Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 114-year history has instilled the principles of quality, value, and integrity in everything we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and meet the demands of a global economy.
With 91 BHF stores at August 27, 2016, 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. We created our store program in 1997 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 25 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 ready for delivery in less than 30 days, 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 each 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 factories in Newton, North Carolina and Grand Prairie, Texas that manufacture upholstered 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 recently introduced “Bench Made” line of furniture. 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 a timeframe to meet the 30 day promise. In addition to the furniture that we manufacture domestically, we source most of our formal bedroom and dining room furniture and certain upholstery offerings from several foreign plants, primarily in Vietnam and China. Over 65% of the products we currently sell are manufactured in the United States.
“Bench Made” is a selection of American dining furniture that first appeared in retail showrooms during the second quarter of 2015. Partnering with nearby hardwood component manufacturers, we are preparing, distressing, finishing, and assembling an assortment of solid maple tables and chairs in our newly renovated facility in Bassett, Virginia. Due to its strong reception, we have expanded “Bench Made” offerings to include bedroom and occasional furniture starting in May of 2016. Also in 2016 we began moving to a great room centric floor plan for our retail locations that will focus more on our domestic upholstery products that have lead our sales increases in recent years complemented by both imported and domestically produced entertainment and occasional furnishings. All of these new products have been carefully designed in coordination with our merchants, designers, engineers and finishing technicians to achieve the upscale casual decor that we believe speaks to today’s consumer.
For many years we owned 49% of Zenith Freight Lines, LLC (“Zenith”). During that time the strategic significance of our partnership with Zenith had risen to include the over-the-road transportation of furniture, the operation of regional freight terminals, warehouse and distribution facilities in eleven states, and the management of various home delivery facilities that service BHF stores and other clients in local markets around the United States. On February 2, 2015, we acquired the remaining 51% of Zenith, which now operates as a wholly-owned subsidiary of Bassett. Our acquisition of Zenith brings to our Company the ability to deliver best-of-class shipping and logistical support services that are uniquely tailored to the needs of the furniture industry, as well as the ability to provide the expedited delivery service which is increasingly demanded by our industry. We believe that our ownership of Zenith will not only enhance our own wholesale and retail distribution capabilities, but will provide additional growth opportunities as Zenith continues to expand its service to other customers.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
In September of 2011, we announced the formation of a strategic partnership with HGTV (Home and Garden Television), a division of Scripps Networks, LLC, which combines our heritage in the furniture industry with the penetration of 96 million households in the United States that HGTV enjoys today. As part of this alliance, the in-store design centers have been co-branded with HGTV to more forcefully market the concept of a “home makeover”, an important point of differentiation for our stores that also mirrors much of the programming content on the HGTV network. We believe the new co-branded design centers coupled with the targeted national advertising on HGTV have played a key role in our improved comparable store sales since their introduction. In October of 2015, we announced the extension of our partnership with HGTV through 2019. While continuing to feature HGTV branded custom upholstery products in our HGTV Home Design Studios in BHF stores, we have now expanded the concept to select independent dealers. We believe this will provide additional growth outside our BHF store network.
At August 27, 2016, our BHF store network included 59 Company-owned stores and 32 licensee-owned stores. During the first nine months of 2016, we closed three underperforming stores in Tucson, Arizona; Egg Harbor, New Jersey and Fountain Valley, California. We opened a new store in Sterling, Virginia during the second quarter of 2016 and opened another new store in Hunt Valley, Maryland during the third quarter of 2016.
Due to the improved operating performance of our retail network over the last few years, we are expanding our retail presence in various parts of the country. We currently have signed leases for three new stores that we expect to open during fiscal 2017. In addition, we have a signed lease for the repositioning of one of our legacy stores to an improved location which we expect to occur in the first half of 2017. We are also in various stages of negotiation on several leases for both new store locations and relocations of existing stores. While there can be no assurance that any of these leases will be completed, we expect additional store openings and relocations during fiscal 2017.
As with any retail operation, prior to opening a new store we incur such expenses as rent, training costs and other payroll related costs. These costs generally range between $100 to $300 per store depending on the overall rent costs for the location and the period between the time when we take physical possession of the store space and the time of the store opening. Generally, rent payments during a buildout period between delivery of possession and opening of a new store are deferred and therefore straight line rent expense recognized during that time does not require cash. Inherent in our retail business model, we also incur losses in the two to three months of operation following a new store opening. Like other furniture retailers, we do not recognize a sale until the furniture is delivered to our customer. Because our retail business model does not involve maintaining a stock of retail inventory that would result in quick delivery and because of the custom nature of many of our furniture offerings, delivery to our customers usually occurs about 30 days after an order is placed. We generally require a deposit at the time of order and collect the remaining balance when the furniture is delivered, at which time the sale is recognized. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $300 to $500 per store. While our retail expansion is initially costly, we believe our site selection and new store presentation will generally result in locations that operate at or above a retail break-even level within a reasonable period of time following store opening. Factors affecting the length of time required to achieve this goal on a store-by-store basis may include the level of brand recognition, the degree of local competition and the depth of penetration in a particular market. Even as new stores ramp up to break-even, we do realize additional wholesale sales volume that leverages the fixed costs in our wholesale business.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Results of Operations –
Periods ended August 27, 2016 compared with periods ended August 29, 2015
:
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 periods ended August 27, 2016 and August 29, 2015:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and accessories
|
|
$
|
91,465
|
|
|
|
87.3
|
%
|
|
$
|
97,107
|
|
|
|
87.5
|
%
|
|
$
|
276,857
|
|
|
|
87.0
|
%
|
|
$
|
286,122
|
|
|
|
90.7
|
%
|
Logistics revenue
|
|
|
13,247
|
|
|
|
12.7
|
%
|
|
|
13,904
|
|
|
|
12.5
|
%
|
|
|
41,395
|
|
|
|
13.0
|
%
|
|
|
29,250
|
|
|
|
9.3
|
%
|
Total sales revenue
|
|
|
104,712
|
|
|
|
100.0
|
%
|
|
|
111,011
|
|
|
|
100.0
|
%
|
|
|
318,252
|
|
|
|
100.0
|
%
|
|
|
315,372
|
|
|
|
100.0
|
%
|
Cost of furniture and accessories sold
|
|
|
40,091
|
|
|
|
38.3
|
%
|
|
|
44,824
|
|
|
|
40.4
|
%
|
|
|
124,496
|
|
|
|
39.1
|
%
|
|
|
133,676
|
|
|
|
42.4
|
%
|
SG&A expenses
|
|
|
56,800
|
|
|
|
54.2
|
%
|
|
|
58,303
|
|
|
|
52.5
|
%
|
|
|
173,845
|
|
|
|
54.6
|
%
|
|
|
163,203
|
|
|
|
51.7
|
%
|
New store pre-opening costs
|
|
|
281
|
|
|
|
0.3
|
%
|
|
|
192
|
|
|
|
0.2
|
%
|
|
|
727
|
|
|
|
0.2
|
%
|
|
|
236
|
|
|
|
0.1
|
%
|
Other charges
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
974
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
7,540
|
|
|
|
7.2
|
%
|
|
$
|
7,692
|
|
|
|
6.9
|
%
|
|
$
|
19,184
|
|
|
|
6.1
|
%
|
|
$
|
17,283
|
|
|
|
5.5
|
%
|
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 nine months ended August 27, 2016 as compared with the prior year periods.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(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 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 income.
Retail – Company-owned
s
tores.
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.
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, delivery 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 statement of income. Zenith’s operating costs are included in selling, general and administrative expenses. Amounts charged by Zenith to the Company for transportation and logistical services prior to February 2, 2015 are included in selling, general and administrative expenses, and our equity in the earnings of Zenith prior to the date of acquisition is included in other loss, net, in the accompanying statements of income.
The following tables illustrate the effects of various intercompany eliminations on income (loss) from operations in the consolidation of our segment results:
|
|
Quarter Ended August 27, 2016
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
58,303
|
|
|
$
|
61,216
|
|
|
$
|
-
|
|
|
$
|
(28,054
|
)(1)
|
|
$
|
91,465
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
22,991
|
|
|
|
(9,744
|
)(2)
|
|
|
13,247
|
|
Total sales revenue
|
|
|
58,303
|
|
|
|
61,216
|
|
|
|
22,991
|
|
|
|
(37,798
|
)
|
|
|
104,712
|
|
Cost of furniture and accessories sold
|
|
|
37,637
|
|
|
|
30,478
|
|
|
|
-
|
|
|
|
(28,024
|
)(3)
|
|
|
40,091
|
|
SG&A expense
|
|
|
15,018
|
|
|
|
29,689
|
|
|
|
22,317
|
|
|
|
(10,224
|
)(4)
|
|
|
56,800
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
281
|
|
Income from operations
|
|
$
|
5,648
|
|
|
$
|
768
|
|
|
$
|
674
|
|
|
$
|
450
|
|
|
$
|
7,540
|
|
|
|
Quarter Ended August 29, 2015
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
62,165
|
|
|
$
|
62,009
|
|
|
$
|
-
|
|
|
$
|
(27,067
|
)(1)
|
|
$
|
97,107
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
23,650
|
|
|
|
(9,746
|
)(2)
|
|
|
13,904
|
|
Total sales revenue
|
|
|
62,165
|
|
|
|
62,009
|
|
|
|
23,650
|
|
|
|
(36,813
|
)
|
|
|
111,011
|
|
Cost of furniture and accessories sold
|
|
|
41,332
|
|
|
|
30,868
|
|
|
|
-
|
|
|
|
(27,376
|
)(3)
|
|
|
44,824
|
|
SG&A expense
|
|
|
17,038
|
|
|
|
28,912
|
|
|
|
22,580
|
|
|
|
(10,227
|
)(4)
|
|
|
58,303
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
192
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192
|
|
Income from operations (5)
|
|
$
|
3,795
|
|
|
$
|
2,037
|
|
|
$
|
1,070
|
|
|
$
|
790
|
|
|
$
|
7,692
|
|
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
|
|
Nine Months Ended August 27, 2016
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
177,785
|
|
|
$
|
184,754
|
|
|
$
|
-
|
|
|
$
|
(85,682
|
) (1)
|
|
$
|
276,857
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
71,480
|
|
|
|
(30,085
|
) (2)
|
|
|
41,395
|
|
Total sales revenue
|
|
|
177,785
|
|
|
|
184,754
|
|
|
|
71,480
|
|
|
|
(115,767
|
)
|
|
|
318,252
|
|
Cost of furniture and accessories sold
|
|
|
116,571
|
|
|
|
93,434
|
|
|
|
-
|
|
|
|
(85,509
|
) (3)
|
|
|
124,496
|
|
SG&A expense
|
|
|
46,834
|
|
|
|
89,128
|
|
|
|
69,401
|
|
|
|
(31,518
|
) (4)
|
|
|
173,845
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
727
|
|
Income from operations (5)
|
|
$
|
14,380
|
|
|
$
|
1,465
|
|
|
$
|
2,079
|
|
|
$
|
1,260
|
|
|
$
|
19,184
|
|
|
|
Nine Months Ended August 29, 2015
|
|
|
|
Wholesale
|
|
|
Retail
|
|
|
Logistics
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture & accessories
|
|
$
|
187,675
|
|
|
$
|
183,113
|
|
|
$
|
-
|
|
|
$
|
(84,666
|
) (1)
|
|
$
|
286,122
|
|
Logistics
|
|
|
-
|
|
|
|
-
|
|
|
|
51,607
|
|
|
|
(22,357
|
) (2)
|
|
|
29,250
|
|
Total sales revenue
|
|
|
187,675
|
|
|
|
183,113
|
|
|
|
51,607
|
|
|
|
(107,023
|
)
|
|
|
315,372
|
|
Cost of furniture and accessories sold
|
|
|
126,130
|
|
|
|
91,432
|
|
|
|
-
|
|
|
|
(83,886
|
) (3)
|
|
|
133,676
|
|
SG&A expense
|
|
|
50,027
|
|
|
|
87,478
|
|
|
|
49,518
|
|
|
|
(23,820
|
) (4)
|
|
|
163,203
|
|
New store pre-opening costs
|
|
|
-
|
|
|
|
236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236
|
|
Income from operations (5)
|
|
$
|
11,518
|
|
|
$
|
3,967
|
|
|
$
|
2,089
|
|
|
$
|
683
|
|
|
$
|
18,257
|
|
(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 and retail segments.
|
(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 retail and wholesale segments as follows:
|
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany logistical services
|
|
$
|
(9,744
|
)
|
|
$
|
(9,746
|
)
|
|
$
|
(30,085
|
)
|
|
$
|
(22,357
|
)
|
Intercompany rents
|
|
|
(480
|
)
|
|
|
(481
|
)
|
|
|
(1,433
|
)
|
|
|
(1,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A expense elimination
|
|
$
|
(10,224
|
)
|
|
$
|
(10,227
|
)
|
|
$
|
(31,518
|
)
|
|
$
|
(23,820
|
)
|
(5)
|
Excludes the effects of management restucturing costs, asset impairment charges and lease exit costs, which are not allocated to our segments.
|
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Wholesale
s
egment
Results for the wholesale segment for the three and nine months ended August 27, 2016 and August 29, 2015 are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
58,303
|
|
|
|
100.0
|
%
|
|
$
|
62,165
|
|
|
|
100.0
|
%
|
|
$
|
177,785
|
|
|
|
100.0
|
%
|
|
$
|
187,675
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
20,666
|
|
|
|
35.4
|
%
|
|
|
20,833
|
|
|
|
33.5
|
%
|
|
|
61,214
|
|
|
|
34.4
|
%
|
|
|
61,545
|
|
|
|
32.8
|
%
|
SG&A expenses
|
|
|
15,018
|
|
|
|
25.7
|
%
|
|
|
17,038
|
|
|
|
27.4
|
%
|
|
|
46,834
|
|
|
|
26.3
|
%
|
|
|
50,027
|
|
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
5,648
|
|
|
|
9.8
|
%
|
|
$
|
3,795
|
|
|
|
6.1
|
%
|
|
$
|
14,380
|
|
|
|
8.1
|
%
|
|
$
|
11,518
|
|
|
|
6.1
|
%
|
Quarterly Analysis of Results - Wholesale
Net sales for the wholesale segment were $58,303 for the third quarter of 2016 as compared to $62,165 for the third quarter of 2015, a decrease of $3,862 or 6.2%. This sales decrease was driven by a 16% decrease in open market shipments (outside the BHF store network) while shipments to the BHF store network were essentially flat compared to the prior year period.
The decrease in sales to the open market was primarily due to
lower sales of imported product primarily from the discontinuation of our relationship with a significant customer and loss of sales from the HGTV Home Collection brand, exited late in 2015.
Gross margins for the wholesale segment were 35.4% for the third quarter of 2016 as compared to 33.5% for the third quarter of 2015. This increase is primarily due to the $1,428 million settlement of the Polyurethane Foam Antitrust Litigation. Excluding the effects of the legal settlement, the gross margin would have been 33.0%. This decrease is due primarily to lower margins in domestic wood operations associated with introduction of new products into the growing Bench Made line. SG&A as a percentage of sales decreased to 25.7% as compared to 27.4% for the third quarter of 2015 primarily due to lower incentive compensation expenses of $612 and bad debt costs of $444. Operating income was $5,648 or 9.8% of sales as compared to $3,795 or 6.1% of sales in the prior year quarter.
Year-to-date
Analysis of Results - Wholesale
Net sales for the wholesale segment were $177,785 for the first nine months of 2016 as compared to $187,675 for the first nine months of 2015, a decrease of $9,890 or 5.3%. This sales decrease was driven by a 12% decrease in open market shipments (outside the BHF store network) and a 1.9% decrease in shipments to the BHF store network.
The decrease in sales to the BHF network and the open market was primarily due to general softness at retail. In addition, sales to the open market were impacted by the loss of sales from the HGTV Home Collection branded line of wood furniture, which was discontinued in late 2015
and the discontinuation of our relationship with a significant customer
. Gross margins for the wholesale segment were 34.4% for the first nine months of 2016 as compared to 32.8% for the first nine months of 2015. Excluding the above mentioned legal settlement, the gross margin for the nine months of 2016 would have been 33.6%. This increase over 2015 was driven largely by higher margins in the imported wood operation from favorable ocean freight and lower impact from discounting, as we were exiting the open market HGTV Home Collection brand in 2015. In addition, gross margins in the upholstery operation improved due to improved pricing strategies coupled with favorable raw material costs. In August 2016, Hanjin Shipping Co. LTD filed for bankruptcy protection at the Seoul Central District Court. Hanjin is one of the top 10 container carriers in the world in terms of capacity. While we were not directly impacted by the filing, we expect ocean container rates to increase throughout the network and potentially reduce our margins on imported product in the future. SG&A as a percentage of sales decreased to 26.3% as compared to 26.7% for the first nine months of 2015 primarily due to lower incentive compensation expenses of $880 and bad debt costs of $706. The prior year period also included $335 of costs associated with the acquisition of Zenith. Operating income for the first nine months of 2016 was $14,380 or 8.1% of sales as compared to $11,518 or 6.1% of sales in the comparable prior year period.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Wholesale shipments by type:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wood
|
|
$
|
21,503
|
|
|
|
36.9
|
%
|
|
$
|
23,381
|
|
|
|
37.6
|
%
|
|
$
|
65,945
|
|
|
|
37.1
|
%
|
|
$
|
69,043
|
|
|
|
36.8
|
%
|
Upholstery
|
|
|
36,300
|
|
|
|
62.3
|
%
|
|
|
38,141
|
|
|
|
61.4
|
%
|
|
|
109,868
|
|
|
|
61.8
|
%
|
|
|
117,054
|
|
|
|
62.4
|
%
|
Other
|
|
|
500
|
|
|
|
0.9
|
%
|
|
|
643
|
|
|
|
1.0
|
%
|
|
|
1,972
|
|
|
|
1.1
|
%
|
|
|
1,578
|
|
|
|
0.8
|
%
|
Total
|
|
$
|
58,303
|
|
|
|
100.0
|
%
|
|
$
|
62,165
|
|
|
|
100.0
|
%
|
|
$
|
177,785
|
|
|
|
100.0
|
%
|
|
$
|
187,675
|
|
|
|
100.0
|
%
|
Wholesale Backlog
The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $10,544 at August 27, 2016 as compared with $12,916 at August 29, 2015.
Retail – Company-
o
wned
s
tores
segment
Results for the retail segment for the periods ended August 27, 2016 and August 29, 2015 are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
61,216
|
|
|
|
100.0
|
%
|
|
$
|
62,009
|
|
|
|
100.0
|
%
|
|
$
|
184,754
|
|
|
|
100.0
|
%
|
|
$
|
183,113
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
30,738
|
|
|
|
50.2
|
%
|
|
|
31,141
|
|
|
|
50.2
|
%
|
|
|
91,320
|
|
|
|
49.4
|
%
|
|
|
91,681
|
|
|
|
50.1
|
%
|
SG&A expenses
|
|
|
29,689
|
|
|
|
48.5
|
%
|
|
|
28,912
|
|
|
|
46.6
|
%
|
|
|
89,128
|
|
|
|
48.2
|
%
|
|
|
87,478
|
|
|
|
47.8
|
%
|
New store pre-opening costs
|
|
|
281
|
|
|
|
0.5
|
%
|
|
|
192
|
|
|
|
0.3
|
%
|
|
|
727
|
|
|
|
0.4
|
%
|
|
|
236
|
|
|
|
0.1
|
%
|
Income from operations
|
|
$
|
768
|
|
|
|
1.3
|
%
|
|
$
|
2,037
|
|
|
|
3.3
|
%
|
|
$
|
1,465
|
|
|
|
0.8
|
%
|
|
$
|
3,967
|
|
|
|
2.2
|
%
|
Results for comparable stores
†
(56 stores for both the quarter and nine months) are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
59,371
|
|
|
|
100.0
|
%
|
|
$
|
59,884
|
|
|
|
100.0
|
%
|
|
$
|
176,425
|
|
|
|
100.0
|
%
|
|
$
|
175,849
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
29,803
|
|
|
|
50.2
|
%
|
|
|
30,167
|
|
|
|
50.4
|
%
|
|
|
87,880
|
|
|
|
49.8
|
%
|
|
|
88,359
|
|
|
|
50.2
|
%
|
SG&A expenses
|
|
|
28,353
|
|
|
|
47.8
|
%
|
|
|
27,621
|
|
|
|
46.1
|
%
|
|
|
84,088
|
|
|
|
47.7
|
%
|
|
|
83,237
|
|
|
|
47.3
|
%
|
Income from operations
|
|
$
|
1,450
|
|
|
|
2.4
|
%
|
|
$
|
2,546
|
|
|
|
4.3
|
%
|
|
$
|
3,792
|
|
|
|
2.1
|
%
|
|
$
|
5,122
|
|
|
|
2.9
|
%
|
†
“Comparable” stores include those locations that have been open and operated by the Company for all of each respective comparable period.
Results for all other stores are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,845
|
|
|
|
100.0
|
%
|
|
$
|
2,125
|
|
|
|
100.0
|
%
|
|
$
|
8,329
|
|
|
|
100.0
|
%
|
|
$
|
7,264
|
|
|
|
100.0
|
%
|
Gross profit
|
|
|
935
|
|
|
|
50.7
|
%
|
|
|
974
|
|
|
|
45.8
|
%
|
|
|
3,440
|
|
|
|
41.3
|
%
|
|
|
3,322
|
|
|
|
45.7
|
%
|
SG&A expenses
|
|
|
1,336
|
|
|
|
72.4
|
%
|
|
|
1,291
|
|
|
|
60.8
|
%
|
|
|
5,040
|
|
|
|
60.5
|
%
|
|
|
4,241
|
|
|
|
58.4
|
%
|
New store pre-opening costs
|
|
|
281
|
|
|
|
15.2
|
%
|
|
|
192
|
|
|
|
9.0
|
%
|
|
|
727
|
|
|
|
8.7
|
%
|
|
|
236
|
|
|
|
3.2
|
%
|
Loss from operations
|
|
$
|
(682
|
)
|
|
|
-37.0
|
%
|
|
$
|
(509
|
)
|
|
|
-24.0
|
%
|
|
$
|
(2,327
|
)
|
|
|
-27.9
|
%
|
|
$
|
(1,155
|
)
|
|
|
-15.9
|
%
|
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Quarterly Analysis of Results - Retail
Net sales for the 59 Company-owned BHF stores were $61,216 for the third quarter of 2016 as compared to $62,009 for the third quarter of 2015, a decrease of $793 or 1.3%. The decrease was primarily due to a $513 or 0.9% decrease in comparable store sales along with a $280 decrease in non-comparable store sales.
While we do not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores increased by 7.9% for the third quarter of 2016 as compared to the third quarter of 2015.
The consolidated retail operating income for the third quarter of 2016 was $768 as compared to $2,037 for the third quarter of 2015. The 56 comparable stores generated operating income of $1,450 for the quarter, or 2.4% of sales, as compared to $2,546, or 4.3% of sales, for the prior year quarter. Gross margins for comparable stores were 50.2% for the third quarter of 2016 compared to 50.4% for the third quarter of 2015. SG&A expenses for comparable stores increased $732 to $28,353 or 47.8% of sales as compared to 46.1% of sales for the third quarter of 2015 driven primarily by higher advertising and promotional costs of $496 and health care costs of $163.
Losses from the non-comparable stores in the third quarter of fiscal 2016 were $682 compared with $509 for the third quarter of fiscal 2015, an increase of $173. The loss during the third quarter of 2016 included $281 of pre-opening costs recognized in the quarter primarily associated with the Hunt Valley, Maryland store which opened at the end of the third quarter of 2016 along with three other stores expected to open during the first half of 2017. These costs include rent, training costs and other payroll-related costs specific to a new store location incurred during the period leading up to its opening and generally range between $100 to $300 per store based on the overall rent costs for the location and the period between the time when the Company takes possession of the physical store space and the time of the store opening. Also included in the non-comparable store loss for the third quarter of 2016 are the operations of the Woodland Hills, California store that opened during the fourth quarter of 2015 and the Sterling, Virginia store that opened late in the second quarter of 2016.
We incur losses in the first two to three months of operation following a store opening as sales are not recognized in the income statement until the furniture is delivered to its customers resulting in operating expenses without the normal sales volume. Because we do not maintain a stock of retail inventory that would result in quick delivery, and because of the custom nature of the furniture offerings, such deliveries are generally not made until after 30 days from when the furniture is ordered by the customer. Coupled with the pre-opening costs, total start-up losses typically amount to $300 to $500 per store. We had post-opening losses of $235 in the third quarter of 2016 associated with the Sterling, Virginia store and none during the prior year period.
Each addition to our Company-owned store network results in incremental fixed overhead costs, primarily associated with local store personnel, occupancy costs and warehousing expenses. The incremental SG&A expenses associated with each new store will be ongoing.
Year-to-date
Analysis of Results - Retail
Net sales for the 59 Company-owned BHF stores were $184,754 for the first nine months of 2016 as compared to $183,113 for the first nine months of 2015, an increase of $1,641 or 0.9%. The increase was due to a $576 or 0.3% increase in comparable store sales coupled with a $1,065 increase in non-comparable store sales.
While we do not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores decreased by 0.5% for the first nine months of 2016 as compared to the first nine months of 2015.
The consolidated retail operating income for the first nine months of 2016 was $1,465 as compared to $3,967 for the first nine months of 2015. The 56 comparable stores generated operating income of $3,792 for the nine months ended August 27, 2016, or 2.1% of sales, as compared to $5,122, or 2.9% of sales, for the comparable prior year period. Gross margins for comparable stores were 49.8% for the first nine months of 2016 compared to 50.2% for the first nine months of 2015. Lower gross margins were due primarily to increased discounting of clearance items in preparation for a significant product rollout for the Memorial Day holiday promotion. Also, Company-owned stores experienced increased clearance activity in reducing imported wood furniture placements to make room for more upholstery on their retail floors. SG&A expenses for comparable stores increased $851 to $84,088 or 47.7% of sales as compared to 47.3% of sales for the first nine months of 2015 driven primarily by higher advertising and promotional costs of $738 and health care costs of $111.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Losses from the non-comparable stores in the first nine months of fiscal 2016 were $2,327 compared with $1,155 for the first nine months of fiscal 2015, an increase of $1,172. The loss for the nine months ended August 27, 2016 included $727 of pre-opening costs recognized in the first nine months of 2016 primarily associated with the Sterling, Virginia and Hunt Valley, Maryland stores which opened at the end of the second and third quarters of 2016, respectively, along with three other stores expected to open during the first half of 2017. These costs include rent, training costs and other payroll-related costs specific to a new store location incurred during the period leading up to its opening and generally range between $100 to $300 per store based on the overall rent costs for the location and the period between the time when the Company takes possession of the physical store space and the time of the store opening. Also included in the non-comparable store loss for the first half of 2016 are losses arising from the closure of our stores in Tucson, Arizona; Egg Harbor, New Jersey and Fountain Valley, California and the operations of the Woodland Hills, California store opened during the fourth quarter of 2015.
We incur losses in the first two to three months of operation following a store opening as sales are not recognized in the income statement until the furniture is delivered to its customers resulting in operating expenses without the normal sales volume. Because we do not maintain a stock of retail inventory that would result in quick delivery, and because of the custom nature of the furniture offerings, such deliveries are generally not made until 30 days after the furniture is ordered by the customer. Coupled with the pre-opening costs, total start-up losses typically amount to $300 to $500 per store. We had post-opening losses of $235 for the nine months ended August 27, 2016 associated with the Sterling, Virginia store and none during the prior year period.
Each addition to our Company-owned store network results in incremental fixed overhead costs, primarily associated with local store personnel, occupancy costs and warehousing expenses. The incremental SG&A expenses associated with each new store will be ongoing.
Retail Backlog
The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was $27,594, or an average of $468 per open store at August 27, 2016 as compared with a retail backlog of $26,369, or an average of $447 per open store at August 29, 2015.
Logistical services segment
Results for our logistical services segment for the periods ended August 27, 2016 and August 29, 2015 are as follows:
|
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
August 27, 2016
|
|
|
August 29, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Logistical services revenue
|
|
$
|
22,991
|
|
|
|
100.0
|
%
|
|
$
|
23,650
|
|
|
|
100.0
|
%
|
|
$
|
71,480
|
|
|
|
100.0
|
%
|
|
$
|
51,607
|
|
|
|
100.0
|
%
|
Operating expenses
|
|
|
22,317
|
|
|
|
97.1
|
%
|
|
|
22,580
|
|
|
|
95.5
|
%
|
|
|
69,401
|
|
|
|
97.1
|
%
|
|
|
49,518
|
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
674
|
|
|
|
2.9
|
%
|
|
$
|
1,070
|
|
|
|
4.5
|
%
|
|
$
|
2,079
|
|
|
|
2.9
|
%
|
|
$
|
2,089
|
|
|
|
4.0
|
%
|
(1) Results for logistical services for the nine months ended August 29, 2015 include approximately seven months of operations from the date of acquisition, February 2, 2015.
Quarterly Analysis of Operations – Logistical Services
Logistical services revenue was $22,991 for the third quarter of 2016 compared with $23,650 for the third quarter of 2015, a decrease of $659 or 2.8%, as declines in revenue from line haul transportation and warehousing services were partially offset by increases in home delivery. Revenue from services to third-party customers (excluding intercompany sales to Bassett) were $13,247 for the third quarter of 2016, a decrease of $657 or 4.7% over the prior year period. The decrease is primarily due to softness in the furniture retail environment resulting in less demand for Zenith’s services. Operating expenses for the third quarter of 2016 were $22,317 or 97.1% of revenue compared with $22,580 or 95.5% of revenue for the third quarter of 2015 driven by higher planned fixed costs in anticipation of higher freight and warehousing revenue.
Zenith’s results for the nine months ended August 27, 2016 and August 29, 2015 are not comparable as the 2015 period only includes seven months of operations following the date of acquisition.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Other
i
tems
a
ffecting
N
et Income
Acquisition of Zenith
On February 2, 2015 we acquired the remaining 51% ownership interest in Zenith in exchange for cash, Bassett common stock and a note payable with a total fair value of $19,111 which, along with the fair value of our prior 49% interest in Zenith, resulted in a total enterprise value for Zenith of $35,803. In accordance with the acquisition method of accounting, we recognized a gain of $7,212 during the nine months ended August 29, 2015 for the remeasurement of our previous interest in Zenith. For additional information regarding our acquisition of Zenith, see Note 3 to our condensed consolidated financial statements.
Income from Continued Dumping & Subsidy Offset Act
During the nine months ended August 29, 2015, we recognized income of $1,066 arising from distributions received from U.S. Customs and Border Protection (“Customs”) under the Continued Dumping and Subsidy Offset Act of 2000 (“CDSOA”). These distributions primarily represent amounts previously withheld by Customs pending the resolution of claims filed by certain manufacturers who did not support the antidumping petition (“Non-Supporting Producers”) challenging certain provisions of the CDSOA and seeking to share in the distributions. The Non-Supporting Producers’ claims were dismissed by the courts and all appeals were exhausted in 2014. While it is possible that we may receive additional distributions from Customs, we cannot estimate the likelihood or amount of any future distributions.
Other loss, net
Prior to our acquisition of Zenith on February 2, 2015, we owned a 49% interest in the company for which we used the equity method of accounting. Accordingly, our equity in the income of Zenith prior to the acquisition date was included in other loss, net, and was $220 for the nine months ended August 29, 2015.
Other loss, net, for the third quarter of fiscal 2016 was $647 as compared to $472 for the third quarter of fiscal 2015, an increase of $175. Lower gains from reductions in lease guarantee reserves, higher investment real estate expenses and reduced interest income were partially offset by lower interest expense.
Other loss, net, for the nine months ended August 27, 2016 was $1,904 as compared to $1,692 for the nine months ended August 29, 2015, an increase of $212. The effect of the $220 decline in equity method income attributable to Zenith noted above along with lower gains from reductions in lease guarantee reserves and higher investment real estate expenses was partially offset by a $182 charge recorded during the first quarter of 2015 to write down the carrying value of retail real estate in Sugarland, Texas, which was sold during the first nine months of 2015.
Income taxes
We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rate for the three and nine months ended August 27, 2016 differs from the federal statutory rate primarily due to the effects of state income taxes and various permanent differences including the favorable impact of the Section 199 manufacturing deduction.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
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 the first nine months of 2016 was $18,965 compared to cash provided by operations of $13,335 for the first nine months of 2015, representing an increase of $5,630 in cash flows from operations. Operating cash flows for the current year period benefited from reductions in inventory levels whereas prior year operating cash flows were impacted by increases in inventory levels associated with new product introductions and increased purchase activity to support higher order volume. Cash provided by operations for the first nine months of 2016 includes cash flows arising from excess tax benefits related to stock based compensation in the amount of $87 compared to $2,008 associated with such excess tax benefits during the comparable prior year period. This amount was previously reported as a cash flow from financing activities and has been reclassified due to our adoption of Accounting Standards Update No. 2016-09 (see Note 1 to our condensed consolidated financial statements).
Our overall cash position decreased by $8,217 during the first nine months of 2016. Offsetting cash provided by operations, we used $18,955 of cash in investing activities, primarily consisting of capital expenditures which included the purchase of freight transportation equipment, retail store relocations, retail store remodels, in-process spending on new stores, and expanding and upgrading our manufacturing capabilities. Net cash used in financing activities was $8,859, including dividend payments of $5,238 and stock repurchases of $3,989 under our existing share repurchase plan, of which $13,939 remains authorized at August 27, 2016. Offsetting these uses were stock issuance net proceeds of $219 and proceeds from loans secured by new transportation equipment which exceeded total debt repayments by $149. With cash and cash equivalents and short-term investments totaling $51,176 on hand at August 27, 2016, we believe we have sufficient liquidity to fund operations for the foreseeable future.
Debt and Other Obligations
Effective December 5, 2015, we entered into a new credit facility with our bank which provides for a line of credit of up to $15,000. This credit facility, which matures in December of 2018, is unsecured and contains covenants requiring us to maintain certain key financial ratios. We are in compliance with all covenants under the agreement and expect to remain in compliance for the foreseeable future. At August 27, 2016, we had $1,970 outstanding under standby letters of credit against our line, leaving availability under our credit line of $13,030. In addition, we have outstanding standby letters of credit with another bank totaling $356.
At August 27, 2016 we have outstanding principal totaling $14,234, excluding discounts, under notes payable of which $5,125 matures within one year of the balance sheet date. See Note 9 to our condensed consolidated financial statements for additional details regarding these notes, including collateral and future maturities. We expect to satisfy these obligations as they mature using cash flow from operations or our available cash on hand.
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 segment. We had obligations of $152,942 at August 27, 2016 for future minimum lease payments under non-cancelable operating leases having remaining terms in excess of one year. 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 $2,098 at August 27, 2016. See Note 12 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)
Investment in Retail Real Estate
We have a substantial investment in real estate acquired for use as retail locations. To the extent such real estate is occupied by Company-owned retail stores, it 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 $26,630 at August 27, 2016. All other retail real estate that we own, consisting of locations formerly leased to our licensees and now leased to others, is included in other assets in the accompanying condensed consolidated balance sheets. The net book value of such real estate, which is considered part of our wholesale segment, was $3,007 at August 27, 2016.
The following table summarizes our total investment in retail real estate owned at August 27, 2016:
|
|
Number of
|
|
|
Aggregate
|
|
|
Net Book
|
|
|
|
Locations
|
|
|
Square Footage
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate occupied by Company-owned
and operated stores, included in property
and equipment, net (1)
|
|
|
11
|
|
|
|
276,887
|
|
|
$
|
26,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment real estate leased to others,
included in other assets
|
|
|
2
|
|
|
|
41,021
|
|
|
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company investment in retail real estate
|
|
|
13
|
|
|
|
317,908
|
|
|
$
|
29,637
|
|
(1) Includes two properties encumbered under mortgages totalling $1,447 at August 27, 2016.
|
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Annual Report on Form 10-K for the fiscal year ended November 28, 2015.
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 both Company-owned and licensee stores as well as land and buildings used in our logistical services segment. We also lease transportation equipment used in our logistical services segment. We have guaranteed certain lease obligations of licensee operators of the stores, as part of our retail expansion strategy. See Note 12 to our condensed consolidated financial statements for further discussion of operating leases and 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 12 to our condensed consolidated financial statements for further information regarding certain contingencies as of August 27, 2016.
PART I-FINANCIAL INFORMATION-CONTINUED
BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES
AUGUST 27, 2016
(Dollars in thousands except share and per share data)