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EX-21 - EXHIBIT 21 - BASSETT FURNITURE INDUSTRIES INCex21.htm
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EX-31.B - EXHIBIT 31.B - BASSETT FURNITURE INDUSTRIES INCex31-b.htm
EX-32.B - EXHIBIT 32.B - BASSETT FURNITURE INDUSTRIES INCex32-b.htm
EX-23.A - EXHIBIT 23.A - BASSETT FURNITURE INDUSTRIES INCex23-a.htm
EX-31.A - EXHIBIT 31.A - BASSETT FURNITURE INDUSTRIES INCex31-a.htm

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended November 28, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File No. 0-209


 

BASSETT FURNITURE INDUSTRIES, INCORPORATED

(Exact name of registrant as specified in its charter)

 


 

VIRGINIA

54-0135270

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

3525 FAIRYSTONE PARK HIGHWAY

BASSETT, VIRGINIA

24055

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code 276/629-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange on which registered

Common Stock ($5.00 par value)

 

NASDAQ

 

Securities registered pursuant to Section 12(g) of the Act:      None 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act         ☐  Yes    ☒  No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐  Yes    ☒  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site , if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days.     ☒  Yes    ☐  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one) Large Accelerated Filer ☐     Accelerated Filer ☒  Non-Accelerated Filer ☐  Smaller reporting company  ☐    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).    ☐  Yes    ☒  No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of May 30, 2015 was $308,300,086.

 

The number of shares of the Registrant’s common stock outstanding on January 8, 2016 was 10,870,858.

 

 
 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Bassett Furniture Industries, Incorporated definitive Proxy Statement for its 2015 Annual Meeting of Stockholders to be held March 9, 2016, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 
 

 

 

TABLE OF CONTENTS

  

FORWARD-LOOKING STATEMENTS

1
     

PART I

Item 1.

Business

2

Item 1A.

Risk Factors

7

Item 1B.

Unresolved Staff Comments

10

Item 2.

Properties

10

Item 3.

Legal Proceedings

11

Item 4B

Executive Officers of the Registrant

11
     

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

Item 6.

Selected Financial Data

13

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 8.

Financial Statements and Supplementary Data

30

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

66

Item 9A.

Controls and Procedures

66

Item 9B.

Other Information

68
     

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

68

Item 11.

Executive Compensation

68

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

68

Item 13.

Certain Relationships and Related Transactions, and Director Independence

68

Item 14.

Principal Accountant Fees and Services

68
     

PART IV

Item 15.

Exhibits

69
     

SIGNATURES

71

 

 
 

 

 

As used herein, unless the context otherwise requires, “Bassett,” the “Company,” “we,” “us” and “our” refer to Bassett Furniture Industries, Incorporated and its subsidiaries. References to 2015, 2014, 2013, 2012 and 2011 mean the fiscal years ended November 28, 2015, November 29, 2014, November 30, 2013, November 24, 2012 and November 26, 2011. Please note that fiscal 2013 contained 53 weeks.

   

Safe-harbor, forward-looking statements

 

This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Bassett Furniture Industries, Incorporated and subsidiaries. Such forward-looking statements are identified by use of forward-looking words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, “aimed” and “intends” or words or phrases of similar expression. These forward-looking statements involve certain risks and uncertainties. No assurance can be given that any such matters will be realized. Important factors, which should be read in conjunction with Item 1A “Risk Factors”, that could cause actual results to differ materially from those contemplated by such forward-looking statements include:

 

 

competitive conditions in the home furnishings industry

 

 

general economic conditions, including the strength of the housing market in the United States

 

 

overall retail traffic levels and consumer demand for home furnishings

 

 

ability of our customers and consumers to obtain credit

 

 

Bassett store openings

 

 

store closings and the profitability of the stores (independent licensees and Company-owned retail stores)

 

 

ability to implement our Company-owned retail strategies and realize the benefits from such strategies as they are implemented

 

 

fluctuations in the cost and availability of raw materials, labor and sourced products

 

 

results of marketing and advertising campaigns

 

 

information and technology advances

 

 

future tax legislation, or regulatory or judicial positions

 

 

ability to efficiently manage the import supply chain to minimize business interruption

 

 

concentration of domestic manufacturing, particularly of upholstery products, and the resulting exposure to business interruption from accidents, weather and other events and circumstances beyond our control

 

 

general risks associated with providing freight transportation and other logistical services due to our acquisition of Zenith Freight Lines, LLC

 

 
1

 

 

PART I

  

ITEM 1.

BUSINESS

 

(dollar amounts in thousands except per share data)

 

General

 

Bassett is a leading vertically integrated manufacturer, importer and retailer of high quality, mid-priced home furnishings. With 93 Bassett Home Furnishings (“BHF”) stores at November 28, 2015, we have leveraged our strong brand name in furniture into a network of corporate 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.  The store features custom order furniture ready for delivery in less than 30 days, more than 1,000 upholstery fabrics, free in-home design visits, and perfectly coordinated decorating accessories.  We believe that our capabilities in custom furniture have become unmatched in recent years. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its delivery.  The selling philosophy in the stores 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.  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, specialty stores and mass merchants. 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.  

 

For several 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 Bassett Home Furnishings 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.

 

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. 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 Bassett Home Furnishings stores, we will now expand the concept to select independent dealers.

 

 
2

 

 

Operating Segments

 

We have strategically aligned our business into three reportable segments: Wholesale, Retail – Company-owned stores, and Logistical services.

 

The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of BHF stores (licensee-owned stores and Company-owned retail stores) and independent furniture retailers. The wholesale segment accounted for approximately one half of net sales, excluding logistical services, during fiscal 2015, 2014, and 2013, respectively.

 

Our retail segment consists of 60 Company-owned and operated stores. The following table shows the number of Company-owned stores by state as of November 28, 2015:

  

State

 

Number of

Stores

 

State

 

Number of

Stores

 

Alabama

    1  

Mississippi

    1  

Arizona

    2  

Missouri

    1  

Arkansas

    1  

Nevada

    1  

California

    5  

New Jersey

    2  

Connecticut

    4  

New York

    4  

Delaware

    1  

North Carolina

    5  

Florida

    3  

Ohio

    1  

Georgia

    3  

South Carolina

    1  

Kentucky

    1  

Tennessee

    1  

Maryland

    3  

Texas

    12  

Massachusetts

    3  

Virginia

    4  
         

Total

    60  

 

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.

 

Prior to the beginning of fiscal 2015, our former investments and real estate segment included our short-term investments, our holdings of retail real estate previously leased as licensee stores, and our former equity investment in Zenith prior to acquisition. This segment has been eliminated and the assets formerly reported therein are now considered to be part of our wholesale segment.  

  

Wholesale Segment Overview

 

The wholesale furniture industry is very competitive and there are a large number of manufacturers both within and outside the United States who compete in the market on the basis of product quality, price, style, delivery and service. Additionally, many retailers source imported product directly, thus bypassing domestic furniture manufacturers and wholesale importers. We believe that we can be successful in the current competitive environment because our products represent excellent value combining attractive prices, quality and styling; prompt delivery; and superior service.

 

Wholesale shipments by category for the last three fiscal years are summarized below:

 

   

2015

   

2014

   

2013

 
                                                 

Wood

  $ 93,073       36.9 %   $ 86,577       38.7 %   $ 87,935       40.8 %

Upholstery

    156,768       62.2 %     135,831       60.6 %     125,403       58.2 %

Other

    2,339       0.9 %     1,585       0.7 %     2,113       1.0 %

Total

  $ 252,180       100.0 %   $ 223,993       100.0 %   $ 215,451       100.0 %

 

 
3

 

 

Approximately 37% of our 2015 wholesale sales were of imported product compared to 42% and 46% in 2014 and 2013, respectively. We define imported product as fully finished product that is sourced. Our domestic product includes certain products that contain components which were also sourced. We continue to believe that a blended strategy including domestically produced products primarily of a custom-order nature combined with sourcing of major collections provides the best value and quality of products to our customers. The decline in imported goods share of our wholesale sales over the last three years has been driven primarily by increasing sales of our domestic custom wood and upholstery product offerings.

 

The dollar value of our wholesale backlog, representing orders received but not yet shipped to the BHF store network or independent dealers, was $17,131 at November 28, 2015 and $13,644 at November 29, 2014. We expect that the November 28, 2015 backlog will be filled within fiscal 2016, with the majority of our backlog being filled during the first quarter.

 

We use lumber, fabric, leather, foam and other materials in the production of wood and upholstered furniture. These components are purchased from a variety of domestic and international suppliers and are widely available. The price of foam, which is highly dependent on the cost of petroleum, has shown significant volatility in recent years. We currently assemble and finish these components in our two plants in the United States.

  

Retail Segment Overview – Company-Owned Retail Stores

 

The retail furniture industry remains very competitive and includes local furniture stores, regional furniture retailers, national department and chain stores and single-vendor branded retailers. As a whole, our store network with 60 Company-owned stores and 33 licensee-owned, ranks in the top 30 in retail furniture sales in the United States. We plan to continue opening new stores, primarily in underpenetrated markets where we currently have stores.  In this regard we are currently considering several locations for new store expansion over the next three years, with at least three of these planned to open in fiscal 2016. We continue to evaluate all stores in our fleet and plan to close three underperforming stores this year as well.

 

Net sales for our Company-owned retail stores for the last three fiscal years are summarized below:

 

   

2015

   

2014

   

2013

 
                         

Net sales

  $ 249,379     $ 216,631     $ 199,380  

 

Maintaining and enhancing our brand are critical to our ability to expand our base of customers and drive increased traffic at both Company-owned and licensee-owned stores. Our advertising and marketing campaign utilizes local and national television, direct mail, catalogs, newspapers, magazines, radio and the internet in an effort to maintain and enhance our existing brand equity.

 

Our stores incorporate a stylish, residential feel while highlighting our unmatched custom manufacturing capabilities.  We leverage our customization capabilities by dedicating space in the stores to design solutions for dining, upholstery, home entertainment and storage.  Domestic custom manufacturing capabilities make it possible for us to offer a 30 day delivery promise on custom products. 

 

With the introduction of our strategic alliance with HGTV, 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. Coupled with expanded national advertising on the HGTV network, we believe this alliance will help to increase store traffic and, consequently, comparable store sales.

 

To further solidify ourselves as a complete home furnishings retailer, we have expanded accessory product lines including lighting, rugs decorative wall art, mirrors and accent pillows that coordinate with each lifestyle presentation throughout the store.  We have also increased our mattress offerings such that our stores now carry Sealy, Tempurpedic and Stearns & Foster branded products.

 

 
4

 

 

Logistical Services Overview

 

Zenith is a specialized supply chain solutions provider, offering the home furnishings industry the benefit of an asset-based network to move product with greater efficiency, enhanced speed to market, less damage, and a single source of shipment visibility. We provide fully integrated solutions with the highest commitment to customer care and service as we seek to go beyond our customers’ transactional expectations to create collaborative partnerships that provide a single source network to:

 

 

Better manage inventory across multiple locations and provide total audit-ready accountability

 

Reduce line haul and delivery costs

 

Ensure availability of high-volume items in stores

 

Integrate the omnichannel nature of today’s retail supply chain

 

Management and predictability of the total landed cost of goods

 

Achieve full visibility from vendor to showroom to final delivery

 

Our customer solutions are provided through the following services:

 

 

Network line haul freight

 

Warehousing, distribution and inventory management

 

Home delivery services to end-consumer

 

At November 28, 2015, our shipping and delivery fleet consisted of the following:

 

   

Owned

   

Leased

   

Total

 

Tractors

    154       53       207  

Trailers

    188       340       528  

Home delivery trucks

    12       10       22  

 

We own a central warehousing and national distribution hub located in Conover, North Carolina, and we lease nineteen facilities in eleven states across the continental United States from which we operate regional freight terminal, warehouse and distribution facilities.

 

Other Investments and Real Estate

 

Our balance sheet at November 28, 2015 includes short-term investments in certificates of deposit and certain retail real estate related to former licensee-owned stores. At November 29, 2014 and November 30, 2013 we also carried an equity investment in Zenith. As noted above, these assets are no longer viewed as belonging to a distinct operating segment but are now a part of our wholesale segment. The impact upon earnings arising from these assets is included in other loss, net, in our consolidated statements of income. Our investment balances at each of the last three fiscal year-ends are as follows:

 

   

November 28,

2015

   

November 29,

2014

   

November 30,

2013

 
                         

Investments in certificates of deposit

  $ 23,125     $ 23,125     $ 28,125  

Certain retail real estate

    3,120       14,969       10,435  

Retail real estate held for sale

    -       -       1,401  

Zenith (Recorded in Other long-term assets)

    -       7,915       7,254  

 

Our short-term investments at November 28, 2015 consist of certificates of deposit (CDs) with original terms generally ranging from six to twelve months, bearing interest at rates ranging from 0.28% to 1.00% with a weighted average yield of approximately 0.42%. At November 28, 2015, the weighted average remaining time to maturity of the CDs was approximately seven months. Each CD is placed with a federally insured financial institution and all deposits are within Federal deposit insurance limits.

 

We hold investments in retail store properties that we had previously leased to licensees. These holdings, which also include closed store real estate currently leased to non-licensees, are presented as a long-term asset in our consolidated balance sheets with the exception of one property which was included in other current assets as real estate held for sale at November 30, 2013 (the property was sold on December 26, 2013). These real estate holdings are typically in urban, high-traffic retail locations. See Item 2, Properties, for additional information about our retail real estate holdings.

 

Prior to February 2, 2015 we owned a 49% interest in Zenith. The balance of our investment in Zenith, which was accounted for under the equity method, was included in other long-term assets in our consolidated balance sheets.

 

 
5

 

 

Trademarks

 

Our trademarks, including “Bassett” and the names of some of our marketing divisions, products and collections, are significant to the conduct of our business. This is important due to consumer recognition of the names and identification with our broad range of products. Certain of our trademarks are licensed to independent retailers for use in full store and store gallery presentations of our products. We also own copyrights that are important in the conduct of our business.

 

Research and Development

 

The furniture industry is considered to be a “fashion” industry subject to constant fluctuations to meet changing consumer preferences and tastes. As such, we are continuously involved in the development of new designs and products. Due to the nature of these efforts and the close relationship to the manufacturing operations, these costs are considered normal operating costs and are not segregated. We are not otherwise involved in “traditional” research and development activities nor do we sponsor the research and development activities of any of our customers.

 

Government Regulations

 

We believe that we have materially complied with all federal, state and local standards in the areas of safety, health and pollution and environmental controls. We are involved in environmental matters at certain of our plant facilities, which arise in the normal course of business. Although the final outcome of these environmental matters cannot be determined, based on the present facts, we do not believe that the final resolution of these matters will have a material adverse effect on our financial position or future results of operations.

 

Our logistical services segment is also subject to regulation by several federal governmental agencies, including the Department of Transportation (“DOT”), specifically the Federal Motor Carrier Safety Administration and the Surface Transportation Board, which are agencies within the DOT. We are also subject to rules and regulations of various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, and other matters.

 

We may also be affected by laws and regulations of countries from which we source goods. Labor, environmental, and other laws and regulations change over time, especially in the developing countries from which we source. Changes in these areas of regulation could negatively impact the cost and availability of sourced goods. The timing and extent to which these regulations could have an adverse effect on our financial position or results of operations is difficult to predict. Based on the present facts, we do not believe that they will have a material adverse effect on our financial position or future results of operations.

 

People

 

We employed 2,237 people as of November 28, 2015, of which 793 were employed in our retail segment, 870 were employed in our wholesale segment and 669 were employed in our logistical services segment, which also utilized another 296 temporary workers provided through staffing agencies. None of our employees are subject to collective bargaining arrangements and we have not experienced any recent work stoppages. We consider our relationship with our employees to be good.

 

Foreign and Domestic Operations and Export Sales

 

We have no foreign manufacturing or retail operations. We define export sales as sales to any country or territory other than the United States or its territories or possessions. Our export sales were approximately $4,516, $4,774, and $4,603 in 2015, 2014, and 2013, respectively. At November 28, 2015 and November 29, 2014, we had $4,316 and $4,143, respectively of our finished goods inventory physically warehoused in Vietnam and Indonesia.

 

Major Customers

 

Our risk exposure related to our customers, consisting primarily of trade accounts receivable along with certain guarantees, net of recognized reserves, totaled approximately $23,648 and $18,866 at November 28, 2015 and November 29, 2014, respectively. At November 28, 2015, approximately 26% of the aggregate risk exposure, net of reserves, was attributable to three customers. At November 29, 2014, approximately 24% of the aggregate risk exposure, net of reserves, was attributable to two customers. In fiscal 2015, 2014 and 2013, no customer accounted for more than 10% of total net sales.

 

 
6

 

 

Available Information

 

Through our website www.bassettfurniture.com, we make available free of charge as soon as reasonably practicable after electronically filing or furnishing with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments thereto.

 

ITEM 1A.

RISK FACTORS

 

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. The risk factors below represent what we believe are the known material risk factors with respect to us and our business. Any of the following risks could materially adversely affect our business, operations, industry, financial position or future financial results.

 

We face a volatile retail environment and changing economic conditions that may further adversely affect consumer demand and spending.

 

The home furnishings industry has experienced a difficult period over the last seven years marked with depressed housing starts, high unemployment, changing consumer confidence and uncertain fiscal policies. While the economy has improved over the most recent three years, the pace of the recovery continues to be slow by historical standards and remains fragile. Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Should the current economic recovery falter or the current recovery in housing starts stall, consumer confidence and demand for home furnishings could deteriorate which could adversely affect our business through its impact on the performance of our Company-owned stores, as well as our licensees and the ability of a number of them to meet their obligations to us.

 

Our use of foreign sources of production for a substantial portion of our products exposes us to certain additional risks associated with international operations.

 

Our use of foreign sources for the supply of many of our products exposes us to risks associated with overseas sourcing.  These risks are related to government regulation, volatile ocean freight costs, delays in shipments, and extended lead time in ordering. Governments in the foreign countries where we source our products may change their laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation and exchange controls which could make it more difficult to service our customers resulting in an adverse effect on our earnings. We could also experience increases in the cost of ocean freight shipping which could have an adverse effect on our earnings. Shipping delays and extended order lead times may adversely affect our ability to respond to sudden changes in demand, resulting in the purchase of excess inventory in the face of declining demand, or lost sales due to insufficient inventory in the face of increasing demand, either of which would also have an adverse effect on our earnings or liquidity.

 

Our retail stores face significant competition from national, regional and local retailers of home furnishings.

 

The retail market for home furnishings is highly fragmented and intensely competitive. We currently compete against a diverse group of retailers, including national department stores, regional or independent specialty stores, and dedicated franchises of furniture manufacturers. National mass merchants such as Costco also have limited product offerings. We also compete with retailers that market products through store catalogs and the Internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. We have recently seen electronics and appliance retailers adding limited furniture products in their stores. Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including aggressive advertising, pricing and marketing, extension of credit to customers on terms more favorable than we offer, and expansion into markets where we currently operate.

 

Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.

 

Our licensee-owned stores may not be able to meet their obligations to us.

 

We have a significant amount of accounts receivable attributable to our network of licensee-owned stores. We also guarantee some of the leases of some of our licensees. If these stores do not generate the necessary level of sales and profits, the licensees may not be able to fulfill their obligations to us resulting in additional bad debt expenses and real estate related losses.

 

 
7

 

 

Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

 

Sales of our furniture are dependent upon consumer acceptance of our designs, styles, quality and price. As with all retailers, our business is susceptible to changes in consumer tastes and trends. We attempt to monitor changes in consumer tastes and home design trends through attendance at international industry events and fashion shows, internal marketing research, and communication with our retailers and design consultants who provide valuable input on consumer tendencies. However, such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

 

In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any downturn in the U.S. economy.

 

Our success depends upon our brand, marketing and advertising efforts and pricing strategies, and if we are not able to maintain and enhance our brand, or if we are not successful in these efforts and strategies, our business and operating results could be adversely affected. 

 

Maintaining and enhancing our brand is critical to our ability to expand our base of customers and drive increased traffic at both Company-owned and licensee-owned stores. Our advertising and marketing campaign utilizes television, direct mail, catalogs, newspapers, magazines, radio and the internet in an effort to maintain and enhance our existing brand equity. We cannot provide assurance that our marketing, advertising and other efforts to promote and maintain awareness of our brand will not require us to incur substantial costs. If these efforts are unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial condition could be adversely affected.

 

Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays which might result in a decline in sales, either of which could adversely impact our earnings. 

 

We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our furniture. Certain of our raw materials, including fabrics, are purchased both abroad and domestically. Fluctuations in the price, availability and quality of raw materials could result in increased costs or a delay in manufacturing our products, which in turn could result in a delay in delivering products to our customers. For example, lumber prices fluctuate over time based on factors such as weather and demand, which in turn impact availability. Production delays or upward trends in raw material prices could result in lower sales or margins, thereby adversely impacting our earnings.

 

We rely extensively on computer systems to process transactions, summarize results and manage our business.  Disruptions in both our primary and back-up systems could adversely affect our business and operating results.

 

Our primary and back-up computer systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, natural disasters and errors by employees.  Though losses arising from some of these issues would be covered by insurance, interruptions of our critical business computer systems or failure of our back-up systems could reduce our sales or result in longer production times.  If our critical business computer systems or back-up systems are damaged or cease to function properly, we may have to make a significant investment to repair or replace them.

 

We may incur costs resulting from security risks we face in connection with our electronic processing and transmission of confidential customer information.

 

We accept electronic payment cards in our stores. We may in the future become subject to claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Proceedings related to theft of credit or debit card information may be brought by payment card providers, banks and credit unions that issue cards, cardholders (either individually or as part of a class action lawsuit) and federal and state regulators. Any such proceedings could distract our management from running our business and cause us to incur significant unplanned losses and expenses. Consumer perception of our brand could also be negatively affected by these events, which could further adversely affect our results and prospects.

 

 
8

 

 

We may suffer adverse impacts from additional risks associated with our entry into the freight transportation and logistics business following our acquisition of Zenith.

 

Our entry into the freight transportation and logistics business through our acquisition of Zenith exposes us to certain risks common to that business, including, but not limited to: difficulties attracting and retaining qualified drivers which could result in increases in driver compensation and could adversely affect our profitability and our ability to maintain or grow our fleet; adverse impacts from unfavorable fluctuations in the availability and price of diesel fuel; increased costs of compliance with, or liability for violation of, existing or future regulations in the highly regulated freight transportation industry; and adverse impacts upon Zenith’s results of operations which may result from seasonal factors and harsh weather conditions.

 

 
9

 

  

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

  

ITEM 2.

PROPERTIES

 

General

 

We own our corporate office building, which includes an annex, located in Bassett, Va.

 

We own the following facilities, by segment:

 

Wholesale Segment:

 

Facility

 

Location

 
       

Bassett Wood Division

 

Martinsville, Va.

 

Bassett Upholstery Division

 

Newton, N.C. 

 

3 Warehouses

 

Bassett, Va.

 

 

In general, these facilities are suitable and are considered to be adequate for the continuing operations involved. All facilities are in regular use and provide adequate capacity for our manufacturing and warehousing needs.

 

Retail Segment:

 

Real estate associated with our retail segment consists of 11 owned locations with an aggregate square footage of 276,887 and a net book value of $27,843. These stores are located as follows:

 

Concord, North Carolina

 

Greensboro, North Carolina

Greenville, South Carolina

 

Fredericksburg, Virginia

Houston, Texas (3 locations)

 

Gulfport, Mississippi

Knoxville, Tennessee

 

Las Vegas, Nevada

Louisville, Kentucky

   
     
     

 

Of these locations, two are subject to land leases and two are subject to mortgages. Our remaining 49 store locations are leased from third-parties.

 

Logistical Services Segment:

 

Owned real estate associated with our logistical services segment is located in Conover, North Carolina and includes the following facilities:

 

Facility

 

Square Footage

 

Distribution center and corporate office

    242,000  

2 Maintenance facilities

    15,142  

2 Transit warehouses

    86,135  

 

The distribution center and corporate office is subject to a mortgage.

 

In addition to the owned facilities listed above, we also lease warehouse space in 19 locations across the United States with an aggregate square footage of 1,468,406.

 

Other Real Estate Owned:

 

We hold investments in retail store property that we previously leased to licensees and now lease to others. Such properties consist of two locations with aggregate square footage of 41,021 and net book value of $3,120 at November 28, 2015.

 

At November 28, 2015, there was one closed store for which we are paying the monthly lease amount due to being the lessee. We have a sublease agreement on this property which helps to defray a portion of the on-going cash requirements.

 

See Note 17 to the Consolidated Financial Statements included under Item 8 of this Annual Report for more information with respect to our operating lease obligations.

 

 
10

 

 

ITEM 3.

LEGAL PROCEEDINGS

 

In 2004, the US Environmental Protection Agency (EPA) advised us that we had been identified as a potentially responsible party (PRP) at the Ward Transformer Superfund site in Wake County, North Carolina. The EPA alleges that we are a responsible party because, prior to 1990, we sent transformers to the site for repair that contained certain polychlorinated biphenyls (PCBs) which were allegedly mishandled by the owner/operator of the site. Pursuant to a settlement agreement that we and several other PRPs (the “Initial PRP Group”) entered into with the EPA in 2005, the Initial PRP Group has paid for remediation work conducted at the Ward Transformer site. To date we have spent approximately $1,000 on the remediation of the site, which exceeded our share of the remediation expense under the law at the time of the remediation. Through the litigation and collection efforts of the Initial PRP Group, we sought recovery of our excess payment from dozens of other PRPs. Most of the PRPs in the litigation had either sent transformers to Ward for repair (“repair transactions”), sold used transformers to Ward (“sale transactions”), or both. Certain PRPs in the litigation involved in “sale transactions” have been allowed to avoid liability for their share of the cost of remediation as a result of court decisions upheld by the Fourth Circuit Court of Appeals in 2015. We are in negotiations with members of the Initial PRP Group to determine our remaining share of the remediation cost.  

  

ITEM 4B.

EXECUTIVE OFFICERS OF THE REGISTRANT

 

David C. Baker, 55, joined the Company in 2005 as Director, Store Operations. From 2006 to 2015 he served as Vice President – Corporate Retail, and currently serves as Senior Vice President – Corporate Retail. Prior to joining Bassett, Mr. Baker managed Bassett stores for licensees from 1999 to 2005 after having previously managed stores for other furniture retail chains including Haverty’s and Rhodes Furniture.

 

John E. Bassett III, 57, has been with the Company since 1981 and served as Vice President of Wood Manufacturing from 1997 to 2001, as Vice President Global Sourcing from 2001 to 2006 and as Senior Vice-President of Global Sourcing since 2006.

 

Bruce R. Cohenour, 57, has been with the Company since 2011, serving as Senior Vice President of Sales and Merchandising since January 2013, prior to which he served as Senior Vice President of Upholstery Merchandising. Prior to joining Bassett, Mr. Cohenour was with Hooker Furniture Corp. from 2007 through 2010, serving as Senior Vice President of National Accounts and Business Development until 2009. In 2009, he was promoted to Executive Vice President of Marketing and in 2010, he was promoted to President of the Case Goods Division.

 

J. Michael Daniel, 54, joined the Company in 2007 as Corporate Controller. From April 2009 through December 2009, he served as Corporate Controller and Interim Chief Financial Officer. In January 2010, he was appointed Vice President and Chief Accounting Officer. In January 2013, he was promoted to Senior Vice President and Chief Financial Officer.

 

Jack L. Hawn., 62, has been with the company since 2015 as President and CEO of Zenith Freight Lines, LLC, which he founded in 1988. From 1979 to 1987 he was President and CEO of Carrier Freight Lines.

 

Jay R. Hervey, Esq., 56, has served as the General Counsel, Vice President – Real Estate and Secretary for the Company since 1997.

 

Mark S. Jordan, 62, joined the Company in 1999 as Plant Manager. In 2001, he was promoted to Vice President of Upholstery Manufacturing and in 2002 he was promoted to Vice President and General Manager-Upholstery. He has served as Senior Vice President of Upholstery since 2006.

 

Robert H. Spilman, Jr., 59, has been with the Company since 1984. Since 2000, he has served as Chief Executive Officer and President.

 

 
11

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market and Dividend Information:

 

Bassett’s common stock trades on the NASDAQ global select market system under the symbol “BSET.” We had approximately 1,300 registered stockholders at November 28, 2015. The range of per share amounts for the high and low market prices and dividends declared for the last two fiscal years are listed below:

 

   

Market Prices of Common Stock

                 
   

2015

   

2014

   

Dividends Declared

 

Quarter

 

High

   

Low

   

High

   

Low

   

2015

   

2014

 
                                                 

First

  $ 26.97     $ 18.22     $ 16.19     $ 13.32     $ 0.08     $ 0.06  

Second

    32.54       24.59       16.02       13.13       0.08       0.06  

Third

    38.02       26.81       15.73       12.07       0.09       0.08  

Fourth

    33.30       27.85       19.60       13.21       0.29       0.28  

  

Issuer Purchases of Equity Securities

(dollar amounts in thousands, except share and per share data)

 

   

Total

Shares Purchased

   

Average

Price Paid

   

Total Number of Shares 

Purchased as Part of

Publicly Announced Plans

or Programs (1)

   

Approximate Dollar Value

of Shares that May Yet Be Purchased Under the Plans

or Programs (1)

 
                                 

August 30 - October 3, 2015

    16,350     $ 28.14       16,350     $ 18,166  

October 3 - October 31, 2015

    -     $ -       -     $ 18,166  

November 1 - November 28, 2015

    8,200     $ 28.85       8,200     $ 17,929  

 


(1)

The Company is authorized to repurchase Company stock under a plan which was originally announced in 1998. On October 9, 2014, the Board of Directors increased the remaining limit of the repurchase plan to $20,000. At November 28, 2015, $17,929 remains available for stock repurchases under the plan.

 

 
12

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The selected financial data set forth below for the fiscal years indicated were derived from our audited consolidated financial statements. The information should be read in conjunction with our consolidated financial statements (including the notes thereto) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in, or incorporated by reference into, this report.

  

   

2015

   

2014

   

2013 (1)

   

2012

   

2011

 
                                         
                                         

Net sales

  $ 430,927 (2)   $ 340,738     $ 321,286     $ 269,972     $ 253,208  

Operating income (loss)

  $ 25,989     $ 15,131     $ 10,005     $ 5,080 (3)   $ (20,622) (3)

Gain on sale of affiliate

  $ -     $ -     $ -     $ -     $ 85,542 (4)

Other income (loss), net

  $ 5,879 (5)   $ (524)     $ (1,818)     $ 6,934 (6)   $ (5,169) (6)

Income before income taxes

  $ 31,868     $ 14,607     $ 8,187     $ 12,014     $ 59,571  

Income tax expense (benefit)

  $ 11,435     $ 5,308     $ 3,091     $ (14,699) (7)   $ (4,409)  

Net income

  $ 20,433     $ 9,299     $ 5,096     $ 26,713     $ 55,342  

Diluted earnings per share

  $ 1.88     $ 0.87     $ 0.47     $ 2.41     $ 4.79  

Cash dividends declared

  $ 5,868     $ 5,805     $ 4,565     $ 15,920     $ 6,757  

Cash dividends per share

  $ 0.54     $ 0.48     $ 0.42     $ 1.45     $ 0.60  

Total assets

  $ 282,543     $ 240,746     $ 225,849     $ 227,180     $ 223,174  

Long-term debt

  $ 8,500 (8)   $ 1,902     $ 2,467     $ 3,053     $ 3,662  

Current ratio (9)

    1.84 to 1       1.95 to 1       2.37 to 1       2.39 to 1       2.70 to 1  

Book value per share

  $ 16.25     $ 14.95     $ 14.50     $ 14.51     $ 13.44  

  

 

(1)

Fiscal 2013 contained 53 weeks, whereas all other fiscal years presented above contained 52 weeks.

 

 

(2)

Fiscal 2015 included logistical services revenue from Zenith in the amount of $43,522 since the acquisition of Zenith on February 2, 2015.

 

 

(3)

Fiscal 2012 included restructuring and asset impairment charges and lease exits costs totalling $1,070. Fiscal 2011 included restructuring and asset impairment charges of $6,228 as well as licensee debt cancellation charges of $6,447.

 

 

(4)

On May 2, 2011 we sold our 46.9% interest in International Home Furnishings Center, Inc. (“IHFC”) resulting in a gain of $85,542.

 

 

(5)

See Note 3 to the Consolidated Financial Statements related to a remeasurement gain of $7,212 arising from our acquisition of Zenith during fiscal 2015. Also see Note 16 to the Consolidated Financial Statements related to $1,156 of income from the Continued Dumping and Subsidy Offset Act (“CDSOA”) received in fiscal 2015.

 

 

(6)

During fiscal 2012 and 2011, other income (loss), net included income from the CDSOA of $9,010 and $765, respectively.

 

 

(7)

Fiscal 2012 included the effects of changes in our valuation allowance on deferred tax assets resulting in a credit to income of $18,704.

 

 

(8)

See Note 10 to the Consolidated Financial Statements related to notes payable in connection with our acquisition of Zenith during fiscal 2015, the long-term portion of which totaled $7,143 at November 28, 2015.

 

 

(9)

See Note 2 to the Consolidated Financial Statements regarding our fiscal 2015 adoption of Accounting Standards Update 2015-17, which requires the classification of all deferred tax assets and liabilities as non-current. The current ratio for all prior periods presented has been restated to reflect the reclassification of our current deferred tax assets to non-current.

 

 
13

 

 

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

 

(Amounts in thousands except share and per share data)

 

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, specialty stores and mass merchants. We were founded in 1902 and incorporated under the laws of Virginia in 1930. Our rich 113-year history has instilled the principles of quality, value, and integrity in everything that we do, while simultaneously providing us with the expertise to respond to ever-changing consumer tastes and to meet the demands of a global economy.

 

With 93 BHF stores at November 28, 2015, we have leveraged our strong brand name in furniture into a network of corporate 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.  The store features custom order furniture ready for delivery in less than 30 days, more than 1,000 upholstery fabrics, free in-home design visits, and coordinated decorating accessories.  We believe that our capabilities in custom upholstery have become unmatched in recent years. Our manufacturing team takes great pride in the breadth of its options, the precision of its craftsmanship, and the speed of its delivery.  The selling philosophy in the stores 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. We continue to strengthen the sales and design talent within our Company-owned retail stores.  Our Design Consultants undergo extensive Design Certification training. This training has strengthened their skills related to our house call and design business, and is intended to increase business with our most valuable customers.

 

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, specialty stores and mass merchants. 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.  

 

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 terminal, warehouse and distribution facilities in eleven states, and the management of various home delivery facilities that service Bassett Home Furnishings 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.

 

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 Bassett Home Furnishings stores, we will now expand the concept to select independent dealers. We believe this will provide additional growth outside our BHF store network.

 

At November 28, 2015, our BFH store network included 60 Company-owned stores and 33 licensee-owned stores. Due to the improved operating performance of our retail network along with continued improvement in underlying economic factors such as the housing market and consumer confidence, we have been expanding our retail presence in various parts of the country. As part of this expansion we opened one new store and relocated two stores during fiscal 2015 while opening six new stores and relocating two stores in fiscal 2014. We plan to continue opening new stores, primarily in underpenetrated markets where we currently have stores. In this regard we are currently considering several locations for new store expansion over the next three years, with at least three of these planned to open in fiscal 2016. We continue to evaluate all stores in our fleet and plan to close three underperforming stores this year as well.

 

 
14

 

 

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.

 

Our wholesale operations include an upholstery plant in Newton, North Carolina that produces a wide range of upholstered furniture. We believe that we are an industry leader with our quick-ship custom upholstery offerings. We also operate a custom dining manufacturing facility in Martinsville, Virginia. Most of our wood furniture and certain of our upholstery offerings are sourced through several foreign plants, primarily in Vietnam, Indonesia and China. We define imported product as fully finished product that is sourced internationally. For fiscal 2015, approximately 37% of our wholesale sales were of imported product compared to 42% for fiscal 2014. In fiscal 2015 we launched several significant new product categories. An important new product introduction in 2015 has been “Bench Made”, a selection of American dining furniture that 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 Company-owned facility in Bassett, Virginia. Sales of “Bench   Made” product during 2015 were ahead of our expectations. Also extremely significant is the second phase of our store assortment makeover that began with the introduction of new wood items and finishes last spring. We are planning to move to a living area centric floor plan that will focus more on the upholstery products that are driving our sales today 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. We will begin production in a new manufacturing facility in Grand Prairie, Texas in early March. The new plant will begin by producing a portion of the upholstery assortment for customers and stores in the Texas area and west.

 

Our website, www.bassettfurniture.com, provides our consumers with the ability to research and purchase our merchandise online. The ultimate goal of our digital strategy is to drive traffic to our stores while deepening interactions with our consumers. We have worked diligently to enhance our online presence by making it easier for consumers to browse our wide array of goods and to design custom furniture. Late in 2015, we launched a new responsive platform allowing smartphone and tablet users to browse and purchase our product assortment on their mobile devices. Our e-commerce platform is simple, easy to use and amplifies the experience of the Bassett brand reflected in our stores, direct mail and television commercials. We constantly update our website to reflect current product availability, pricing and special offers. In 2016, we will continue to make improvements to our website to improve brand interaction and drive more qualified prospects to our stores. While sales through our website are currently not material, they have increased significantly in the last several years. We are leveraging our Company-owned and licensed store network to handle delivery and customer service for orders placed online.

 

 
15

 

 

Analysis of Operations

 

Our fiscal year ends on the last Saturday of November, which periodically results in a 53-week year. Fiscal 2013 contained 53 weeks, while fiscal 2015 and 2014 each contained 52 weeks. 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 28, 2015, November 29, 2014 and November 30, 2013:

 

   

2015

 

2014

 

2013

Sales Revenue:

                                               

Furniture and accessories

  $ 387,405       89.9 %   $ 340,738       100.0 %   $ 321,286       100.0 %

Logistics

    43,522       10.1 %     -       0.0 %     -       0.0 %

Total net sales revenue

    430,927       100.0 %     340,738       100.0 %     321,286       100.0 %
                                                 

Cost of furniture and accessories sold

    179,291       41.6 %     158,317       46.5 %     155,292       48.3 %

SG&A

    224,050       52.0 %     166,073       48.7 %     155,318       48.3 %

New store pre-opening costs

    623       0.1 %     1,217       0.4 %     671       0.2 %

Other charges

    974       0.2 %     -       0.0 %     -       0.0 %
                                                 

Income from operations

  $ 25,989       6.0 %   $ 15,131       4.4 %   $ 10,005       3.1 %

 

Sales for fiscal 2015 include the logistical services revenue of Zenith from customers outside of the Company since the date of acquisition on February 2, 2015. Sales of furniture and accessories, net of estimates for returns and allowances, were $387,405 for fiscal 2015 as compared to $340,738 for 2014 and $321,286 for 2013, representing increases of 13% and 6.1%, respectively. As noted above, fiscal 2013 contained 53 weeks while fiscal 2015 and 2014 contained 52 weeks. On an average weekly basis, sales for 2014 increased 8.1% over 2013. This trend primarily reflects the increase in the number of stores owned and operated by us, as well as growth in our wholesale shipments outside of our licensee network. Our consolidated net sales by segment were as follows:

 

   

2015

   

2014

   

2013

 
                         

Wholesale

  $ 252,180     $ 223,993     $ 215,451  

Retail

    249,379       216,631       199,380  

Logistical services

    77,250       -       -  

Inter-company eliminations:

                       

Furniture and accessories

    (114,154 )     (99,886 )     (93,545 )

Logistical services

    (33,728 )     -       -  

Consolidated net sales

  $ 430,927     $ 340,738     $ 321,286  

 

Operating income was $25,989 for 2015 as compared to $15,131 for 2014 and $10,005 for 2013. These increases have been primarily attributable to increased retail volume, the addition of Zenith, which contributed an additional $3,528 of operating income for fiscal 2015, and increased wholesale volume. Other charges of $974 during fiscal 2015 include lease exit costs of $419, asset impairment charges of $106, and a management restructuring charge of $449. See Note 15 of our Consolidated Financial Statements for additional information regarding these charges.

 

Certain other items affecting comparability between periods 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.

 

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.

 

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 logistics revenue in our 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 consolidated statements of income.

 

Prior to the beginning of fiscal 2015, our former investments and real estate segment included our short-term investments, our holdings of retail real estate previously leased as licensee stores, and our former equity investment in Zenith prior to acquisition. This segment has been eliminated and the assets formerly reported therein are now considered to be part of our wholesale segment. The earnings and costs associated with these assets, including our equity in the income of Zenith prior to the date of acquisition, will continue to be included in other loss, net, in our condensed consolidated statements of income.

 

 
17

 

 

The following tables illustrate the effects of various intercompany eliminations on income (loss) from operations in the consolidation of our segment results:

 

   

Year Ended November 28, 2015

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 

Sales revenue:

                                       

Furniture & accessories

  $ 252,180     $ 249,379     $ -     $ (114,154) (1)   $ 387,405  

Logistics

    -       -       77,250       (33,728) (2)     43,522  

Total sales revenue

    252,180       249,379       77,250       (147,882)       430,927  

Cost of furniture and accessories sold

    168,792       124,376       -       (113,877) (3)     179,291  

SG&A expense

    67,770       118,210       73,722       (35,652) (4)     224,050  

New store pre-opening costs

    -       623       -       -       623  

Income from operations (5)

  $ 15,618     $ 6,170     $ 3,528     $ 1,647     $ 26,963  

 

   

Year Ended November 29, 2014

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 

Sales revenue:

                                       

Furniture & accessories

  $ 223,993     $ 216,631     $ -     $ (99,886) (1)   $ 340,738  

Logistics

    -       -       -       - (2)     -  

Total sales revenue

    223,993       216,631       -       (99,886)       340,738  

Cost of furniture and accessories sold

    149,646       108,174       -       (99,503) (3)     158,317  

SG&A expense

    60,227       107,768       -       (1,922) (4)     166,073  

New store pre-opening costs

    -       1,217       -       -       1,217  

Income (loss) from operations

  $ 14,120     $ (528 )   $ -     $ 1,539     $ 15,131  

 

   

Year Ended November 30, 2013

 
   

Wholesale

   

Retail

   

Logistics

   

Eliminations

   

Consolidated

 

Sales revenue:

                                       

Furniture & accessories

  $ 215,451     $ 199,380     $ -     $ (93,545) (1)   $ 321,286  

Logistics

    -       -       -       - (2)     -  

Total sales revenue

    215,451       199,380       -       (93,545)       321,286  

Cost of furniture and accessories sold

    144,639       102,911       -       (92,258) (3)     155,292  

SG&A expense

    59,929       97,250       -       (1,861) (4)     155,318  

New store pre-opening costs

    -       671       -       -       671  

Income (loss) from operations

  $ 10,883     $ (1,452 )   $ -     $ 574     $ 10,005  

 

(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 for the year ended November 28, 2015, logisitcal services expense incurred from Zenith by our retail and wholesale segments.

(5)

Excludes the effects of asset impairment charges, lease exit costs and management restructuring costs which are not allocated to our segments.

 

 
18

 

 

Wholesale Segment

 

Net sales, gross profit, selling, general and administrative (SG&A) expense and operating income (loss) from operations for our Wholesale Segment were as follows for the years ended November 28, 2015, November 29, 2014 and November 30, 2013:

 

   

2015

 

2014

 

2013

                                                 

Net sales

  $ 252,180       100.0 %   $ 223,993       100.0 %   $ 215,451       100.0 %

Gross profit

    83,388       33.1 %     74,347       33.2 %     70,812       32.9 %

SG&A

    67,770       26.9 %     60,227       26.9 %     59,929       27.8 %

Income from operations

  $ 15,618       6.2 %   $ 14,120       6.3 %   $ 10,883       5.1 %

   

Wholesale shipments by category for the last three fiscal years are summarized below:

 

   

2015

 

2014

 

2013

                                                 

Wood

  $ 93,073       36.9 %   $ 86,577       38.7 %   $ 87,935       40.8 %

Upholstery

    156,768       62.2 %     135,831       60.6 %     125,403       58.2 %

Other

    2,339       0.9 %     1,585       0.7 %     2,113       1.0 %

Total

  $ 252,180       100.0 %   $ 223,993       100.0 %   $ 215,451       100.0 %

 

Fiscal 2015 as Compared to Fiscal 2014

 

Net sales for the wholesale segment were $252,180 for 2015 as compared to $223,993 for 2014, an increase of $28,187 or 13%. This sales increase was driven by a 13% increase in shipments to the BHF store network and a 7.4% increase in open market shipments (outside the BHF store network). Gross margins for the wholesale segment decreased slightly to 33.1% for 2015 as compared to 33.2% for 2014. Wholesale SG&A increased $7,543 to $67,770 for 2015 as compared to $60,227 for 2014. SG&A as a percentage of sales was 26.9% for both fiscal 2015 and 2014. Included in SG&A for 2015 is an additional $850 in increased legal and environmental costs, an additional $541 of incentive compensation, and a $289 increase in bad debt costs largely associated with one remaining long-term note from a prior licensee. Also included in SG&A during 2015 are $209 of costs associated with the acquisition of Zenith. Operating income was $15,618 or 6.2% of sales for 2015 as compared to $14,120 or 6.3% of sales in 2014.

 

Fiscal 2014 as Compared to Fiscal 2013

 

Net sales for the wholesale segment were $223,993 for 2014 as compared to $215,451 for 2013, an increase of $8,542, or 4%. On an average weekly basis (normalizing for the extra week in fiscal 2013), wholesale net sales increased 6%. Average weekly wholesale shipments to the open market (outside the Bassett Home Furnishings store network) for 2014 increased 10%, while average weekly shipments to the Bassett Home Furnishings store network increased by 4.2% compared to 2013. We gained market share in the traditional furniture store channel as recent product offerings were well received in 2014. Sales to our BHF store network were negatively impacted by slower business due to inclement weather during the winter months in early 2014 along with overall softness in the demand for wood furniture. Gross margins for the wholesale segment increased 30 basis points to 33.2% for 2014 as compared to 32.9% for 2013. This increase was primarily due to improved margins in the wood operations over the course of 2014 after discounting of discontinued product earlier in the year, and also due to the increased leveraging of fixed costs from higher sales volume in our upholstery operations. Wholesale SG&A increased $298 to $60,227 for 2014 as compared to $59,929 for 2013. SG&A costs as a percentage of sales decreased to 26.9% as compared to 27.6% for 2013 primarily due to tighter expense control. Income from operations was $14,120, or 6.3% of sales, for fiscal 2014 as compared to $10,883, or 5.1% of sales, for the prior year.

 

Wholesale Backlog

 

The dollar value of our wholesale backlog, representing orders received but not yet delivered to dealers and Company stores as of November 28, 2015, November 29, 2014, and November 30, 2013 was as follows:

 

   

2015

   

2014

   

2013

 
                         

Year end wholesale backlog

  $ 17,131     $ 13,644     $ 11,916  

 

 
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Retail Segment – Company Owned Stores

 

Net sales, gross profit, selling, general and administrative (SG&A) expense, new store pre-opening costs and operating income (loss) for our Retail Segment were as follows for the years ended November 28, 2015, November 29, 2014 and November 30, 2013:

 

   

2015 vs 2014

   

2014 vs 2013

 
   

2015

   

2014

   

2014

   

2013

 
                                                                 

Net sales

  $ 249,379       100.0 %   $ 216,631       100.0 %   $ 216,631       100.0 %   $ 199,380       100.0 %

Gross profit

    125,003       50.1 %     108,457       50.1 %     108,457       50.1 %     96,469       48.4 %

SG&A expense

    118,210       47.4 %     107,768       49.7 %     107,768       49.7 %     97,250       48.8 %

New store pre-opening costs

    623       0.2 %     1,217       0.6 %     1,217       0.6 %     671       0.3 %

Income (loss) from operations

  $ 6,170       2.5 %   $ (528 )     -0.2 %   $ (528 )     -0.2 %   $ (1,452 )     -0.7 %

  

The following tables present operating results on a comparable store basis for each comparative set of periods. Table A compares the results of the 53 stores that were open and operating for all of 2015 and 2014. Table B compares the results of the 51 stores that were open and operating for all of 2014 and 2013.

 

Comparable Store Results:

 

   

Table A: 2015 vs 2014 (53 Stores)

   

Table B: 2014 vs 2013 (51 Stores)

 
   

2015

   

2014

   

2014

   

2013

 
                                                                 

Net sales

  $ 225,444       100.0 %   $ 199,048       100.0 %   $ 194,092       100.0 %   $ 187,146       100.0 %

Gross profit

    112,815       50.0 %     99,591       50.0 %     96,905       49.9 %     90,626       48.4 %

SG&A expense

    105,347       46.7 %     97,325       48.9 %     94,726       48.8 %     90,389       48.3 %

Income (loss) from operations

  $ 7,468       3.3 %   $ 2,266       1.1 %   $ 2,179       1.1 %   $ 237       0.1 %

 

The following tables present operating results for all other stores which were not comparable year-over-year. Each table includes the results of stores that either opened or closed at some point during the 24 months of each comparative set of periods.

 

All Other (Non-Comparable) Store Results:

 

   

2015 vs 2014 All Other Stores

   

2014 vs 2013 All Other Stores

 
   

2015

   

2014

   

2014

   

2013

 
                                                                 

Net sales

  $ 23,935       100.0 %   $ 17,583       100.0 %   $ 22,539       100.0 %   $ 12,234       100.0 %

Gross profit

    12,188       50.9 %     8,866       50.4 %     11,552       51.3 %     5,843       47.8 %

SG&A expense

    12,863       53.7 %     10,443       59.4 %     13,042       57.9 %     6,861       56.1 %

New store pre-opening costs

    623       2.6 %     1,217       6.9 %     1,217       5.4 %     671       5.5 %

Loss from operations

  $ (1,298 )     -5.4 %   $ (2,794 )     -15.9 %   $ (2,707 )     -12.0 %   $ (1,689 )     -13.8 %

 

Fiscal 2015 as Compared to Fiscal 2014

 

Net sales for the 60 Company-owned Bassett Home Furnishings stores were $249,379 for fiscal 2015 as compared to $216,631 for fiscal 2014, an increase of $32,748 or 15%. The increase was primarily due to a $26,396 or 13% increase in comparable store sales coupled with a $6,352 increase in non-comparable store sales from 7 new stores opened in the last 24 months.

 

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 11% for 2015 over 2014.

 

 

 
20

 

 

The consolidated retail operating income for 2015 was $6,170 as compared to a loss of $528 for 2014, a $6,698 improvement. The 53 comparable stores generated operating income of $7,468 for the year, or 3.3% of sales, as compared to $2,266, or 1.1% of sales, for the prior year. Gross margins were 50.0% for 2015, unchanged from the prior year. SG&A expenses for comparable stores increased $8,022 to $105,347 or 46.7% of sales as compared to 48.9% of sales for 2014. This decrease is primarily due to greater leverage of fixed costs due to higher sales volumes.

 

Losses from the non-comparable stores in 2015 were $1,298 compared to $2,794 for 2014. This decrease is due in part to a decline in new store pre-opening costs from $1,217 recognized in 2014 due to the six new store openings during that year as compared with $623 in 2015 primarily associated with the Woodland Hills, California store which opened in early October of 2015. These costs included 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 we take possession of the physical store space and the time of the store opening. Also included in the non-comparable store loss for 2014 was $983 in post-opening losses from six stores opened during 2014. We incur losses in the 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.

 

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.

 

Fiscal 2014 as Compared to Fiscal 2013

 

Net sales for the 60 Company-owned stores were $216,631 for fiscal 2014 as compared to $199,380 for 2013, an increase of $17,251 or 8.7%. The increase was comprised of a $6,946 or 3.7% increase in comparable store sales and a $10,305 increase in non-comparable store sales. On an average weekly basis (normalizing for the extra week in the first quarter of 2013), comparable store sales increased 5.7%.

 

While we do not recognize sales until goods are delivered to the consumer, we track 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 4.3% for fiscal 2014 as compared to 2013. On an average weekly basis, written sales increased 6.4% over the prior year.

 

The operating loss for the 60 Company-owned stores for fiscal 2014 was $528 as compared to an operating loss of $1,452 for 2013. This decline in the consolidated retail operating loss was primarily due to improved margins, partially offset by increased new store related opening costs, overlapping rent costs during the transition period for store relocations, and initial operating losses at newly opened locations.

 

The 51 comparable stores generated operating income of $2,179 for 2014 as compared to $237 for the prior year. Gross margins at our comparable stores improved to 49.9% compared to 48.4% in the prior year due primarily to improved pricing strategies. SG&A expenses for comparable stores increased $4,337 to $94,726 or 48.8% of sales as compared to 48.3% for 2013. This increase is primarily due to planned increases in advertising spending, higher health care benefit costs, increased other overhead costs as the store network continues to grow and the effects of having one less week to leverage fixed costs. In addition, we incurred $222 of overlapping rent while two stores were in the process of being relocated. As with new store openings as described below, we begin to recognize rent expense at the date we take possession of the new store location. We recognized rent expense on both locations until the date that the previously existing store closed. We completed relocations in Little Rock, Arkansas and Boston, Massachusetts during fiscal 2014, with two additional relocations in Texas expected which were completed during the first quarter of fiscal 2015. We define a store relocation as the closing of one store and opening of another store in the same market. Since there is no change in the store count for a specific market, we continue to include relocation costs as part of the comparable store operations.

 

Losses from the non-comparable stores during fiscal 2014 were $2,707 which includes $1,217 of costs incurred prior to the opening of six stores during the year. 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 open 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 we take physical possession of the store space and the time when the store opens. Also included in the non-comparable store loss is $983 in post-opening losses from these six store openings. 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. The remaining non-comparable stores incurred an operating loss of $507 during 2014.

 

 

 
21

 

  

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 Comparable Store Sales Increases

 

The following table provides year-over-year comparable store sales increases for the last three fiscal years:

  

   

2015

   

2014

      2013 (1)
                         

Delivered

    13.3 %     3.7 %     7.6 %

Written

    11.0 %     4.3 %     9.0 %

 

(1) The reported amounts for fiscal 2013 reflect the fact that 2013 contained 53 weeks versus 52 weeks for the preceding year. Adjusting for the additional week of sales on an average weekly basis, 2013 delivered and written sales would have increased 5.6% and 7.0%, respectively, over 2012.

 

Retail Backlog

 

The dollar value of our retail backlog, representing orders received but not yet delivered to customers as of November 28, 2015, November 29, 2014, and November 30, 2013, was as follows:

 

   

2015

    2014    

2013

 
                         

Year end retail backlog

  $ 31,871     $ 30,206     $ 22,483  

Retail backlog per open store

  $ 531     $ 503     $ 409  

  

Logistical Services Segment

 

Our logistical services segment was created with the acquisition of Zenith on February 2, 2015. Results for that segment since the date of acquisition during fiscal 2015 are as follows:

  

Logistics revenue

  $ 77,250       100.0 %

Operating expenses

    73,722       95.4 %
                 

Income from operations

  $ 3,528       4.6 %

 

Operating expenses since the date of acquisition during fiscal 2015 include depreciation and amortization of $2,634.

  

 

 
22

 

   

Other Items Affecting Net Income (Loss)

 

Other items affecting net income for fiscal 2015, 2014 and 2013 are as follows:

 

   

2015

   

2014

   

2013

 
                         

Remeasurement gain on acquisition of affiliate (1)

  $ 7,212     $ -     $ -  

Income from unconsolidated affiliated company (2)

    220       661       770  

Income from Continued Dumping & Subsidy Offset Act (3)

    1,156       -       -  

Interest expense (4)

    (607 )     (188 )     (255 )

Retail real estate impairment charges (5)

    (182 )     -       (416 )

Loan and lease guarantee (expense) recovery (6)

    73       66       (40 )

Investment income (7)

    228       352       99  

Other (8)

    (2,221 )     (1,415 )     (1,976 )
                         

Total other income (loss), net

  $ 5,879     $ (524 )   $ (1,818 )

 

(1)

See Note 3 to the Consolidated Financial Statements for information related to our acquisition of Zenith and the recognition of a remeasurement gain on our pre-acquisition equity method investment in Zenith.

(2)

See Note 9 to the Consolidated Financial Statements for information related to our equity in the income of Zenith as an unconsolidated affiliate prior to our acquisition of Zenith.

(3)

See Note 16 to the Consolidated Financial Statements for information related to our income from the Continued Dumping and Subsidy Offset Act (“CDSOA”).

(4)

Our interest expense prior to fiscal 2015 consisted primarily of interest on our retail real estate mortgage obligations and has been declining steadily as those obligations are being repaid. During fiscal 2015 our interest expense increased significantly due to debt arising from our acquisition of Zenith. See Note 3 to the Consolidated Financial Statements regarding debt incurred and assumed at the date of the acquisition. See also Note 10 to the Consolidated Financial Statements for additional information regarding our outstanding debt at November 28, 2015.

(5)

See Note 2 to the Consolidated Financial Statements for additional information regarding impairment charges related to our retail real estate.

(6)

Loan and lease guarantee expense consists of adjustments to our reserves for the net amount of our estimated losses on loan and lease guarantees that we have entered into on behalf of our licensees. The recovery (expense) recognized for fiscal 2015, 2014 and 2013 reflects the changes in our estimates of the risk that we may have to assume the underlying obligations with respect to our guarantees.

(7)

Investment income for fiscal 2015, 2014 and 2013 includes interest income arising from our short-term investments. See Note 4 to the Consolidated Financial Statements for additional information regarding our investments in certificates of deposit. Investment income for Fiscal 2015 and 2014 also includes gains of $136 and $280 arising from the partial liquidation of our previously impaired investment in the Fortress Value Recovery Fund I, LLC, which was fully impaired during fiscal 2012.

(8)

Fiscal 2014 includes $827 in death benefits received from life insurance policies covering former executives, compared with $304 of similar proceeds in fiscal 2013 and none in fiscal 2015.

 

 

 
23

 

 

Provision for Income taxes

  

We recorded an income tax provision of $11,629, $5,308 and $3,091 in fiscal 2015, 2014 and 2013, respectively. For fiscal 2015, our effective tax rate of approximately 35.9% differs from the statutory rate of 35.0% primarily due to the effects of state income taxes, partially offset by a lower effective tax rate on the gain associated with our acquisition of Zenith arising from the remeasurement of our previous 49% equity method investment in Zenith. For fiscal 2014, our effective tax rate of approximately 36.3% differs from the statutory rate of 35.0% primarily due to the effects of state income taxes, adjustments to state net operating loss carryforwards, a reduction in the valuation allowance on deferred tax assets and permanent differences arising from non-taxable income. For fiscal 2013, our effective tax rate of approximately 37.8% differs from the statutory rate of 34.0% primarily due to the effects of state income taxes and permanent differences arising from non-deductible expenses. See Note 14 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 $13,470 as of November 28, 2015, which, upon utilization, are expected to reduce our cash outlays for income taxes in future years. It will require approximately $35,000 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 2015 was $32,398 compared to $29,961 for fiscal 2014, an increase of $2,437. The improvement is primarily the result of higher operating income, partially offset by increases in inventory levels due to the introduction of new products and increased purchase activity to support higher order volume.

 

Our overall cash position increased by $9,595 during 2015. Offsetting the cash provided by operations, we used $19,661 of cash in investing activities, primarily consisting of: cash paid for the acquisition of Zenith (net of cash acquired); a capital contribution made to Zenith prior to the acquisition; capital expenditures which included retail store relocations, retail store remodels, and in-process spending on new stores, expanding and upgrading our manufacturing capabilities, and the purchase of freight transportation equipment. Net cash used in financing activities was $3,132, including dividend payments of $5,786 and stock repurchases of $2,071 under our existing share repurchase plan, of which $17,929 remains authorized at November 28, 2015. These uses were partially offset by net proceeds and excess tax benefits associated with the exercise of stock options. With cash and cash equivalents and short-term investments totaling $59,393 on hand at November 28, 2015, we believe we have sufficient liquidity to fund operations for the foreseeable future.

 

Debt and Other Obligations

 

Our credit facility with our bank provides for a line of credit of up to $15,000 and is secured by our accounts receivable and inventory. The facility 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. The line matured in December 2015 but has been temporarily extended while we are in negotiations with our bank for a new line, which we expect to obtain during the first quarter of fiscal 2016 under substantially similar terms, except that the line is expected to be unsecured. We have $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 November 28, 2015 we have outstanding principal totaling $14,085, excluding discounts, under notes payable of which $5,477 matures within one year of the balance sheet date. See Note 10 to our 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 $124,897 at November 28, 2015 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 $2,494 at November 28, 2015. See Note 17 to our condensed consolidated financial statements for additional details regarding our leases and lease guarantees.

 

Dividends and Share Repurchases

 

During fiscal 2015, we declared four quarterly dividends totaling $3,684, or $0.34 per share, and one special dividend of $2,184, or $0.20 per share. Cash dividend payments to our shareholders during fiscal 2014 totaled $5,786. During fiscal 2015, we also repurchased 76,350 shares of our stock for $2,071 under our share repurchase program. The weighted-average effect of these share repurchases was to increase both our basic and diluted earnings per share in 2015 by approximately $0.01.

 

 

 
24

 

 

Capital Expenditures

 

We currently anticipate that total capital expenditures for fiscal 2016 will be approximately $20 million which will be used primarily for the build out of new stores and remodeling existing Company-owned stores in our retail segment, and the purchase of transportation equipment for our logistical services 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 new stores, 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. The recurring estimate of the fair value of our mortgages and notes payable for disclosure purposes (see Note 10 to the Consolidated Financial Statements) involves Level 3 inputs. Our primary non-recurring fair value estimates, typically involving the valuation of business acquisitions (see Note 3 to the Consolidated Financial Statements) and asset impairments (see Note 15 to the Consolidated Financial Statements) have utilized Level 3 inputs.

  

 

 
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Contractual Obligations and Commitments

 

We enter into contractual obligations and commercial commitments in the ordinary course of business (See Note 17 to the Consolidated Financial Statements for a further discussion of these obligations). The following table summarizes our contractual payment obligations and other commercial commitments and the fiscal year in which they are expected to be paid.

 

   

2016

   

2017

   

2018

   

2019

   

2020

   

Thereafter

   

Total

 

Post employment benefit obligations (1)

  $ 1,069     $ 1,013     $ 980     $ 926     $ 885     $ 11,137     $ 16,010  

Notes payable

    5,477       4,112       3,803       543       150       -       14,085  

Other obligations & commitments

    840       840       740       740       100       200       3,460  

Contractual advertising

    3,010       3,190       3,375       3,560       -       -       13,135  

Interest payable

    264       172       113       27       14       -       590  

Letters of credit

    2,326       -       -                       -       2,326  

Operating leases (2)

    25,356       22,576       17,642       14,737       12,817       31,769       124,897  

Lease guarantees (4)

    1,070       739       728       -       -       -       2,537  

Purchase obligations (3)

    -       -       -                       -       -  

Total

  $ 39,412     $ 32,642     $ 27,381     $ 20,533     $ 13,966     $ 43,106     $ 177,040  

 

(1)

Does not reflect a reduction for the impact of any company owned life insurance proceeds to be received. Currently, we have life insurance policies with net death benefits of $3,087 to provide funding for these obligations. See Note 11 to the Consolidated Financial Statements for more information.

(2)

Does not reflect a reduction for the impact of sublease income to be received. See Note 17 to the Consolidated Financial Statements for more information.

(3)

The Company is not a party to any long-term supply contracts with respect to the purchase of raw materials or finished goods. At the end of fiscal year 2015, we had approximately $15,076 in open purchase orders, primarily for imported inventories, which are in the ordinary course of business. We also have a firm commitment to purchase transportation equipment in fiscal 2016 totaling approximately $4,670.

(4)

Lease guarantees relate to payments we would only be required to make in the event of default on the part of the guaranteed parties.

   

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 Contractual Obligations and Commitments table above and Note 17 to the Consolidated Financial Statements, included in Item 8 of this Annual Report on Form 10-K, 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 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.

 

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.

 

Consolidation The consolidated financial statements include the accounts of Bassett Furniture Industries, Incorporated and its majority-owned subsidiaries for whom we have operating control. In accordance with ASC Topic 810, Consolidation, we have evaluated our licensees and certain other entities to determine whether they are variable interest entities (“VIEs”) of which we are the primary beneficiary and thus would require consolidation in our financial statements. To date we have concluded that none of our licensees nor any other of our counterparties represent VIEs.

 

 

 
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Revenue Recognition - Revenue is recognized when the risks and rewards of ownership and title to the product have transferred to the buyer. This generally occurs upon the shipment of goods to independent dealers or, in the case of Company-owned retail stores, upon delivery to the customer. Our wholesale payment terms generally vary from 30 to 60 days. For retail sales, we typically receive a significant portion of the purchase price as a customer deposit upon order, with the balance typically collected upon delivery. An estimate for returns and allowances has been provided in recorded sales. The contracts with our licensee store owners do not provide for any royalty or license fee to be paid to us. For our logistical services segment, line-haul freight revenue and home delivery revenue are recognized upon delivery to the destination. 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.

 

Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) outlines the four basic criteria for recognizing revenue as follows: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. SAB 104 further asserts that if collectibility of all or a portion of the revenue is not reasonably assured, revenue recognition should be deferred until payment is received. During fiscal 2015 and 2014, there were no dealers for which these criteria were not met.

 

Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our accounts receivable reserves were $1,175 and $1,249 at November 28, 2015 and November 29, 2014, respectively, representing 5.3% and 7.6% of our gross accounts receivable balances at those dates, respectively. The allowance for doubtful accounts is based on a review of specifically identified customer accounts in addition to an overall aging analysis. We evaluate the collectibility of our receivables from our licensees and other customers on a quarterly basis based on factors such as their financial condition, our collateral position, potential future plans with licensees and other similar factors. Our allowance for doubtful accounts represents our best estimate of potential losses on our accounts and notes receivable and is adjusted accordingly based on historical experience, current developments and present economic conditions and trends. 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 are stated at the lower of cost or market. Cost is determined for domestic furniture inventories using the last-in, first-out method. The cost of imported inventories is determined on a first-in, first-out 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 $1,397 and $1,412 at November 28, 2015 and November 29, 2014, respectively, representing 2.3% and 2.4%, respectively, of our inventories on a last-in, first-out basis. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

 

Valuation Allowance on Deferred Tax AssetsWe evaluate our deferred income tax assets to determine if valuation allowances are required or should be adjusted. A valuation allowance is established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with tax attributes expiring unused and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified. During fiscal 2014, reductions in the reserve related to changes in laws which impact our ability to recover certain state net operating loss carryforwards resulted in a credit to income of $974, which is included in our net income tax expense for 2014. The remaining valuation allowance at November 28, 2015 is $0.

 

Goodwill – Goodwill represents the excess of the purchase price over the value assigned to tangible assets and liabilities and identifiable intangible assets of businesses acquired. The acquisition of assets and liabilities and any 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.

 

In accordance with ASC Topic 350, Intangibles – Goodwill & Other, the goodwill impairment test consists of a two-step process, if necessary. However, 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 two-step goodwill impairment test described in ASC Topic 350. 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 two-step 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 two-step process. Based on our qualitative assessment as described above, we have concluded that our goodwill in the amount of $11,588 is not impaired as of November 28, 2015.

 

 

 
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The first step 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, the second step is performed whereby we must calculate the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. This second step represents a hypothetical purchase price allocation as if we had acquired the reporting unit on that date. Our impairment methodology uses a discounted cash flow analysis requiring certain assumptions and estimates to be made regarding future profitability of the reporting unit and industry economic factors. 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 28, 2015, our indefinite-lived intangible assets other than goodwill consist of trade names acquired in the acquisition of Zenith and have a carrying value of $2,490.

 

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 28, 2015 our definite-lived intangible assets consist of customer relationships and customized technology applications acquired in the acquisition of Zenith with a total carrying value of $3,604.

  

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.

  

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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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  

We are exposed to market risk from changes in the value of foreign currencies. Substantially all of our imports purchased outside of North America are denominated in U.S. dollars. Therefore, we believe that gains or losses resulting from changes in the value of foreign currencies relating to foreign purchases not denominated in U.S. dollars would not be material to our results from operations in fiscal 2015.

   

We are exposed to market risk from changes in the cost of raw materials used in our manufacturing processes, principally wood, woven fabric, and foam products. An increase in the rate of in home construction could result in increases in wood and fabric costs from current levels, and the cost of foam products, which are petroleum-based, is sensitive to changes in the price of oil.

   

We are also exposed to commodity price risk related to diesel fuel prices for fuel used in our logistical services segment. We manage our exposure to that risk primarily through the application of fuel surcharges to our customers.

   

We have potential exposure to market risk related to conditions in the commercial real estate market. Our retail real estate holdings of $3,120 and $6,302 at November 28, 2015 and November 29, 2014, respectively, for stores formerly operated by licensees as well as our holdings of $27,175 and $27,843 at November 28, 2015 and November 29, 2014, respectively, for Company-owned stores could suffer significant impairment in value if we are forced to close additional stores and sell or lease the related properties during periods of weakness in certain markets. Additionally, if we are required to assume responsibility for payment under the lease obligations of $2,537 and $3,296 which we have guaranteed on behalf of licensees as of November 28, 2015 and November 29, 2014, respectively, we may not be able to secure sufficient sub-lease income in the current market to offset the payments required under the guarantees.

   

                   

Net Book

 
   

Number of

   

Aggregate

   

Value

 
   

Locations

   

Square Footage

   

(in thousands)

 
                         

Real estate occupied by Company-owned and operated stores, included in property and equipment, net (1)

    11       276,887     $ 27,175  
                         

Investment real estate leased to others

    2       41,021       3,120  
                         

Total Company investment in retail real estate

    13       317,908     $ 30,295  

 

   (1) Includes two properties encumbered under mortgages totaling $1,709 at November 28, 2015.

 

 

 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm 

 

The Board of Directors and Stockholders of Bassett Furniture Industries, Incorporated and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of Bassett Furniture Industries, Incorporated and Subsidiaries as of November 28, 2015 and November 29, 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended November 28, 2015. Our audits also included Financial Statement Schedule II - Analysis of Valuation and Qualifying Accounts for each of the three years in the period ended November 28, 2015. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bassett Furniture Industries, Incorporated and Subsidiaries at November 28, 2015 and November 29, 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 28, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bassett Furniture Industries, Incorporated and Subsidiaries’ internal control over financial reporting as of November 28, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated January 21, 2016 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Richmond, Virginia

 

January 21, 2016

 

 

 
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Consolidated Balance Sheets

Bassett Furniture Industries, Incorporated and Subsidiaries

November 28, 2015 and November 29, 2014

(In thousands, except share and per share data)

 

   

2015

   

2014

 

Assets

               

Current assets

               

Cash and cash equivalents

  $ 36,268     $ 26,673  

Short-term investments

    23,125       23,125  

Accounts receivable, net of allowance for doubtful accounts of $1,175 and $1,249 as of November 28, 2015 and November 29, 2014, respectively

    21,197       15,228  

Inventories

    59,896       57,272