# BASSETT FURNITURE INDUSTRIES INC (BSET) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BASSETT FURNITURE INDUSTRIES INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/10329/000143774922001938/bset20211127_10k.htm
Accession: 0001437749-22-001938
Filing date: 2022-01-31
Report date: 2021-11-27
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BSET/
All MD&A years: /company/BSET/mda/
Next year: /company/BSET/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts 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 fiscal year ending November 30, 2019 was a 53-week year, with the additional week being included in the first fiscal quarter.  Accordingly, the information presented below includes 53 weeks of operations for the year ended November 30, 2019 as compared to 52 weeks included in the years ended November 27, 2021 and November 28, 2020.

Impact of COVID-19

For a discussion of how COVID-19 has impacted and may continue to impact our business and financial condition, please refer to the discussion under the heading "Ongoing Impact of the COVID-19 Pandemic and Related Supply Chain and Labor Issues Upon Our Business " in Part I, Item 1 of this report.

Overview

Bassett is a leading retailer, manufacturer and marketer of branded home furnishings. Our products are sold primarily through a network of Company-owned and licensee-owned branded stores under the Bassett Home Furnishings (“BHF”) name, with additional distribution through other wholesale channels including multi-line furniture stores, many of which feature Bassett galleries or design centers. We also sell our products through our website at www.bassettfurniture.com. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 119-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 97 BHF stores at November 27, 2021, 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 and ultimately gain market share.  

The BHF stores feature custom order furniture, free in-home or virtual design visits (“home makeovers”) and coordinated decorating accessories.  Our philosophy is based on building strong long-term relationships with each customer.  Sales people are referred to as “Design Consultants” and are trained to evaluate customer needs and provide comprehensive solutions for their home decor.  Until a rigorous training and design certification program is completed, Design Consultants are not authorized to perform in-home or virtual design services for our customers.

We have factories in Newton, North Carolina that manufacture Bench Made custom upholstered and outdoor furniture. We also have factories in Martinsville and Bassett, Virginia that assemble and finish our custom dining offerings, including our Bench Made line of solid hardwood furniture. We currently lease a facility in Haleyville, Alabama where we manufacture aluminum frames for our outdoor furniture. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its manufacturing process. Our logistics team then 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.

During fiscal 2018, we acquired Lane Venture, a manufacturer and distributor of premium outdoor furniture which is 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 the Bassett Outdoor brand that is only marketed through the BHF store network. This allows Bassett branded product to move from inside the home to outside the home to capitalize on the growing trend of outdoor living.

We also own 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.

14

We consider our website to be the front door to our brand experience where customers can research our furniture and accessory offerings and subsequently buy online or engage with an in-store design consultant. Customer acquisition resulting from our digital outreach strategies has significantly increased our traffic to the website and our online orders over the last two years. While the growth in website traffic and orders moderated somewhat in late fiscal 2021 compared to 2020, both have nearly doubled since 2019. The migration to digital brand research has 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, most of these items must be purchased in a store as they are not conducive to web transactions due to the number of options available. Consequently, we will continue to methodically re-design each one of these important lines. Our intent is to continue to offer the consumer custom options that will help them personalize their home but to do so in an edited fashion that will provide a better web experience in the research phase and will also allow the final purchase to be made either on the web or in the store. While we work to make it easier to purchase either in store or on-line, we will not compromise on our in-store experience or the quality of our in-home makeover capabilities.

Analysis of Operations

The following discussion provides an analysis of our results of operations and reasons for material changes therein for fiscal year 2021 as compared to fiscal year 2020 and 2019. Because of the significant adverse impact that the COVID-19 pandemic had on our operations during the second quarter of fiscal 2020, we believe that a better understanding of the revenue and profitability growth that has resulted from our product and marketing initiatives as well as the cost reductions implemented in fiscal 2020 is obtained by comparing our current year results to the pre-pandemic results of fiscal 2019. Therefore, 2019 results are presented below for the purpose of showing a comparison with 2021. For an analysis of the fiscal year 2020 results as compared to fiscal year 2019, see “Analysis of Operations” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2020 Annual Report on Form 10-K, filed with the SEC on January 21, 2021

Net sales revenue, cost of furniture and accessories sold, selling, general and administrative (“SG&A”) expense, new store pre-opening costs, other charges, and income from operations were as follows for the years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","","","","","","","","","","","Comparative Change"],["","","","","","","","","","","","","","","","","","","","","","","","","","","2021 vs 2020","","","2021 vs 2019"],["","","2021","","","2020","","","2019*","","","Dollars","","","Percent","","","Dollars","","","Percent"],["Sales Revenue:"],["Furniture and accessories","","$","430,886","","","","88.6","%","","$","337,672","","","","87.5","%","","$","403,865","","","","89.3","%","","$","93,214","","","","27.6","%","","$","27,021","","","","6.7","%"],["Logistics","","","55,648","","","","11.4","%","","","48,191","","","","12.5","%","","","48,222","","","","10.7","%","","","7,457","","","","15.5","%","","","7,426","","","","15.4","%"],["Total net sales revenue","","","486,534","","","","100.0","%","","","385,863","","","","100.0","%","","","452,087","","","","100.0","%","","","100,671","","","","26.1","%","","","34,447","","","","7.6","%"],["Cost of furniture and accessories sold","","","209,799","","","","43.1","%","","","163,567","","","","42.4","%","","","179,244","","","","39.6","%","","","46,232","","","","28.3","%","","","30,555","","","","17.0","%"],["SG&A","","","196,831","","","","40.5","%","","","176,368","","","","45.7","%","","","217,913","","","","48.2","%","","","20,463","","","","11.6","%","","","(21,082",")","","","-9.7","%"],["New store pre-opening costs","","","-","","","","0.0","%","","","-","","","","0.0","%","","","1,117","","","","0.2","%","","","-","","","","NM","","","","(1,117",")","","","-100.0","%"],["Cost of logistical services","","","53,905","","","","11.1","%","","","46,946","","","","12.2","%","","","46,367","","","","10.3","%","","","6,959","","","","14.8","%","","","7,538","","","","16.3","%"],["Other charges","","","-","","","","0.0","%","","","15,205","","","","3.9","%","","","8,041","","","","1.8","%","","","(15,205",")","","","-100.0","%","","","(8,041",")","","","-100.0","%"],["Income (loss) from operations","","$","25,999","","","","5.3","%","","$","(16,223",")","","","-4.2","%","","$","(595",")","","","-0.1","%","","$","42,222","","","N/M","","","$","26,594","","","N/M"]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2021 and 2020.

15

Our consolidated net sales by segment were as follows:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Comparative Change"],["","","","","","","","","","","","","","","2021 vs 2020","","","2021 vs 2019"],["","","2021","","","2020","","","","2019*","","","Dollars","","","Percent","","","Dollars","","","Percent"],["Sales Revenue"],["Wholesale sales of furniture and accessories","","$","295,329","","","$","221,075","","","$","261,105","","","$","74,254","","","","33.6","%","","$","34,224","","","","13.1","%"],["Less: Sales to retail segment","","","(112,270",")","","","(95,347",")","","","(125,933",")","","","(16,923",")","","","17.7","%","","","13,663","","","","-10.8","%"],["Wholesale sales to external customers","","","183,059","","","","125,728","","","","135,172","","","","57,331","","","","45.6","%","","","47,887","","","","35.4","%"],["Retail sales of furniture and accessories","","","247,827","","","","211,944","","","","268,693","","","","35,883","","","","16.9","%","","","(20,866",")","","","-7.8","%"],["Consolidated net sales of furniture and accessories","","","430,886","","","","337,672","","","","403,865","","","","93,214","","","","27.6","%","","","27,021","","","","6.7","%"],["Logistical services revenue","","","86,977","","","","75,158","","","","80,074","","","","11,819","","","","15.7","%","","","6,903","","","","8.6","%"],["Less: Services to wholesale segment","","","(31,329",")","","","(26,967",")","","","(31,852",")","","","(4,362",")","","","16.2","%","","","523","","","","-1.6","%"],["Logistical services to external customers","","","55,648","","","","48,191","","","","48,222","","","","7,457","","","","15.5","%","","","7,426","","","","15.4","%"],["Total sales revenue","","$","486,534","","","$","385,863","","","$","452,087","","","$","100,671","","","","26.1","%","","$","34,447","","","","7.6","%"]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2021 and 2020.

Total sales revenue for fiscal 2021 increased $100,671, or 26.1%, from prior year due primarily to the major impact of the COVID-19 pandemic on our operations during fiscal 2020, which forced a near total shut-down of our manufacturing and retail operations from late March through early May of 2020, followed by an exceptionally strong recovery in demand for home furnishings that has continued into fiscal 2021. Sales of furniture and accessories for fiscal 2021 increased $34,447 or 7.6%, over fiscal 2019. This growth as compared to fiscal 2019 is attributable not only to the exceptionally strong demand for home furnishings that has benefited our industry over the past eighteen months, but also due to increases in our wholesale business through growth in our Lane Venture line of outdoor furniture, the introduction of our Bassett Outdoor line of outdoor furniture sold through our BHF store network, and the expansion of our wholesale customer base of independent dealers partially offset by lower retail sales from the closure of seven Company-owned stores since the end of 2019.

Cost of furniture and accessories sold as a percentage of total revenue for the fiscal 2021 increased over fiscal 2020 and 2019 primarily due to rising raw material and inbound freight costs, partially offset by improved leverage on fixed costs during fiscal 2021 versus 2020 when our operations were temporarily shut down due to the pandemic. SG&A expenses as a percentage of sales for fiscal 2021 decreased significantly from fiscal 2020 and 2019 due to increased leverage of fixed costs due to higher sales volume coupled with the fact that we have been able to maintain various expense reductions implemented in the second and third quarters of fiscal 2020 in response to the COVID-19 pandemic. This was partially offset by increased operating costs in the logistical services segment.

Other charges of $15,205 incurred during fiscal 2020 included $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 in May of 2020, a non-cash charge of $1,971 for the impairment of goodwill associated with our wood reporting unit within our wholesale segment, and $1,050 of litigation costs relating to certain wage and hour violation claims that had been asserted against the Company. These claims have since been settled at no additional cost.

Certain other items affecting comparability between fiscal 2021 and 2020 are discussed below in “Other Items Affecting Net Income”.

16

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 (licensee-owned stores and Company-owned stores) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations 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. Our wholesale segment also includes our holdings of short-term investments and retail real estate previously leased as licensee stores. The earnings and costs associated with these assets are included in other loss, net, in our 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. With our acquisition of Zenith on February 2, 2015, we created the logistical services operating segment which reflects the operations of Zenith. In addition to providing shipping and warehousing services for the Company, the revenue from which is eliminated upon consolidation, 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 logistics revenue in our consolidated statement of operations. Zenith’s operating costs are included in selling, general and administrative expenses. See “Recent Development Regarding Zenith” under Part I, Item 1 of the Annual Report regarding our entry into an agreement to sell substantially all of the assets of Zenith.

17

The following tables illustrate the effects of various intercompany eliminations on income (loss) from operations in the consolidation of our segment results for the full fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","Year Ended November 27, 2021"],["","","Wholesale","","","Retail","","","Logistics","","","Eliminations","","","","Consolidated"],["Sales revenue:"],["Furniture & accessories","","$","295,329","","","$","247,827","","","$","-","","","$","(112,270",")","(1)","","$","430,886"],["Logistics","","","-","","","","-","","","","86,977","","","","(31,329",")","(2)","","","55,648"],["Total sales revenue","","","295,329","","","","247,827","","","","86,977","","","","(143,599",")","","","","486,534"],["Cost of furniture and accessories sold","","","202,026","","","","118,455","","","","-","","","","(110,682",")","(3)","","","209,799"],["SG&A expense","","","75,813","","","","122,328","","","","-","","","","(1,310",")","(4)","","","196,831"],["Cost of logistical services","","","-","","","","-","","","","85,234","","","","(31,329",")","(5)","","","53,905"],["Income from operations","","$","17,490","","","$","7,044","","","$","1,743","","","$","(278",")","","","$","25,999"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended November 28, 2020"],["","","Wholesale","","","Retail","","","Logistics","","","Eliminations","","","","Consolidated"],["Sales revenue:"],["Furniture & accessories","","$","221,075","","","$","211,944","","","$","-","","","$","(95,347",")","(1)","","$","337,672"],["Logistics","","","-","","","","-","","","","75,158","","","","(26,967",")","(2)","","","48,191"],["Total sales revenue","","","221,075","","","","211,944","","","","75,158","","","","(122,314",")","","","","385,863"],["Cost of furniture and accessories sold","","","152,982","","","","107,233","","","","-","","","","(96,648",")","(3)","","","163,567"],["SG&A expense","","","63,506","","","","114,208","","","","-","","","","(1,346",")","(4)","","","176,368"],["Cost of logistical services","","","-","","","","-","","","","73,913","","","","(26,967",")","(5)","","","46,946"],["Income (loss) from operations (6)","","$","4,587","","","$","(9,497",")","","$","1,245","","","$","2,647","","","","$","(1,018",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended November 30, 2019"],["","","Wholesale","","","Retail","","","Logistics","","","Eliminations","","","","Consolidated"],["Sales revenue:"],["Furniture & accessories","","$","261,105","","","$","268,693","","","$","-","","","$","(125,933",")","(1)","","$","403,865"],["Logistics","","","-","","","","-","","","","80,074","","","","(31,852",")","(2)","","","48,222"],["Total sales revenue","","","261,105","","","","268,693","","","","80,074","","","","(157,785",")","","","","452,087"],["Cost of furniture and accessories sold","","","173,350","","","","131,528","","","","-","","","","(125,634",")","(3)","","","179,244"],["SG&A expense","","","76,299","","","","143,057","","","","-","","","","(1,443",")","(4)","","","217,913"],["New store pre-opening costs","","","-","","","","1,117","","","","-","","","","-","","","","","1,117"],["Cost of logistical services","","","-","","","","-","","","","78,219","","","","(31,852",")","(5)","","","46,367"],["Income (loss) from operations (6)","","$","11,456","","","$","(7,009",")","","$","1,855","","","$","1,144","","","","$","7,446"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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."],["(4)","Represents the elimination of rent paid by our retail stores occupying Company-owned real estate."],["(5)","Represents the elimination of the cost of logistical services provided by Zenith to our wholesale segment."],["(6)","Excludes the effects of goodwill and asset impairment charges, cost of early retirement program, litigation costs and lease exit costs which are not allocated to our segments."]]
[[/GREPCENT_TABLE]]

18

Non-GAAP Financial Information

To supplement the financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures, including income (loss) from operations before other charges and gross profit on wholesale sales of furniture and accessories by segment inclusive of intercompany sales. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below.

Income (Loss) from Operations before Other Charges

The following table reconciles income (loss) from operations as shown above for our consolidated segment results with income (loss) from operations as reported in accordance with GAAP for fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019"],["Consolidated segment income (loss) from operations excluding special charges","","$","25,999","","","$","(1,018",")","","$","7,446"],["Less:"],["Asset impairment charges","","","-","","","","12,184","","","","4,431"],["Goodwill impairment charge","","","-","","","","1,971","","","","1,926"],["Early retirement program","","","-","","","","-","","","","835"],["Litigation expense","","","-","","","","1,050","","","","700"],["Lease exit costs","","","-","","","","-","","","","149"],["Income (loss) from operations as reported","","$","25,999","","","$","(16,223",")","","$","(595",")"]]
[[/GREPCENT_TABLE]]

Asset Impairment Charges

During fiscal 2020 the loss from operations included $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.

During fiscal 2019 the loss from operations included $4,431 of non-cash impairment charges recognized on the assets of six underperforming retail stores.

Goodwill Impairment Charges

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 during fiscal 2020 for the impairment of goodwill associated with our wood reporting unit within our wholesale segment (see Note 6 to our Consolidated Financial Statements).

During fiscal 2019 our annual evaluation of the carrying value of our recorded goodwill resulted in the recognition of a $1,926 non-cash charge for the impairment of goodwill associated with our retail reporting unit (see Note 6 to our Consolidated Financial Statements).

Early Retirement Program

During the first quarter of fiscal 2019, we offered a voluntary early retirement package to certain eligible employees of the Company. These employees received 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 year ended November 30, 2019.

Litigation Expense

During fiscal 2020 and 2019 we accrued $1,050 and $700, respectively for the estimated costs to resolve certain wage and hour violation claims that had been asserted against the Company.

Lease Exit Costs

During fiscal 2019 we recognized a $149 charge for lease exit costs incurred in connection with the repositioning of a Company-owned retail store in Palm Beach, Florida to a new location within the same market.

19

Gross Profit by Segment

In the following analysis of results for our wholesale and retail segments, we present a measure of gross profit on sales which is inclusive of intercompany sales from our wholesale segment to our retail segment. We believe that this is a key metric by which to evaluate the performance of each segment and is consistent with management’s view of our operating results. The following table reconciles the sales, cost of sales and gross profit presented for each of the wholesale and retail segments to the consolidated amounts for sales, cost of sales and the implied gross profit in accordance with GAAP.

[[GREPCENT_TABLE]]
[["","","Year Ended November 27, 2021"],["","","Non-GAAP Presentation","","","","","","","","GAAP Presentation"],["","","Wholesale","","","Retail","","","Eliminations","","","","Consolidated"],["Sales revenue: furniture & accessories","","$","295,329","","","$","247,827","","","$","(112,270",")","(1)","","$","430,886"],["Cost of furniture and accessories sold","","","202,026","","","","118,455","","","","(110,682",")","(2)","","","209,799"],["Gross profit","","$","93,303","","","$","129,372","","","$","(1,588",")","(3)","","$","221,087"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended November 28, 2020"],["","","Non-GAAP Presentation","","","","","","","","GAAP Presentation"],["","","Wholesale","","","Retail","","","Eliminations","","","","Consolidated"],["Sales revenue: furniture & accessories","","$","221,075","","","$","211,944","","","$","(95,347",")","(1)","","$","337,672"],["Cost of furniture and accessories sold","","","152,982","","","","107,233","","","","(96,648",")","(2)","","","163,567"],["Gross profit","","$","68,093","","","$","104,711","","","$","1,301","","(3)","","$","174,105"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended November 30, 2019"],["","","Non-GAAP Presentation","","","","","","","","GAAP Presentation"],["","","Wholesale","","","Retail","","","Eliminations","","","","Consolidated"],["Sales revenue: furniture & accessories","","$","261,105","","","$","268,693","","","$","(125,933",")","(1)","","$","403,865"],["Cost of furniture and accessories sold","","","173,350","","","","131,528","","","","(125,634",")","(2)","","","179,244"],["Gross profit","","$","87,755","","","$","137,165","","","$","(299",")","(3)","","$","224,621"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_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 change for the period in the elimination of intercompany profit in ending retail inventory."]]
[[/GREPCENT_TABLE]]

Wholesale Segment

Net sales, gross profit, SG&A expense and operating income for our Wholesale Segment were as follows for the fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","","","","","","","","","","","Comparative Change"],["","","","","","","","","","","","","","","","","","","","","","","","","","","2021 vs 2020","","","2021 vs 2019"],["","","2021","","","2020","","","2019*","","","Dollars","","","Percent","","","Dollars","","","Percent"],["Net sales","","$","295,329","","","","100.0","%","","$","221,075","","","","100.0","%","","$","261,105","","","","100.0","%","","$","74,254","","","","33.6","%","","$","34,224","","","","13.1","%"],["Gross profit (1)","","","93,303","","","","31.6","%","","","68,093","","","","30.8","%","","","87,755","","","","33.6","%","","","25,210","","","","37.0","%","","","5,548","","","","6.3","%"],["SG&A","","","75,813","","","","25.7","%","","","63,506","","","","28.7","%","","","76,299","","","","29.2","%","","","12,307","","","","19.4","%","","","(486",")","","","-0.6","%"],["Income from operations","","$","17,490","","","","5.9","%","","$","4,587","","","","2.1","%","","$","11,456","","","","4.4","%","","$","12,903","","","","281.3","%","","$","6,034","","","","52.7","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 Non-GAAP Financial Information above."]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2021 and 2020.

20

Wholesale shipments by category for the fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019 are summarized below:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019*"],["","","External","","","Intercompany","","","Total","","","External","","","Intercompany","","","Total","","","External","","","Intercompany","","","Total"],["Bassett Custom Upholstery","","$","105,445","","","$","69,533","","","$","174,978","","","","59.2","%","","$","71,840","","","$","56,360","","","$","128,200","","","","58.0","%","","$","78,856","","","$","73,559","","","$","152,415","","","","58.4","%"],["Bassett Leather","","","36,157","","","","61","","","","36,218","","","","12.3","%","","","20,487","","","","949","","","","21,436","","","","9.7","%","","","17,083","","","","2,137","","","","19,220","","","","7.4","%"],["Bassett Custom Wood","","","24,079","","","","24,066","","","","48,145","","","","16.3","%","","","19,682","","","","19,629","","","","39,311","","","","17.8","%","","","21,264","","","","24,818","","","","46,082","","","","17.6","%"],["Bassett Casegoods","","","17,378","","","","18,610","","","","35,988","","","","12.2","%","","","13,719","","","","18,409","","","","32,128","","","","14.5","%","","","17,221","","","","23,699","","","","40,920","","","","15.7","%"],["Accessories (1)","","","-","","","","-","","","","-","","","","0.0","%","","","-","","","","-","","","","-","","","","0.0","%","","","748","","","","1,720","","","","2,468","","","","0.9","%"],["Total","","$","183,059","","","$","112,270","","","$","295,329","","","","100.0","%","","$","125,728","","","$","95,347","","","$","221,075","","","","100.0","%","","$","135,172","","","$","125,933","","","$","261,105","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Beginning with the third quarter of fiscal 2019, our wholesale segment no longer purchases accessory items for resale to our retail segment or to third party customers such as licensees or independent furniture retailers. Our retail segment and third-party customers now source their accessory items directly from the accessory vendors."]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2021 and 2020.

Fiscal 2021 as Compared to Fiscal 2020

Net sales for the fiscal year ended November 27, 2021 increased $74,254, or 33.6%, from the prior year due primarily to the major impact of the COVID-19 pandemic on our operations during fiscal 2020, which forced a nearly total shut-down of our manufacturing and retail operations from late March through early May of 2020, followed by an exceptionally strong recovery in demand for home furnishings that has continued through fiscal 2021. The increase in orders resulting from this surge in demand, coupled with continuing supply chain disruptions in the wake of the pandemic, has resulted in a wholesale backlog of $90,057 at November 27, 2021 as compared to $54,874 at November 28, 2020. As previously discussed, Bassett and most of the home furnishings industry has been faced with continuing logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. For fiscal 2021, gross margins improved primarily due to improved leverage on fixed costs versus the prior year period when our operations were temporarily shut down due to the pandemic partially offset by various cost increases including foam, plywood and various other commodity costs and container freight and other logistics costs. As a result of the aforementioned cost increases, we have instituted multiple price increases during the year, some of which have not been fully realized in the operations as those price increases have generally not been implemented against the existing backlog at the time those increases were given. SG&A expenses as a percentage of sales for fiscal 2021 decreased significantly from fiscal 2020 due to increased leverage of fixed costs due to higher sales volume partially offset by higher spending in the marketing and information technology areas.

Fiscal 2021 as Compared to Fiscal 2019

Because of the significant adverse impact that the COVID-19 pandemic had on our operations during the second quarter of fiscal 2020, we believe that a better understanding of the revenue growth that has resulted from our product and marketing initiatives is obtained by comparing our current year revenues to the pre-pandemic levels of fiscal 2019. Wholesale sales for fiscal 2021 increased $34,224 or 13.1% over fiscal 2019. On an average weekly basis normalizing for fiscal 2019 being a 53-week year, sales increased 15.3% over 2019. Shipments to the BHF store network declined 3.6% for fiscal 2021 as compared to fiscal 2019. Growth in shipments to the BHF store network of the Bassett Outdoor line of outdoor furniture, introduced in fiscal 2020, was offset by lower retail sales from the closure of seven Company-owned stores since the end of 2019 and the fact that fiscal 2021 included one less week of sales as compared to 2019. Shipments to the open market (independent dealers outside of the BHF store network) increased 41% for fiscal 2021 over fiscal 2019 primarily due to increases from existing dealers along with an expansion of the dealer base. Shipments of our Lane Venture line of outdoor furniture increased 35% for fiscal 2021, respectively, over the comparable fiscal 2019 periods. In addition, wholesale orders for fiscal 2021, increased 28% over fiscal 2019. Wholesale orders from independent dealers increased 67% for fiscal 2021 over fiscal 2019 driven by increases from existing dealers along with an expansion of the dealer base. Also, orders from the Bassett Home Furnishings store network for fiscal 2021 increased 4.7% over fiscal 2019 in spite of having seven fewer stores in the fleet during 2021 as well as one less week in 2021 as compared to 2019. Lane Venture orders increased by 83% for fiscal 2021 over fiscal 2019.

21

Retail Segment – Company Owned Stores

Net sales, gross profit, SG&A expense, new store pre-opening costs and operating income (loss) for our retail segment were as follows for the fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","","","","","","","","","","","Comparative Change"],["","","","","","","","","","","","","","","","","","","","","","","","","","","2021 vs 2020","","","2021 vs 2019"],["","","2021","","","2020","","","2019*","","","Dollars","","","Percent","","","Dollars","","","Percent"],["Net sales","","$","247,827","","","","100.0","%","","$","211,944","","","","100.0","%","","$","268,693","","","","100.0","%","","$","35,883","","","","16.9","%","","$","(20,866",")","","","-7.8","%"],["Gross profit (1)","","","129,372","","","","52.2","%","","","104,711","","","","49.4","%","","","137,165","","","","51.0","%","","","24,661","","","","23.6","%","","","(7,793",")","","","-5.7","%"],["SG&A","","","122,328","","","","49.4","%","","","114,208","","","","53.9","%","","","143,057","","","","53.2","%","","","8,120","","","","7.1","%","","","(20,729",")","","","-14.5","%"],["New store pre-opening costs","","","-","","","","0.0","%","","","-","","","","0.0","%","","","1,117","","","","0.4","%","","","-","","","","0.0","%","","","(1,117",")","","","-100.0","%"],["Loss from operations","","$","7,044","","","","2.8","%","","$","(9,497",")","","","-4.5","%","","$","(7,009",")","","","-2.6","%","","$","16,541","","","","NM","","","$","14,053","","","","NM"]]
[[/GREPCENT_TABLE]]

(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 Non-GAAP Financial Information above.

Retail sales by major product category for the fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019 were as follows:

[[GREPCENT_TABLE]]
[["","","2021","","","2020","","","2019*"],["Bassett Custom Upholstery","","$","139,527","","","","56.3","%","","$","112,888","","","","53.3","%","","$","142,865","","","","53.2","%"],["Bassett Leather","","","226","","","","0.1","%","","","2,326","","","","1.1","%","","","3,782","","","","1.4","%"],["Bassett Custom Wood","","","30,931","","","","12.5","%","","","28,942","","","","13.7","%","","","35,092","","","","13.1","%"],["Bassett Casegoods","","","42,658","","","","17.2","%","","","35,728","","","","16.9","%","","","44,827","","","","16.7","%"],["Accessories, mattresses & other (1)","","","34,485","","","","13.9","%","","","32,060","","","","15.1","%","","","42,127","","","","15.7","%"],["Total","","$","247,827","","","","100.0","%","","$","211,944","","","","100.0","%","","$","268,693","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(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."]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2021 and 2020.

Fiscal 2021 as Compared to Fiscal 2020

Net sales for fiscal 2021 increased $35,886 or 16.9% from the prior year due primarily to the major impact of the COVID-19 pandemic on our operations in fiscal 2020, which forced a nearly total shut-down of our retail operations from late March through early May of that year, followed by an exceptionally strong recovery in demand for home furnishings that has continued through fiscal 2021. The increase in written sales (the value of sales orders taken but not delivered) resulting from this surge in demand has resulted in a retail backlog of $82,894 at November 27, 2021 as compared to $57,041 at November 28, 2020. As previously discussed, Bassett and most of the home furnishings industry has been faced with continuing logistical challenges from COVID-related labor shortages and supply chain disruptions creating significant delays in order fulfillment and increased backlogs. Gross margins for fiscal 2021 increased by 280 basis points, primarily driven by lower levels of promotional activity coupled with improved margins on clearance activity. SG&A expenses for fiscal 2021 as a percentage of sales decreased significantly as compared to fiscal 2020. This was driven by workforce and other overhead reductions and greater leverage on fixed costs from higher sales volumes. In addition, over the course of fiscal 2020 we closed seven unprofitable store locations.

Fiscal 2021 as Compared to Fiscal 2019

Because of the significant adverse impact that the COVID-19 pandemic had on our operations during the second quarter of fiscal 2020, we believe that a better understanding of the retail revenue trend that has resulted from our product and marketing initiatives is obtained by comparing our current year revenues to the pre-pandemic levels of fiscal 2019. Compared to fiscal 2019, net sales for fiscal 2021 decreased $20,866 or 7.8%, as sales increases from the introduction of the Bassett Outdoor product line were offset by sales decreases from having seven fewer stores in operation. On an average weekly basis normalizing for fiscal 2019 being a 53-week year, sales decreased 6.0% as compared to 2019. Written sales increased 3.0% for fiscal 2021, respectively over fiscal 2019 in spite of having seven fewer stores in operation and one less week on fiscal 2021.

22

Logistical Services Segment

Revenues, operating expenses and income from operations for our logistical services segment were as follows for the fiscal years ended November 27, 2021, November 28, 2020 and November 30, 2019:

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","","","","","","","","","","","Comparative Change"],["","","","","","","","","","","","","","","","","","","","","","","","","","","2021 vs 2020","","","2021 vs 2019"],["","","2021","","","2020","","","2019*","","","Dollars","","","Percent","","","Dollars","","","Percent"],["Logistics revenue","","$","86,977","","","","100.0","%","","$","75,158","","","","100.0","%","","$","80,074","","","","100.0","%","","$","11,819","","","","15.7","%","","$","6,903","","","","8.6","%"],["Operating expenses","","","85,234","","","","98.0","%","","","73,913","","","","98.3","%","","","78,219","","","","97.7","%","","","11,321","","","","15.3","%","","","7,015","","","","9.0","%"],["Income from operations","","$","1,743","","","","2.0","%","","$","1,245","","","","1.7","%","","$","1,855","","","","2.3","%","","$","498","","","","40.0","%","","$","(112",")","","","-6.0","%"]]
[[/GREPCENT_TABLE]]

*53 weeks for fiscal 2019 as compared with 52 weeks for fiscal 2020.

Analysis of Operations – Logistical Services

Net revenues for fiscal 2021 increased $11,819 over the prior year due primarily to the major impact of the COVID-19 pandemic on our operations in fiscal 2020, which forced a near total shut-down of furniture retail operations throughout the country from late March through early May of 2020.  Zenith’s operating expenses as a percentage of revenue for 2021 improved as compared to fiscal 2020 due to better operating efficiency in our middle mile service compared to fiscal 2020 when we were forced during the second quarter of 2020 to run some of our trucks at substantially lower than optimal load levels resulting in inefficiencies. These improvements were partially offset by significantly higher warehouse labor costs as Zenith has been challenged to find and retain freight-handling personnel in the warehousing operation since reopening from the COVID shutdown. Operating expense as a percent of revenue for 2021 increased as compared to 2019 primarily due to the previously mentioned increased labor costs.

Other Items Affecting Net Income (Loss)

Other items affecting net income (loss) for fiscal 2021 and 2020 are as follows:

[[GREPCENT_TABLE]]
[["","","2021","","","2020"],["Interest income (1)","","$","54","","","$","236"],["Interest expense (2)","","","(322",")","","","(49",")"],["Net periodic pension costs (3)","","","(422",")","","","(499",")"],["Net gains (cost) of company-owned life insurance (4)","","","(364",")","","","647"],["Other","","","(705",")","","","(898",")"],["Total other loss, net","","$","(1,759",")","","$","(563",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Consists of interest income arising from our short-term investments and interest-bearing cash equivalents. The decline in interest income for fiscal 2021 as compared with fiscal 2020 was due primarily to lower interest rates. See Note 3 to the Consolidated Financial Statements for additional information regarding our investments in certificates of deposit."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(2)","The increase in interest expense in fiscal 2021 over fiscal 2020 is due to the increase in finance leases for tractor, trailer and office equipment. See Note 14 to the Consolidated Financial Statements for additional information regarding our leases."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(3)","Represents the portion of net periodic pension costs not included in income from operations. See Note 9 to the Consolidated Financial Statements for additional information related to our defined benefit pension plans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(4)","Includes a gain arising from death benefits from Company-owned life insurance of $914 in fiscal 2020."]]
[[/GREPCENT_TABLE]]

Provision for Income taxes

On March 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, for the year ended November 28, 2020, we were able to recognize tax benefits substantially in excess of the current federal statutory rate of 21% due to the effects of carrying back our current net operating loss to tax years in which the federal statutory rate was 35%.

23

We recorded an income tax provision (benefit) of $6,198, $(6,365) and $188 in fiscal 2021, 2020 and 2019, respectively. Our effective tax rate for 2021 of 25.6% differs from the federal statutory rate of 21.0% due to the effects of state income taxes and various permanent differences. Our effective tax rate of 37.9% for 2020 differs from the federal statutory rate of 21.0% primarily due to the benefit of the CARES Act and to the effects of state income taxes and various permanent differences, including those related to the non-deductible goodwill impairment charge. Our effective tax rate of (10.8%) for 2019 differs from the federal statutory rate of 21.0% primarily due to the non-deductible goodwill impairment charge along with the effects of state income taxes and certain other non-deductible expense. See Note 12 to the Consolidated Financial Statements for additional information regarding our income tax provision (benefit), as well as our net deferred tax assets and other matters.

We have net deferred tax assets of $3,189 as of November 27, 2021, which, upon utilization, are expected to reduce our cash outlays for income taxes in future years. It will require approximately $12,000 of future taxable income to utilize our net deferred tax assets.

Liquidity and Capital Resources

We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, to allow us to take advantage of opportunities as market conditions improve, and to execute our long-term retail strategies.

Cash Flows

Cash provided by operations for fiscal 2021 was $14,563 compared to $36,675 for fiscal 2020, representing a decrease of $22,112. This decrease in operating cash flow is primarily due to significantly increased investment in inventory as we work to fulfill our order backlog and cope with ongoing supply chain disruptions partially offset by increased customer deposits associated with the increase in retail backlogs.

Our overall cash position decreased by $11,425 during fiscal 2021, compared to an overall increase of $26,112 during fiscal 2020, a decline of $37,537 from the prior year. In addition to the decline in cash flows from operations, net cash used in investing activities during fiscal 2021 increased $7,824 to a net use of $11,571 compared to net cash used in investing activities of $3,747 for the prior year. This increase was primarily due to increased capital expenditures in the current year while the prior year period also included proceeds from the sale of our closed Gulfport store location. Net cash used in financing activities during fiscal 2021 increased $7,601 to a net use of $14,417 as compared to a net use of $6,816 for the prior year, primarily due to increased share repurchases of $5,566 during fiscal 2021 as compared to $2,208 repurchased during fiscal 2020 along with a special dividend of $2,479 declared and paid during fiscal 2021. As of November 27, 2021, $19,348 remains authorized under our existing share repurchase plan. With cash and cash equivalents and short-term investments totaling $52,089 on hand at November 27, 2021, expected future operating cash flows and the availability under our credit line noted below, we believe we have sufficient liquidity to fund operations for the foreseeable future.

Debt and Other Obligations

Our bank credit facility provides for a line of credit of up to $25,000. At November 27, 2021, we had $3,931 outstanding under standby letters of credit against our line, leaving availability under our credit line of $21,069. In addition, we have outstanding standby letters of credit with another bank totaling $325. 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. We were in compliance with all covenants under the agreement as of November 27, 2021. The credit facility matures on January 31, 2022.

On January 27, 2022, we entered into a new credit facility with our bank which also provides for a credit line of up to $25,000. The line bears interest at the One-Month Term Secured Overnight Financing Rate (“One-Month Term SOFR”) plus 1.5% and is unsecured. Our bank will charge a fee of 0.25% on the daily unused balance of the line, payable quarterly. Under the terms of the new facility, we must maintain the following financial covenants, measured quarterly on a rolling twelve-month basis:

[[GREPCENT_TABLE]]
[["","\u25cf","Consolidated fixed charge coverage ratio of not less than 1.4 times,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Consolidated lease-adjusted leverage ratio not to exceed 3.0 times, and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Minimum tangible net worth ratio of $140,000, which will change to $120,000 if we do not complete the sale of Zenith (see \u201cRecent Development Regarding Zenith\u201d under Part I, Item 1 of this Annual Report regarding our entry into an agreement to sell substantially all of the assets of Zenith)."]]
[[/GREPCENT_TABLE]]

We were in compliance with these covenants at November 27, 2021 and expect to remain in compliance for the foreseeable future. The new credit facility will mature on January 27, 2025, at which time any amounts outstanding under the facility will be due.

We lease land and buildings that are used in the operation of our Company-owned retail stores as well as in the operation of certain of our licensee-owned stores, and we lease land and buildings at various locations throughout the continental United 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 at November 27, 2021 is $164,855, the present value of which is $141,674 and is included in our accompanying consolidated balance sheet at November 27, 2021. We were contingently liable under licensee lease obligation guarantees in the amount of $1,845 at November 27, 2021. Remaining terms under these lease guarantees range from approximately one to five years. See Note 14 to our consolidated financial statements for a schedule of future cash payments on our lease obligations and additional details regarding our leases and lease guarantees.

24

We provide post-employment benefits to certain current and former executives and management level employees of the Company. Included among these benefits are two defined-benefit plans with a combined projected benefit obligation of $10,740 at November 27, 2021. See Note 9 to our consolidated financial statements for a projection of future benefit payments under these plans from 2022 through 2031. We also have deferred compensation plans with a total liability of $3,437 at November 27, 2021, the current portion of which is $296. See Note 9 to our consolidated financial statements for additional information regarding these plans.

Dividends and Share Repurchases

During fiscal 2021, we declared and paid four quarterly dividends totaling $5,210, or $0.53 per share, as well as one special dividend totaling $2,479, or $0.25 per share. During fiscal 2021, we repurchased 204,714 shares of our stock for $5,566 under our share repurchase program. The weighted-average effect of these share repurchases on both our basic and diluted earnings per share was approximately $0.02 per share. On July 15, 2021, our Board of Directors increased the remaining limit of the repurchase plan to $20,000. The approximate dollar value that may yet be purchased pursuant to our stock repurchase program as of November 27, 2021 was $19,348.

Capital Expenditures

We currently anticipate that total capital expenditures for fiscal 2022 will be approximately $25 to $30 million, approximately half of which will be used for the purchase and renovation of a site for a new retail store in a new market as well as repositions of two other retail locations, with the remainder used for the expansion and upgrade of our outdoor furniture manufacturing facilities in Haleyville, Alabama along with additional investments in technology and various other manufacturing upgrades within our wholesale segment. Our capital expenditure and working capital requirements in the foreseeable future may change depending on many factors, including but not limited to the overall performance of the store program, our rate of growth, our operating results and any adjustments in our operating plan needed in response to industry conditions, competition or unexpected events. We believe that our existing cash, together with cash from operations, will be sufficient to meet our capital expenditure and working capital requirements for the foreseeable future. 

Fair Value Measurements

We account for items measured at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

We believe that the carrying amounts of our current assets and current liabilities approximate fair value due to the short-term nature of these items. Our primary non-recurring fair value estimates, typically involving the valuation of business acquisitions, goodwill impairments (see Note 7 to the Consolidated Financial Statements) and asset impairments (see Note 13 to the Consolidated Financial Statements) have utilized Level 3 inputs.

Off-Balance Sheet Arrangements

We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. We lease land and buildings that are primarily used in the operation of BHF stores and Zenith distribution facilities. We have guaranteed certain lease obligations of licensee operators as part of our retail strategy. See Note 14 to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K, 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 claims and litigation as well as environmental matters, which arise in the normal course of business. Although the final outcome of these legal and environmental 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.

25

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which requires that certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes. Actual results could differ from these estimates and assumptions. We use our best judgment in valuing these estimates and may, as warranted, solicit external advice. Estimates are based on current facts and circumstances, prior experience and other assumptions believed to be reasonable. The following critical accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect our consolidated financial statements.

Revenue Recognition - We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606 or "ASC 606") effective as of November 25, 2018, the beginning of our 2019 fiscal year. ASC 606 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. For our wholesale and retail segments, revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the buyer.

At wholesale, transfer occurs and revenue is recognized upon the shipment of goods to independent dealers and licensee-owned BHF stores. We offer payment terms varying from 30 to 60 days for wholesale customers. Estimates for returns and allowances have been recorded as a reduction of revenue based on our historical return patterns. The contracts with our licensee store owners do not provide for any royalty or license fee to be paid to us.

At retail, transfer occurs and revenue is recognized upon delivery of goods to the customer. We typically collect a significant portion of the purchase price as a customer deposit upon order, with the balance typically collected upon delivery. These deposits are carried on our balance sheet as a current liability until delivery is fulfilled and amounted to $51,492 and $25,341 as of November 27, 2021 and November 28, 2020, respectively. Substantially all of the customer deposits held at November 28, 2020 related to performance obligations satisfied during fiscal 2021 and have therefore been recognized in revenue for the year ended November 27, 2021. Estimates for returns and allowances have been recorded as a reduction of revenue based on our historical return patterns. We also sell furniture protection plans to our retail customers on behalf of a third party which is responsible for the performance obligations under the plans. Revenue from the sale of these plans is recognized upon delivery of the goods net of amounts payable to the third party service provider.

For our logistical services segment, line-haul freight revenue is recognized as services are performed and are billed to the customer upon the completion of delivery to the destination. Because the customer receives the benefits of these services as the freight is in transit from point of origin to destination, we recognize revenue using a percentage of completion method based on our estimate of the amount of time freight has been in transit as of the reporting date compared with our estimate of the total required time for the deliveries. We recognize an asset for the amount of line-haul revenue earned but not yet billed which is included in other current assets. The balance of this asset was $1,240 and $783 at November 27, 2021 and November 28, 2020, respectively. Warehousing services revenue is based upon warehouse space occupied by a customer’s goods and inventory movements in and out of a warehouse and is recognized as such services are provided and billed to the customer concurrently in the same period. All invoices for logistical services are due 30 days from invoice date.

Allowance for credit losses - We maintain an allowance for credit losses for estimated losses resulting from the inability of our customers to make required payments. Our accounts receivable reserves were $796 and $1,211 at November 27, 2021 and November 28, 2020, respectively, representing 2.7% and 5.1% of our gross accounts receivable balances at those dates, respectively. The allowance for credit losses is based on a review of specifically identified customer accounts in addition to an overall aging analysis which is applied to accounts pooled on the basis of similar risk characteristics. Judgments are made with respect to the collectibility of accounts receivable within each pool based on historical experience, current payment practices and current economic trends based on our expectations over the expected life of the receivables, which is generally ninety days or less. Although actual losses have not differed materially from our previous estimates, future losses could differ from our current estimates. Unforeseen events such as a licensee or customer bankruptcy filing could have a material impact on our results of operations.

Inventories - Inventories accounted for under the first-in, first out (“FIFO”) method are stated at the lower of cost or net realizable value, and inventory accounted for under the last-in, first out method (“LIFO”) is stated at the lower of cost or market. Cost is determined for domestic furniture inventories, excluding outdoor furniture products, using the LIFO method. The cost of imported inventories and domestic outdoor furniture products is determined on a FIFO basis. We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand and market conditions. Our reserves for excess and obsolete inventory were $4,816 and $4,522 at November 27, 2021 and November 28, 2020, respectively, representing 5.8% and 7.6%, respectively, of our inventories on a LIFO basis. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

Goodwill – Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets and liabilities and identifiable intangible assets of businesses acquired. The acquisition of assets and liabilities and the resulting goodwill is allocated to the respective reporting unit: Wood, Upholstery, Retail or Logistical Services. We review goodwill at the reporting unit level annually for impairment or more frequently if events or circumstances indicate that assets might be impaired.

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In accordance with ASC Topic 350, Intangibles – Goodwill & Other, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test described in ASC Topic 350 (as amended by Accounting Standards Update No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which we adopted for our annual evaluation of goodwill performed as of September 1, 2019). The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing the quantitative evaluation process. Based on our qualitative assessment as described above for the annual test during fiscal 2019, we concluded that, given declines in our income from operations, primarily resulting from operating losses incurred in our retail reporting unit, as well as in our stock price since the previous analysis in fiscal 2018, it was necessary to perform the quantitative evaluation in the current year. As a result of this test, we recorded an impairment charge of $1,926 during the year ended November 30, 2019. In addition, we performed an interim test of goodwill as of May 30, 2020 due to the severe impact of the COVID-19 pandemic and resulting business interruption during the second fiscal quarter of 2020. This interim test resulted in an impairment charge of $1,971 for the year ended November 28, 2020. For the annual tests of goodwill performed as of the beginning of the fourth fiscal quarters of 2020 and 2021, we performed the qualitative assessment as described above and concluded that there has been no additional impairment of our goodwill as of November 27, 2021.

The quantitative evaluation compares the carrying value of each reporting unit that has goodwill with the estimated fair value of the respective reporting unit. Should the carrying value of a reporting unit be in excess of the estimated fair value of that reporting unit, a goodwill impairment charge will be recognized in the amount by which the reporting unit’s carrying amount exceeds its fair value, but not to exceed the total goodwill assigned to the reporting unit. The determination of the fair value of our reporting units is based on a combination of a market approach, that considers benchmark company market multiples, an income approach, that utilizes discounted cash flows for each reporting unit and other Level 3 inputs as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosure, and, in the case of our retail reporting unit, a cost approach that utilizes estimates of net asset value. The cash flows used to determine fair value are dependent on a number of significant management assumptions such as our expectations of future performance and the expected future economic environment, which are partly based upon our historical experience. Our estimates are subject to change given the inherent uncertainty in predicting future results. Additionally, the discount rate and the terminal growth rate are based on our judgment of the rates that would be utilized by a hypothetical market participant. As part of the goodwill impairment testing, we also consider our market capitalization in assessing the reasonableness of the combined fair values estimated for our reporting units. While we believe such assumptions and estimates are reasonable, the actual results may differ materially from the projected amounts.

Other Intangible Assets – Intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or between annual tests when an impairment indicator exists. The recoverability of indefinite-lived intangible assets is assessed by comparison of the carrying value of the asset to its estimated fair value. If we determine that the carrying value of the asset exceeds its estimated fair value, an impairment loss equal to the excess would be recorded. At November 27, 2021, our indefinite-lived intangible assets other than goodwill consist of trade names acquired in the acquisitions of Zenith and Lane Venture and have a carrying value of $9,338.

Definite-lived intangible assets are amortized over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We estimate the useful lives of our intangible assets and ratably amortize the value over the estimated useful lives of those assets. If the estimates of the useful lives should change, we will amortize the remaining book value over the remaining useful lives or, if an asset is deemed to be impaired, a write-down of the value of the asset may be required at such time. At November 27, 2021 our definite-lived intangible assets consist of customer relationships and customized technology applications acquired in the acquisition of Zenith and customer relationships acquired in the acquisition of Lane Venture with a total carrying value of $1,964.

Impairment of Long-Lived Assets - We periodically evaluate whether events or circumstances have occurred that indicate long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. When analyzing our real estate properties for potential impairment, we consider such qualitative factors as our experience in leasing and selling real estate properties as well as specific site and local market characteristics. Upon the closure of a Bassett Home Furnishings store, we generally write off all tenant improvements which are only suitable for use in such a store. Right of use assets under operating leases are written down to their estimated fair value. Our estimates of the fair value of the impaired right of use assets include estimates of discounted cash flows based upon current market rents and other inputs which we consider to be Level 3 inputs as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurement and Disclosure.

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Recent Accounting Pronouncements

See Note 2 to our Consolidated Financial Statements regarding the impact or potential impact of recent accounting pronouncements upon our financial position and results of operations.

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