fuel, labor and
sourced products, including those which may result from the imposition of new
or increased duties, tariffs, retaliatory tariffs and trade limitations with
respect to foreign-sourced products
• results of marketing and advertising campaigns
• effectiveness and security of our information and technology systems
• 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
• general risks associated with providing freight transportation and other
logistical services through our wholly-owned subsidiary,
LLC Additionally, other risks that could cause actual results to differ materially from those contemplated by such forward-looking statements are set forth in Item 1A. Risk Factors in the Company's Annual Report on Form 10-K for the fiscal year endedNovember 30, 2019 . 25 of 40
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
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.
Impact of the COVID-19 Pandemic Upon Our Financial Condition and Results of
Operations
OnMarch 11, 2020 , theWorld Health Organization declared the current coronavirus ("COVID-19") outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 withinthe United States , federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy, including non-essential retail commerce. In response to these measures and for the protection of our employees and customers, we temporarily closed our dedicated stores, our manufacturing locations and many of our warehouses for several weeks during the second fiscal quarter of 2020. While as ofMay 30, 2020 , we had reopened most of our stores and resumed manufacturing and shipping activities, the extended period of suspended operations had a material adverse impact upon our results of operations for the quarter endedMay 30, 2020 resulting in a 40% decrease in revenues and a net loss of$20,352 . In response to these unprecedented business conditions, we implemented several measures that have helped us to maintain sufficient liquidity during the second quarter and, we believe, for the next several months. Specific measures, among other things, include the following:
? Negotiating with our landlords to receive temporary rent deferrals, and in
some cases abatement of rent, on many of our store leases ? Negotiating with our vendors to defer payments ? Cancelling various purchase orders for inventory
? Negotiating with customers to maintain some level of in-coming cash and to
reduce accounts receivable exposure
? Instituting a 25% permanent workforce reduction along with temporary furloughs
of an additional 42% of the workforce, many of which have returned to full- or
part-time employment
? Implementing a 20% to 25% salary and wage decrease for most other employees
with the Chief Executive Officer and certain other executives taking a 50% pay
reduction through June of 2020
? Amending our bank credit agreement to increase the availability under our line
of credit by an additional$25,000 throughDecember 31, 2020 We continue to manage the impact of the COVID-19 crisis on a daily basis. As of the date of this filing, we have reopened all of our retail stores. However, our manufacturing operations continue in the ramp-up phase and are currently not producing at the incoming rate of wholesale orders. We are unable to predict when and how quickly we will be able to resume full manufacturing operations and the impact this may have on our financial statements in the near and long term. The timing of any future actions in response to COVID-19 is largely dependent on the mitigation of the spread of the virus, status of government orders, directives and guidelines, recovery of the business environment, economic conditions, and consumer demand for our products. We expect a phased return to normal operations over a period of time. Additionally, as we have re-opened stores and re-started plants, we continue to follow enhanced health and safety protocols across all locations for the protection of our employees and customers. 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. We were founded in 1902 and incorporated under the laws ofVirginia in 1930. Our rich 118-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. 26 of 40 --------------------------------------------------------------------------------
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
With 100 BHF stores at May 30, 2020 , 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 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 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 .
The BHF stores feature custom order furniture, free in-home design visits ("home
makeovers") and coordinated decorating accessories. Our philosophy is based on
building strong long-term relationships with each customer. Sales people are
referred to as "Design Consultants " and are trained to evaluate customer needs
and provide comprehensive solutions for their home decor. Until a rigorous
training and design certification program is completed, Design Consultants are
not authorized to perform in-home design services for our customers.
We have a factories in Newton, North Carolina that manufacture custom
upholstered furniture and our Lane Venture and Bassett Outdoor furniture, a
factory in Martinsville, Virginia that primarily assembles and finishes our
custom casual dining offerings and a factory in Bassett, Virginia that assembles
and finishes our "Bench Made" line of custom, solid hardwood furniture. We
recently closed our upholstery facility in Grand Prairie, Texas due to the
expected demand reduction as a result of the COVID-19 crisis. In late 2019, we
also began operating a facility in Haleyville, Alabama that provides Bassett
with the capability to manufacture custom aluminum outdoor furniture primarily
under the Lane Venture brand. Our manufacturing team takes great pride in the
breadth of its options, the precision of its craftsmanship, and the speed of its
process, with custom pieces often manufactured within two weeks of taking the
order in our stores. Our logistics team then promptly ships the product to one
of our home delivery hubs or to a location specified by our licensees. In
addition to the furniture that we manufacture domestically, we source most of
our formal bedroom and dining room furniture (casegoods) and certain leather
upholstery offerings from several foreign plants, primarily in Vietnam , Thailand
and China . Over 75% of the products we currently sell are manufactured in the
United States .
We also own Zenith Freight Lines, LLC ("Zenith") which provides logistical
services to Bassett along with other furniture manufacturers and retailers.
Zenith delivers best-of-class shipping and logistical support services that are
uniquely tailored to the needs of Bassett and the furniture industry.
Approximately 60% of Zenith's revenue is generated from services provided to
non-Bassett customers.
During fiscal 2018, we purchased certain assets and assumed certain liabilities
of Lane Venture from Heritage Home Group, LLC . Lane Venture is a manufacturer
and distributor of premium outdoor furniture and is now being operated as a
component of our wholesale segment. This acquisition marked our entry into the
market for outdoor furniture and we believe that Lane Venture has provided a
foundation for us to become a significant participant in this category. Our
strategy is to distribute this brand outside of our BHF store network only. With
the knowledge we have gained through operating Lane Venture, we have developed a
new separate brand of premium outdoor furniture that is only marketed through
the BHF store network. This allows Bassett branded product to move from inside
the home to outside the home to capitalize the growing trend of outdoor living.
At May 30, 2020 , our BHF store network included 66 Company-owned stores and 34
licensee-owned stores. During the second quarter of fiscal 2020, we completed
the closure of three underperforming Company-owned stores in Newport News,
Virginia , Stoughton, Massachusetts , and Torrance, California .
The COVID crisis has given us the opportunity to look inward and to begin making
structural improvements to our business model. We instituted a "virtual
appointment" program for our stores in late March, whereby consumers digitally
engage with our designers and transact without physically visiting a store. The
vast majority of our design appointments were of the virtual variety in the
month of April. And, in June, when most of our stores had been reopened,
approximately one in five of our appointments were still virtual. Adding this
new form of engagement is one of the many lasting changes that will come out of
the 2020 pandemic. Our pure e-commerce sales (ordering directly from the
website) have historically been immaterial. However, with our stores closed for
much of the second quarter of 2020, our on-line sales nearly doubled as compared
to 2019. We expect to continue investing in our website to improve the
navigation and the ordering capabilities to increase web sales. Much of our
current product offerings highlight the breadth and depth of our custom
furniture capabilities which are difficult to show and sell online. We plan to
expand our merchandising strategies to include more product that can be more
easily purchased online with or without a store visit. While we work to increase
web sales, we will not compromise on our in-store experience or the quality of
our in-home makeover capabilities.
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
We have also begun to re-examine the performance of every one of our stores.
Store traffic has been declining for three years and the effect on our retail
model has become increasingly challenging. We believe that on a market-by-market
basis, there will be fewer stores in the future that must operate with a leaner
structure. As a result, our retail management team has created a new retail
staffing model that includes fewer designers, less administrative staff, and a
smaller field management organization. After a thorough review, we decided to
close three additional stores over the coming months that will leave us with 63
Corporate stores. We will continue to evaluate store-by-store performance as we
seek the optimal store count in the markets in which we compete at retail. We
believe the seismic shift in shopping behavior which has been tremendously
accelerated by closures of bricks and mortar stores as a result of COVID-19 will
ultimately result in more favorable retail rent structures.
The migration to digital brand research and compressed transaction cycles have
caused us to comprehensively evaluate all of our American made custom products.
While our Custom Upholstery , Custom Dining, and Bench Made product lines
continue to be our most successful offerings, they are not conducive to web
transactions; most of these items must be purchased in a store. Furthermore, we
offer many upholstery trim options, fabrics, finishes that have low rates of
sale and that make web navigation more difficult for the consumer. Consequently,
we have begun to methodically re-design each one of these important lines over
the next several months. Our intent is to continue to offer the consumer custom
options that will help them personalize their home but do so in an edited
fashion that will provide a better web experience in the research phase and will
also allow the final purchase to be made either on the web or in the store. We
also plan to heavily emphasize our "Made in America" story and utilize locally
harvested and organic materials when possible. While this will all take time, we
expect that new products will begin to appear this fall. A substantial part of
the $2,936 in inventory valuation charges that we recognized during the second
quarter of 2020 was related to existing raw materials that will no longer be
part of the mix and to the selloff of retail inventory that will become obsolete
as a result of our new approach.
Results of Operations – Periods ended
ended
Net sales of furniture and accessories, logistics revenue, cost of furniture and accessories sold, selling, general and administrative (SG&A) expense, other charges and income from operations were as follows for the three and six months endedMay 30, 2020 andJune 1, 2019 : Quarter Ended Change Six Months Ended* Change May 30, 2020 June 1, 2019 Dollars Percent May 30, 2020 June 1, 2019 Dollars Percent Sales revenue: Furniture and accessories$ 53,000 83.1 %$ 95,824 88.6 % $
(42,824 ) -44.7 %
$ (51,239 ) -25.2 % Logistics revenue 10,801 16.9 % 12,366 11.4 %
(1,565 ) -12.7 % 23,979 13.6 % 25,850 11.3 %
(1,871 ) -7.2 %
Total sales revenue 63,801 100.0 % 108,190 100.0 % (44,389 ) -41.0 % 175,921 100.0 % 229,031 100.0 %
(53,110 ) -23.2 % Cost of furniture and accessories sold 29,452 46.2 % 42,530 39.3 % (13,078 ) -30.8 % 74,722 42.5 % 91,707 40.0 % (16,985 ) -18.5 % SG&A expenses 50,373 79.0 % 64,590 59.7 % (14,217 ) -22.0 % 115,013 65.4 % 133,976 58.5 % (18,963 ) -14.2 % New store pre-opening costs - 0.0 % 369 0.3 % (369 ) -100.0 % - -0.1 % 863 0.4 % (863 ) -100.0 % Other charges 15,205 23.8 % - 0.0 %
15,205 100.0 % 15,205 10.0 % 835 0.4 %
14,370 100.0 %
Income (loss) from operations$ (31,229 ) -48.9 %$ 701 0.6 %$ (31,930 ) N/M$ (29,019 ) -16.4 %$ 1,650 0.7 %$ (30,669 ) N/M
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
Refer to the segment information which follows for a discussion of the
significant factors and trends affecting our results of operations for the three
and six months ended
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Segment Information
We have strategically aligned our business into three reportable segments 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 include Lane Venture, as well as all corporate
selling, general and administrative expenses, including those corporate expenses
related to both Company- and licensee-owned stores. We eliminate the sales
between our wholesale and retail segments as well as the imbedded profit in the
retail inventory for the consolidated presentation in our financial statements.
Also included in our wholesale segment are our short-term investments and our
holdings of retail real estate previously leased as licensee stores. The
earnings and costs associated with these assets are included in other loss, net,
in our condensed consolidated statements of operations.
Retail - Company-owned stores. Our retail segment consists of Company-owned
stores and includes the revenues, expenses, assets and liabilities (including
real estate) and capital expenditures directly related to these stores and the
Company-owned distribution network utilized to deliver products to our retail
customers.
Logistical services. Our logistical services segment reflects the operations of
Zenith. In addition to providing shipping and warehousing services for the
Company, Zenith also provides similar services to other customers, primarily in
the furniture industry. Revenue from the performance of these services to other
customers is included in logistical services revenue in our condensed
consolidated statements of operations. Zenith's operating costs are included in
selling, general and administrative expenses.
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
The following tables illustrate the effects of various intercompany eliminations
on income from operations in the consolidation of our segment results:
Quarter Ended May 30, 2020
Wholesale Retail Logistics Eliminations Consolidated
Sales revenue:
Furniture & accessories $ 33,128 $ 33,171 $ - $ (13,299 ) (1) $ 53,000
Logistics - - 15,259 (4,458 ) (2) 10,801
Total sales revenue 33,128 33,171 15,259 (17,757 ) 63,801
Cost of furniture and
accessories sold 27,300 17,488 - (15,336 ) (3) 29,452
SG&A expense 13,209 24,853 17,101 (4,790 ) (4) 50,373
Loss from operations
(5) $ (7,381 ) $ (9,170 ) $ (1,842 ) $ 2,369 $ (16,024 )
Quarter Ended June 1, 2019
Wholesale Retail Logistics Eliminations Consolidated
Sales revenue:
Furniture & accessories $ 63,131 $ 62,568 $ - $ (29,875 ) (1) $ 95,824
Logistics - - 20,093 (7,727 ) (2) 12,366
Total sales revenue 63,131 62,568 20,093 (37,602 ) 108,190
Cost of furniture and
accessories sold 41,491 30,778 - (29,739 ) (3) 42,530
SG&A expense 18,467 34,374 19,841 (8,092 ) (4) 64,590
New store pre-opening
costs - 369 - - 369
Income (loss) from
operations (6) $ 3,173 $ (2,953 ) $ 252 $ 229 $ 701
Six Months Ended May 30, 2020*
Wholesale Retail Logistics Eliminations Consolidated
Sales revenue:
Furniture & accessories $ 98,145 $ 99,017 $ - $ (45,220 ) (1) $ 151,942
Logistics - - 36,574 (12,595 ) (2) 23,979
Total sales revenue 98,145 99,017 36,574 (57,815 ) 175,921
Cost of furniture and
accessories sold 71,177 50,394 - (46,849 ) (3) 74,722
SG&A expense 31,636 59,042 37,581 (13,246 ) (4) 115,013
Loss from operations
(5) $ (4,668 ) $ (10,419 ) $ (1,007 ) $ 2,280 $ (13,814 )
Six Months Ended June 1, 2019*
Wholesale Retail Logistics Eliminations Consolidated
Sales revenue:
Furniture & accessories $ 135,912 $ 132,197 $ - $ (64,928 ) (1) $ 203,181
Logistics - - 41,844 (15,994 ) (2) 25,850
Total sales revenue 135,912 132,197 41,844 (80,922 ) 229,031
Cost of furniture and
accessories sold 90,341 65,729 - (64,363 ) (3) 91,707
SG&A expense 38,216 71,604 40,880 (16,724 ) (4) 133,976
New store pre-opening
costs - 863 - - 863
Income (loss) from
operations (6) $ 7,355 $ (5,999 ) $ 964 $ 165 $ 2,485
(1) Represents the elimination of sales from our wholesale segment to our
Company-owned BHF stores.
(2) Represents the elimination of logistical services billed to our wholesale
segment.
(3) 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.
(4) Represents the elimination of rent paid by our retail stores occupying
Company-owned real estate, and the elimination of logisitcal services charged
by Zenith to Bassett's wholesale segment as follows:
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Notes to segment consolidation table:
Quarter Ended Six Months Ended*
May 30, 2020 June 1, 2019
Intercompany logistical services
Intercompany rents
(332 ) (365 ) (651 ) (730 )
Total SG&A expense elimination
(5) Excludes the effects of goodwill and asset impairment charges
as well as litigation costs which are not allocated to our
segments.
(6) Excludes the effects of the 2019 early retirement program,
which is not allocated to our segments.
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
The following table reconciles income (loss) from operations as shown above for
our consolidated segment results with income (loss) from operations as reported
for GAAP:
Quarter Ended Six Months Ended
May 30, 2020 June 1, 2019 May 30, 2020 June 1, 2019
Consolidated segment
income from operations
before special charges $ (16,024 ) $ 701 $ (13,814 ) $ 2,485
Less:
Asset impairment
charges 12,184 - 12,184 -
Goodwill impairment
charge 1,971 - 1,971 -
Litigation expense 1,050 - 1,050 -
Early retirement
program - - - 835
Income (loss) from
operations as reported $ (31,229 ) $ 701 $ (29,019 ) $ 1,650
Asset Impairment Charges
During the three and six months ended May 30, 2020 we recorded $11,114 of
non-cash asset impairment charges on five underperforming retail stores,
including $6,239 for the impairment of operating lease right-of-use assets, and
$1,070 of non-cash impairment charges in our wholesale segment, primarily due to
the closure of our custom upholstery manufacturing facility in Grand Prairie,
Texas .
Goodwill Impairment Charge
Due to the impact of the COVID-19 pandemic, we performed an interim impairment
assessment of our goodwill as of May 30, 2020 . As a result, we recognized a
non-cash charge of $1,971 for the impairment of goodwill associated with our
wood reporting unit within our wholesale segment (see Note 6 to our Condensed
Consolidated Financial Statements).
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Litigation Expense
During the three and six months ended May 30, 2020 we accrued an additional
$1,050 for the estimated costs to resolve certain wage and hour violation claims
that have been asserted against the Company and have received class action
designation, bringing our total recorded reserve for these claims to $1,750 at
May 30, 2020 . While the ultimate cost of resolving these claims may be
substantially higher, the amount accrued represents our estimate of the most
likely outcome of a mediated settlement.
Early Retirement Program
During the first quarter of fiscal 2019, we offered a voluntary early retirement
package to certain eligible employees of the Company. Twenty-three employees
accepted the offer, which expired on February 28, 2019 . These employees are to
receive pay equal to one-half their current salary plus benefits over a period
of one year from the final day of each individual's active employment.
Accordingly, we recognized a charge of $835 during the six months ended June 1,
2019 .
Wholesale Segment
Results for the wholesale segment for the periods ended May 30, 2020 and June 1,
2019 are as follows:
Quarter Ended Change Six Months Ended* Change
May 30, 2020 June 1, 2019 Dollars Percent May 30, 2020 June 1, 2019 Dollars Percent
Net sales $ 33,128 100.0 % $ 63,131 100.0 % $
(30,003 ) -47.5 %
Gross profit
5,828 17.6 % 21,640 34.3 %
(15,812 ) -73.1 % 26,968 27.5 % 45,571 33.5 %
(18,603 ) -40.8 %
SG&A expenses 13,209 39.9 % 18,467 29.3 % (5,258 ) -28.5 % 31,636 32.2 % 38,216 28.1 %
(6,580 ) -17.2 %
Income (loss) from operations$ (7,381 ) -22.3 %$ 3,173 5.0 %$ (10,554 ) N/M$ (4,668 ) -4.8 %$ 7,355 5.4 %$ (12,023 ) N/M
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
Analysis of Results – Wholesale
Net sales for the three and six months endedMay 30, 2020 declined$30,003 and$37,767 , respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of our manufacturing and retail operations from late March through early May of the second quarter. Our net sales through the first quarter had been trending approximately 11% below the prior year, primarily due to the decrease in juvenile furniture shipments as we have exited this line of business, along with declines in shipments to traditional open market customers. These declines in the first quarter of the year had been partially offset by increases in shipments to the BHF store network and shipments of Lane Venture product. Gross margins were significantly impacted by reduced leverage of fixed costs due to the temporary shutdown of the manufacturing locations. In addition, we recorded increased inventory valuation reserves in the second quarter of 2020 as we reevaluate the inventory levels throughout the segment given expected reduced demand. We are also reevaluating the inventory assortment to simplify the product offerings and to make them more compatible with our omnichannel marketing strategy, which integrates both internet and store-based selling. SG&A expenses as a percent of sales were also significantly impacted by reduced leverage of fixed costs. We also recorded increased bad debt expense as our customers struggled to pay us during the shutdown period. As of the date of this report, cash receipts on past due receivables have shown improvement since the end of the second quarter. 32 of 40
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PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Wholesale
shipments by type: Quarter Ended Change Six Months Ended* Change
May 30, 2020 June 1, 2019 Dollars Percent May 30, 2020 June 1, 2019
Dollars Percent
Bassett Custom Upholstery$ 19,234 58.1 %$ 36,853 58.4 % $
(17,619 ) -47.8 %
(2,479 ) -24.2 % Bassett Custom Wood 5,632 17.0 % 10,526 16.7 %
(4,894 ) -46.5 % 16,922 17.2 % 22,201 16.3 %
(5,279 ) -23.8 % Bassett Casegoods 5,207 15.7 % 9,979 15.8 % (4,772 ) -47.8 % 14,201 14.5 % 22,619 16.6 % (8,418 ) -37.2 % Accessories - 0.0 % 1,310 2.1 % (1,310 ) -100.0 % - 0.0 % 2,467 1.8 % (2,467 ) -100.0 % Total$ 33,128 100.0 %$ 63,131 100.0 %$ (30,003 ) -47.5 %$ 98,145 100.0 %$ 135,912 100.0 %$ (37,767 ) -27.8 %
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
Wholesale Backlog The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was$17,270 atMay 30, 2020 as compared with$14,373 atJune 1, 2019 . The increase in backlog over the prior year level is primarily due to what we believe are short-term challenges in restoring our production to the levels required to meet the in-flow of orders, which has risen faster than expected during the latter part of the second quarter and subsequently.
Retail – Company-owned Stores Segment
Results for the retail segment for the periods endedMay 30, 2020 andJune 1, 2019 are as follows: Quarter Ended Change Six Months Ended* Change May 30, 2020 June 1, 2019 Dollars Percent May 30, 2020 June 1, 2019 Dollars Percent Net sales$ 33,171 100.0 %$ 62,568 100.0 % $
(29,397 ) -47.0 %
$ (33,180 ) -25.1 % Gross profit 15,683 47.3 % 31,790 50.8 %
(16,107 ) -50.7 % 48,623 49.1 % 66,468 50.3 %
(17,845 ) -26.8 % SG&A expenses 24,853 74.9 % 34,374 54.9 % (9,521 ) -27.7 % 59,042 59.6 % 71,604 54.2 % (12,562 ) -17.5 % New store pre-opening costs - 0.0 % 369 0.6 % (369 ) -100.0 % - 0.0 % 863 0.7 % (863 ) -100.0 % Loss from operations$ (9,170 ) -27.6 %$ (2,953 ) -4.7 % $
(6,217 ) 210.5 %
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
Analysis of Results - Retail Net sales for the three and six months endedMay 30, 2020 declined$29,397 and$33,180 , respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of our retail operations from late March through early May of the second quarter. Gross margins decreased as we recorded increased inventory valuation reserves as we reevaluate the inventory assortment to simplify the product offerings and to make them more web friendly. This is expected to result in increased clearance activity over the remainder of fiscal 2020. SG&A expenses as a percent of sales were also significantly impacted by reduced leverage of fixed costs. Retail Backlog The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was$28,949 , or an average of$439 per open store, atMay 30, 2020 as compared with a retail backlog of$30,910 , or an average of$442 per open store, atJune 1, 2019 . 33 of 40 --------------------------------------------------------------------------------
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Logistical Services Segment
Results for our logistical services segment for the periods ended
and
Quarter Ended Change Six Months Ended* Change
May 30, 2020 June 1, 2019 Dollars Percent May 30, 2020 June 1, 2019
Dollars Percent
Logistical
services revenue
Operating expenses 17,101 112.1 % 19,841 98.7 % (2,740 ) -13.8 % 37,581 102.8 % 40,880 97.7 % (3,299 ) -8.1 %
Income from operations$ (1,842 ) -12.1 %$ 252 1.3 %$ (2,094 ) -831.0 %$ (1,007 ) -2.8 %$ 964 2.3 %$ (1,971 ) -204.5 %
*26 weeks for fiscal 2020 as compared with 27 weeks for fiscal 2019.
Analysis of Operations – Logistical Services
Net revenues for the three and six months endedMay 30, 2020 declined$4,834 and$5,270 , respectively, from the prior year periods due primarily to the major impact of the COVID-19 pandemic which forced a nearly total shut-down of furniture retail operations throughout the country from late March through early May of the second quarter. To maintain some level of revenue and retain our drivers primarily during April, we ran some of our trucks at substantially lower than optimal load levels resulting in inefficiencies and provided freight services for customers outside of the furniture industry.
OtherItems Affecting NetIncome
Other Loss, Net Other loss, net, for the three and six months endedMay 30, 2020 was$765 and$1,127 , respectively, as compared to$145 and$268 , respectively for the three and six months endedJune 1, 2019 . The increased net loss for each respective period is primarily due to death benefits received in the prior year periods from life insurance policies covering former executives, declining interest income from our investments in CDs, and higher net costs for Company-owned life insurance. Income Taxes We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income could have a significant impact on our effective tax rate for the respective quarter. OnMarch 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. A major provision of the CARES Act allows net operating losses from the 2018, 2019 and 2020 tax years to be carried back up to five years. As a result, our effective tax rates for the three and six months endedMay 30, 2020 were (36.4%) and (36.5%), respectively, which differ from the federal statutory rate of 21% primarily due to the effects of carrying back our current net operating loss to tax years in which the federal statutory rate was 35%, and to the effects of state income taxes and various permanent differences, including a tax deficiency of$114 during the six months endedMay 30, 2020 arising from stock-based compensation. Our effective tax rates for the three and six months endedJune 1, 2019 were 20.0% and 23.8%, respectively, and differ from the federal statutory rate of 21% primarily due to the effects of state income taxes and various permanent differences, including the recognition of non-taxable proceeds from Company-owned life insurance. 34 of 40 --------------------------------------------------------------------------------
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Liquidity and Capital Resources
Cash Flows Cash used in operations for the first half of 2020 was$5,747 compared to$8,942 used in operations for the first half of 2019, representing a decrease in cash used of$3,195 . This decreased use of cash is primarily due to decreased investment in inventory as there were no store openings in the first half of fiscal 2020, other changes in working capital due in part to the timing impact of the additional week in the prior year period and improved operations in our retail segment, and cash conservation measures implemented in the second quarter of fiscal 2020 in response to the impact of COVID-19. Our overall cash position decreased by$8,252 during the first half of 2020, compared to an overall decrease of$21,887 during the first half of 2019. In addition to the cash used in operations, we had a net$102 source of cash from investing activities in the current period as compared to a net use of$7,959 for the prior year period, with the change primarily consisting of reduced capital expenditures as compared with the prior year period along with proceeds received in 2020 from the sale of one of our real estate holdings. Net cash used in financing activities was$2,607 for the current period compared to$4,986 used in the prior year period. The decreased use for financing is primarily due to cash conservation measures implemented in response to COVID-19, including delaying the payment of the$1,249 dividend which was declared in the second quarter of 2020, along with a temporary suspension of repurchases of our stock. Share repurchases totaled$1,241 during the first half of 2020 as compared with$2,347 repurchased during the first half of 2019. As ofMay 30, 2020 ,$9,398 remains authorized under our existing share repurchase plan. Debt and Other Obligations Our credit facility as ofMay 30, 2020 provided for a line of credit of up to$25,000 . AtMay 30, 2020 , we had$4,773 outstanding under standby letters of credit against our line, leaving availability under our credit line of$20,227 . In addition, we have outstanding standby letters of credit with another bank totaling$325 . EffectiveJune 15, 2020 , we executed an amended and restated credit facility with our bank to increase the maximum amount available under our credit line to$50,000 throughDecember 31, 2020 , after which date the maximum availability will return to the original amount of$25,000 . The line bears interest at the rate of LIBOR plus 1.9%, with a fee of 0.25% charged for the unused portion of the line and is secured by a general lien on our accounts receivable and inventory. In addition, all covenants based on financial ratios have been waived for the remainder of fiscal 2020, and the maturity of the facility will be extended fromDecember 5, 2021 toJanuary 31, 2022 . We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continentalUnited States for warehousing and distribution hubs used in our logistical services segment. We also lease tractors, trailers and local delivery trucks used in our logistical services and retail segments. The total future minimum lease payments for leases with terms in excess of one year atMay 30, 2020 is$183,043 , the present value of which is$156,027 and is included in our accompanying condensed consolidated balance sheet atMay 30, 2020 . In addition, we are currently in negotiations with a number of our lessors to obtain relief in the form of rent deferrals or abatements from rents currently due as a result of the effects of COVID-19 on our business. We also have guaranteed certain lease obligations of licensee operators. Remaining terms under these lease guarantees range from approximately one to five years. We were contingently liable under licensee lease obligation guarantees in the amount of$1,793 atMay 30, 2020 . See Note 11 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees. 35 of 40 --------------------------------------------------------------------------------
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES , INCORPORATED AND SUBSIDIARIES
MAY 30, 2020
(Dollars in thousands except share and per share data)
Investment in
We have a substantial investment in real estate acquired for use as retail locations. Such real estate is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and is considered part of our retail segment. The net book value of such retail real estate occupied by Company-owned stores was$17,590 atMay 30, 2020 . The following information summarizes our total investment in retail real estate owned atMay 30, 2020 : Number of Aggregate Net Book Locations Square Footage Value Real estate occupied by Company-owned and operated stores, included in property and equipment, net 8 201,096$ 17,590
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 endedNovember 30, 2019 , except for changes related to our adoption of Accounting Standards Codification Topic 842 as described in Note 1 and Note 11 to the condensed consolidated financial statements.
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 11 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 ofMay 30, 2020 .
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