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TMCNet:  BASSETT FURNITURE INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[July 02, 2014]

BASSETT FURNITURE INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 112-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 94 BHF stores at May 31, 2014, 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 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 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.

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 112 year heritage in the furniture industry with the penetration of 99 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.

The following table summarizes the changes in store count during the six months ended May 31, 2014: November 30, New Closed May 31, 2013 Stores* Stores* 2014 Company-owned stores 55 5 - 60 Licensese-owned stores 34 - - 34 Total 89 5 - 94 *Does not include openings and closures due to relocation of existing stores within a market.

18 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) In fiscal 2013, we began a program to increase the Company-owned retail store count and relocate a number of first generation stores to better locations. This program includes opening nine new stores and relocating six existing stores in 2013 and 2014. As a result, we spent $8,984 in capital expenditures for new and relocated stores in the first six months of fiscal 2014 and expect to spend an additional amount of approximately $2,000 during the remainder of the year.

During the six months ended May 31, 2014, stores in the following locations were opened and relocated: New Stores Store Relocations Forth Worth, Texas Little Rock, Arkansas Westport, Connecticut Annapolis, Maryland Burlington, Massachusetts Hartsdale, New York During the next six to nine months, we expect to open or relocate stores in the following locations: New Stores Store Relocations Rockville, Maryland Boston, Massachusetts San Antonio, Texas Southlake, Texas 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 possession of the physical store space and the time of the store opening. Generally, rent payments between time of possession and opening of a new store are deferred and therefore rent costs recognized during that time do not require cash. Inherent in our retail business model, we also incur significant losses in the first two to three months of operation following a new store opening. Similar to other furniture retailers, we do not recognize a sale in the income statement 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 our furniture offerings, delivery to our customers usually does not occur until 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 recorded in the income statement. Coupled with the previously discussed store pre-opening costs, total start-up losses can range from $300 to $500 per store.

While this expansion is initially costly to our operating results, 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 12 months of their opening. Even as these stores ramp up to break-even, we are realizing additional wholesale sales volume that will leverage the fixed costs in our wholesale business. We expect to continue opening and relocating stores at a slower pace after 2014.

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 the six months ended May 31, 2014, approximately 42% of our wholesale sales were of imported product compared to 47% for the six months ended June 1, 2013.

19 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Results of Operations - Quarter ended May 31, 2014 compared with quarter ended June 1, 2013: Net sales, gross profit, selling, general and administrative (SG&A) expense, and income (loss) from operations were as follows for the periods ended May 31, 2014 and June 1, 2013: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Net sales $ 85,185 100.0 % $ 81,223 100.0 % $ 160,832 100.0 % $ 161,072 100.0 % Gross profit 45,313 53.2 % 41,826 51.5 % 85,566 53.2 % 83,186 51.6 % SG&A expenses 40,901 48.0 % 38,361 47.2 % 79,481 49.4 % 77,195 47.9 % New store pre-opening costs 521 0.6 % 55 0.1 % 1,108 0.7 % 217 0.1 % Income (loss) from operations $ 3,891 4.6 % $ 3,410 4.2 % $ 4,977 3.1 % $ 5,774 3.6 % * 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013.

On a consolidated basis, we reported net sales for the second quarter of 2014 of $85,185, as compared to $81,223 for the second quarter of 2013. Net sales for the six months ended May 31, 2014 were $160,832, a 0.1% decrease from the comparable period of 2013. Because of our fiscal calendar, the six months ended June 1, 2013 consisted of 27 weeks compared to 26 weeks for the first half of 2014. On an average weekly basis (normalizing for the extra week in the first half of 2013), consolidated net sales increased 3.7%. Operating income was $3,891 for the second quarter of 2014 as compared to $3,410 for the second quarter of 2013, an increase of $481 primarily attributable to higher margins in our upholstery operations along with tighter wholesale expense control, partially offset by higher SG&A costs in our retail operations associated with the expansion of the Company-owned store network. For the six months ended May 31, 2014, operating income was $4,977, a decrease of $797 from the first six months of 2013 driven primarily by higher new store related costs (both pre- and post- opening), as we opened five new stores during the first half of 2014 compared to two in the first half of 2013.

20 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Segment Information We have strategically aligned our business into three reportable segments as described below: Wholesale. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of Bassett stores (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.

Investments and real estate. Our investments and real estate segment consists of our holdings of retail real estate leased or previously leased as licensee stores and our equity investment in Zenith Freight Lines, LLC, ("Zenith"). We also hold an investment in the Fortress Value Recover Fund I, LLC ("Fortress"), which we fully reserved during the first quarter of fiscal 2012. Although this segment does not have operating earnings, income from the segment is included in other loss, net, in our condensed consolidated statements of income and retained earnings.

21 of 35-------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) The following tables illustrate the effects of various intercompany eliminations on income (loss) from operations in the consolidation of our segment results: Quarter Ended May 31, 2014 Wholesale Retail Eliminations Consolidated Net sales $ 56,184 $ 53,290 $ (24,289 ) (1) $ 85,185 Gross profit 19,028 26,462 (177 ) (2) 45,313 SG&A expense 14,771 26,607 (477 ) (3) 40,901 New store pre-opening costs - 521 - 521 Income (loss) from operations $ 4,257 $ (666 ) $ 300 $ 3,891 Quarter Ended June 1, 2013 Wholesale Retail Eliminations Consolidated Net sales $ 53,933 $ 51,470 $ (24,180 ) (1) $ 81,223 Gross profit 17,593 24,413 (180 ) (2) 41,826 SG&A expense 14,744 24,081 (464 ) (3) 38,361 New store pre-opening costs - 55 - 55 Income from operations $ 2,849 $ 277 $ 284 $ 3,410 Six Months Ended May 31, 2014* Wholesale Retail Eliminations Consolidated Net sales $ 107,270 $ 100,414 $ (46,852 ) (1) $ 160,832 Gross profit 35,559 50,121 (114 ) (2) 85,566 SG&A expense 28,954 51,451 (924 ) (3) 79,481 New store pre-opening costs - 1,108 - 1,108 Income (loss) from operations $ 6,605 $ (2,438 ) $ 810 $ 4,977 Six Months Ended June 1, 2013* Wholesale Retail Eliminations Consolidated Net sales $ 107,893 $ 101,427 $ (48,248 ) (1) $ 161,072 Gross profit 35,601 48,287 (702 ) (2) 83,186 SG&A expense 29,751 48,364 (920 ) (3) 77,195 New store pre-opening costs - 217 - 217 Income (loss) from operations (4) $ 5,850 $ (294 ) $ 218 $ 5,774 (1) Represents the elimination of sales from our wholesale segment to our Company-owned BHF stores.

(2) Represents the change for the period in the elimination of intercompany profit in ending retail inventory.

(3) Represents the elimination of rent paid by our retail stores occupying Company-owned real estate.

(4) Excludes the effects of restructuring and asset impairment charges and lease exit costs. These charges are not allocated to our segments.

* 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013.

22 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) The following is a discussion of operating results for our wholesale and retail segments: Wholesale segment Results for the wholesale segment for the three months ended May 31, 2014 and June 1, 2013 are as follows: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Net sales $ 56,184 100.0 % $ 53,933 100.0 % $ 107,270 100.0 % $ 107,893 100.0 % Gross profit 19,028 33.9 % 17,593 32.6 % 35,559 33.1 % 35,601 33.0 % SG&A expenses 14,771 26.3 % 14,744 27.3 % 28,954 27.0 % 29,751 27.6 % Income from operations $ 4,257 7.6 % $ 2,849 5.3 % $ 6,605 6.2 % $ 5,850 5.4 % * 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013 Quarterly Analysis of Results - Wholesale Net sales for the wholesale segment were $56,184 for the second quarter of 2014 as compared to $53,933 for the second quarter of 2013. Shipments outside of the BHF store network increased 17%, while shipments to the BHF store network declined 4.0% from the comparable prior year period. We continue to gain market share in the traditional furniture store channel as recent product offerings have been well received. Sales to our BHF store network have continued to be negatively impacted by slower business during the winter months from inclement weather along with overall softness in the demand for wood furniture. Gross margins for the wholesale segment increased 1.3 percentage points to 33.9% for the second quarter of 2014 as compared with 32.6% for the second quarter of 2013. This increase was primarily due to improved margins in the upholstery operations with higher sales volumes providing greater leverage of fixed costs and higher wood margins due to less discounting of discontinued product.

Wholesale SG&A increased $27 to $14,771 for the second quarter of 2014 as compared to $14,744 for the second quarter of 2013. SG&A as a percentage of sales decreased to 26.3% for the second quarter of 2014 as compared to 27.3% for the second quarter of 2013 due primarily to greater leverage of fixed costs from higher sales volumes coupled with tighter expense control.

Year-to-date Analysis of Results - Wholesale Net sales for the wholesale segment were $107,270 for the six months ended May 31, 2014 as compared to $107,893 for the comparable prior year period. On an average weekly basis (normalizing for the extra week in the first half of 2013), wholesale net sales increased 3.3%. Average weekly shipments outside of the BHF store network increased 15%, while average weekly shipments to the BHF store network declined 3.5% from the comparable prior year period. We continue to gain market share in the traditional furniture store channel as recent product offerings have been well received. Sales to our BHF store network have continued to be negatively impacted by slower business during the winter months from inclement weather along with overall softness in the demand for wood furniture.

Gross margins for the wholesale segment were essentially flat at 33.1% for the first half of 2014 as compared with 33.0% for the first half of 2013. Wholesale SG&A decreased $797 to $28,954 for the first half of 2014 as compared to $29,751 for the first half of 2013 primarily due to lower fixed SG&A. SG&A as a percentage of sales decreased to 27.0% as compared to 27.6% for the prior year period primarily due to tighter expense control.

23 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Wholesale shipments by type: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Wood $ 21,436 38.2 % $ 22,243 41.2 % $ 41,133 38.3 % $ 44,466 41.2 % Upholstery 34,047 60.6 % 31,233 57.9 % 64,729 60.3 % 62,434 57.9 % Other 700 1.1 % 457 0.9 % 1,408 1.3 % 993 0.9 % Total $ 56,183 100.0 % $ 53,933 100.0 % $ 107,270 100.0 % $ 107,893 100.0 % * 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013 Wholesale Backlog The dollar value of wholesale backlog, representing orders received but not yet shipped to dealers and Company stores, was $15,615 at May 31, 2014 as compared with $15,246 at June 1, 2013.

24 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Retail - Company-owned stores segment Results for the retail segment for the three months ended May 31, 2014 and June 1, 2013 are as follows: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Net sales $ 53,290 100.0 % $ 51,470 100.0 % $ 100,414 100.0 % $ 101,427 100.0 % Gross profit 26,462 49.7 % 24,413 47.4 % 50,121 49.9 % 48,287 47.6 % SG&A expenses 26,607 49.9 % 24,081 46.8 % 51,451 51.2 % 48,364 47.7 % New store pre-opening costs 521 1.0 % 55 0.1 % 1,108 1.1 % 217 0.2 % Loss from operations $ (666 ) -1.2 % $ 277 0.5 % $ (2,438 ) -2.4 % $ (294 ) -0.3 % Results for the comparable stores† (53 stores for the quarters ended May 31, 2014 and June 1, 2013, 52 stores for the six months ended May 31, 2014 and June 1, 2013) are as follows: Comparable stores: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Net sales $ 49,738 100.0 % $ 49,717 100.0 % $ 93,915 100.0 % $ 97,406 100.0 % Gross profit 24,601 49.5 % 23,610 47.5 % 46,698 49.7 % 46,408 47.6 % SG&A expenses 24,457 49.2 % 23,203 46.7 % 47,060 50.1 % 46,150 47.4 % Loss from operations $ 144 0.3 % $ 407 0.8 % $ (362 ) -0.4 % $ 258 0.2 % † "Comparable" stores include those locations that have been open and operated by the Company for all of each respective comparable period.

Results for all other stores are as follows: Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 Net sales $ 3,552 100.0 % $ 1,753 100.0 % $ 6,499 100.0 % $ 4,021 100.0 % Gross profit 1,861 52.4 % 803 45.8 % 3,423 52.7 % 1,879 46.7 % SG&A expenses 2,150 60.5 % 878 50.1 % 4,391 67.6 % 2,214 55.1 % New store pre-opening costs 521 14.7 % 55 3.1 % 1,108 17.0 % 217 5.4 % Loss from operations $ (810 ) -22.8 % $ (130 ) -7.4 % $ (2,076 ) -31.9 % $ (552 ) -13.8 % * 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013 25 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Quarterly Analysis of Results - Retail Our Company-owned stores had sales of $53,290 during the quarter ended May 31, 2014 as compared to $51,470 during the quarter ended June 1, 2013. This increase was comprised primarily of a $1,799 increase in non-comparable store sales as result of opening seven new stores in the last twelve months while comparable store sales were essentially flat.

While we do not recognize sales until goods are delivered to the consumer, management tracks written sales (the retail dollar value of sales orders taken, rather than delivered) as a key store performance indicator. Written sales for comparable stores decreased by 1.8% for the second quarter of 2014 compared to the second quarter of 2013.

The consolidated retail operating loss for the second quarter of 2014 was $666 compared to operating income of $277 million in the second quarter of 2013. This loss was driven largely by increased new store related opening costs, overlapping rent costs incurred during the transition period for store relocations, and initial operating losses at newly opened locations.

The 53 comparable stores recognized operating income of $144 for the second quarter of 2014 as compared to $407 for the comparable prior year period, a decline of $263. Gross margins at our comparable stores improved to 49.5% compared to 47.5% in the comparable prior year period due primarily to improved pricing strategies. SG&A expenses for comparable stores increased $1,254 to $24,457 or 49.2% of sales as compared to 46.7% for the second quarter of fiscal 2013. This increase is primarily due to planned increases in advertising, higher health care benefit costs and increased other overhead costs as the store network continues to grow. In addition, we incurred $195 of overlapping rent incurred 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 will effectively recognize rent expense on both locations until the date that the previously existing store closes. We completed a relocation in Little Rock, Arkansas during the quarter and are in the process of relocating a store in Boston, Massachusetts which will be completed in the third quarter of 2014. 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 in the second quarter of fiscal 2013 were $810 which includes $521 of costs incurred prior to the opening of one store during the second quarter of 2014 and one other store planned to open during the third quarter. These costs include rent, training costs and other payroll-related costs specific to a new store location incurred during the period leading up to its opening and generally range between $100 to $300 per store based on the overall rent costs for the location and the period between the time when we take physical possession of the store space and when the store opens. Also included in the non-comparable store loss is $211 in post-opening losses from three new stores. 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 generated an operating loss of $78 for the second quarter of 2014.

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.

26 of 35-------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Year-to-Date Analysis of Results - Retail Our Company-owned stores had sales of $100,414 during the six months ended May 31, 2014 as compared to $101,427 for the comparable prior year period.

Normalizing for the extra week in 2013, net sales increased 2.8%. This increase was comprised primarily of a $2,478 increase in non-comparable store sales while normalized comparable store sales were essentially flat.

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. Normalized written sales for comparable stores were essentially flat for the first half of 2014 compared to the first half of 2013.

The consolidated retail operating loss for the first half of 2014 increased by $2,144 to $2,438 as compared to a loss of $294 in the first half of 2013. This loss was driven largely by increased new store related opening costs, overlapping rent costs incurred during the transition period for store relocations, and initial operating losses at newly opened locations.

The 52 comparable stores incurred an operating loss of $362 for the first half of 2013 as compared to operating income of $258 for the comparable prior year period. Gross margins at our comparable stores improved to 49.7% compared to 47.6% in the comparable prior year period due primarily to improved pricing strategies. SG&A expenses for comparable stores increased $910 to $47,060 or 50.1% of sales as compared to 47.4% for the first half of fiscal 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 $195 of overlapping rent incurred 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 will effectively recognize rent expense on both locations until the date that the previously existing store closes. We completed a relocation in Little Rock, Arkansas during the quarter and are in the process of relocating a store in Boston, Massachusetts which will be completed in the third quarter of 2014. 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 the six months ended May 31, 2014 were $2,076 which includes $1,108 of costs incurred prior to the opening of five stores during the first half of 2014 and one other store planned to open during the third quarter. 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 $724 in post-opening losses from these five 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 generated an operating loss of $244 for the first half of 2014.

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.

27 of 35-------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Retail Comparable Store Sales Increases Normalized for Extra Week in 2013 Quarter Ended Six Months Ended* May 31, 2014 June 1, 2013 May 31, 2014 June 1, 2013 As reported: Delivered 0.0 % 9.3 % -3.6 % 12.6 % Written 1.8 % 6.9 % -3.7 % 14.0 % Average weekly basis: Delivered 0.0 % 9.3 % 0.1 % 8.5 % Written 1.8 % 6.9 % 0.0 % 9.7 % * 26 weeks for fiscal 2014 as compared to 27 weeks for fiscal 2013 Retail Backlog The dollar value of our retail backlog, representing orders received but not yet delivered to customers, was $25,548, or an average of $426 per open store at May 31, 2014 as compared with $20,030, or an average of $364 per open store at June 1, 2013.

Our retail segment includes the expenses of retail real estate utilized by Company-owned retail stores. Rental income and expenses from our properties utilized by independent licensees and partnership licensees are included in our investment and real estate segment.

Investments and real estate segment and other items affecting Net Income Our investments and real estate segment consists of our holdings of retail real estate leased or previously leased as licensee stores and our equity investment in Zenith. We also hold an investment in Fortress, which we fully impaired during the first quarter of fiscal 2012. Although this segment does not have operating earnings, income or loss from the segment is included in other loss, net in our condensed consolidated statements of income and retained earnings.

Other loss, net, for the second quarter of fiscal 2014 was $272 as compared to other loss, net, of $129 for the second quarter of fiscal 2013. This increased net loss is primarily attributable to decreases in the cash surrender value of life insurance partially offset by higher income from Zenith and a $48 gain resulting from the recovery of a portion of our investment in Fortress due to a partial liquidation of the fund.

Other income, net, for the six months ended May 31, 2014 was $13 as compared to other loss, net, of $797 for the six months ended June 1, 2013. This change is primarily attributable to the recognition of $662 in death benefits receivable from life insurance policies covering a former executive and a $188 gain resulting from the recovery of a portion of our investment in Fortress due to a partial liquidation of the fund.

We own 49% of Zenith, which provides domestic transportation and warehousing services primarily to furniture manufacturers and distributors and also provides home delivery services to furniture retailers. We have contracted with Zenith to provide for substantially all of our domestic freight, transportation and warehousing needs for the wholesale business. In addition, Zenith provides home delivery services for almost half of our Company-owned retail stores. We believe our partnership with Zenith allows us to focus on our core competencies of manufacturing and marketing home furnishings. Zenith focuses on offering Bassett customers best-of-class service and handling. We consider the expertise that Zenith exhibits in logistics to be a significant competitive advantage for us.

In addition, we believe that Zenith is well positioned to take advantage of current growth opportunities for providing logistical services to the furniture industry. Our equity in the income of Zenith, included in other income (loss), net, was $278 and $343 for the three and six months ended May 31, 2014, respectively and $168 and $282 for the three and six months ended June 1, 2013, respectively. Our investment in Zenith was $7,597 and $7,254 at May 31, 2014 and November 30, 2013, respectively.

28 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Income taxes We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. Our effective tax rate for the three and six months ended May 31, 2014 differs from the federal statutory rate primarily due to the effects of state income taxes, permanent differences resulting from non-deductible expenses and, for the three and six months ended May 31, 2014, non-taxable life insurance proceeds. During the second quarter of 2014, the state of New York enacted legislation affecting various corporate tax issues, including the usage of state net operating losses. Based on this legislation, prior limitations on our ability to use those net operating losses have been removed. Thus, we have changed our realization assessment for the deferred tax assets associated with those net operating losses and removed the related valuation allowance resulting in a tax benefit of $190 for the three and six months ended May 31, 2014. Our federal tax return for the fiscal year ended November 24, 2012 is currently under examination by the Internal Revenue Service.

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

Cash Flows Cash provided by operations for the first six months of 2014 was $13,819 compared to cash provided by operations of $2,823 for the first six months of 2013, representing an improvement of $10,996 in cash flows from operations. The improvement is primarily the result of better overall working capital management. In addition, we received $1,270 in tenant improvement funds during the first half of 2014 associated with leasing new stores and store relocations.

Our overall cash position has increased by $4,149 during the first six months of 2014. Cash provided by operations was partially offset by net cash used in investing activities of $3,266, primarily consisting of capital expenditures for retail store expansion, remodeling and relocations substantially offset by proceeds from the maturity of short-term investments in certificates of deposit, the release of the remaining escrowed funds from the 2011 sale of our interested in International Home Furnishings Center, Inc., and proceeds from the disposition of a real estate investment property. Cash used in financing activities totaled $6,404, consisting primarily of dividend payments and stock repurchases under our existing share repurchase plan, of which $8,698 remains authorized as of May 31, 2014. With cash and cash equivalents and short-term investments totaling $40,007 on hand at May 31, 2014, we believe we have sufficient liquidity to fund operations for the foreseeable future.

Credit Agreement 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.

At May 31, 2014, we had $1,366 outstanding under standby letters of credit, leaving availability under our credit line of $13,634.

29 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data) Investment in Retail Real Estate We have a substantial investment in real estate acquired for use as retail locations. To the extent such real estate is occupied by Company-owned retail stores, it is included in property and equipment, net, in the accompanying condensed consolidated balance sheets and is considered part of our retail segment. The net book value of such retail real estate occupied by Company-owned stores was $28,131 at May 31, 2014. All other retail real estate that we own is currently leased to non-licensees and is reported as retail real estate in the accompanying condensed consolidated balance sheets. The net book value of such real estate, which is considered part of our investments/real estate segment, was $6,482 at May 31, 2014.

The following table summarizes our total investment in retail real estate owned at May 31, 2014: Number of Aggregate Net Book Locations Square Footage Value Real estate occupied by Company-owned and operated stores, included in property and equipment, net (1) 11 276,887 $ 28,131 Investment real estate: Leased to others 3 67,521 6,396 Other (2) - - 86 Total included in retail real estate 3 67,521 6,482 Total Company investment in retail real estate 14 344,408 $ 34,613 (1) Includes two properties encumbered under mortgages totalling $2,609 at May 31, 2014.

(2) Consists of leasehold improvements in locations leased by the Company and subleased to licensees.

Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2013.

Off-Balance Sheet Arrangements We utilize stand-by letters of credit in the procurement of certain goods in the normal course of business. We lease land and buildings that are primarily used in the operation of both Company-owned and licensee stores. We have guaranteed certain lease obligations of licensee operators of the stores, as part of our retail expansion strategy. See Note 7 to our condensed consolidated financial statements for further discussion of operating leases and lease guarantees, including descriptions of the terms of such commitments and methods used to mitigate risks associated with these arrangements.

Contingencies We are involved in various legal and environmental matters, which arise in the normal course of business. Although the final outcome of these matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations. See Note 7 to our condensed consolidated financial statements for further information regarding certain contingencies as of May 31, 2014.

30 of 35 -------------------------------------------------------------------------------- PART I-FINANCIAL INFORMATION-CONTINUED BASSETT FURNITURE INDUSTRIES, INCORPORATED AND SUBSIDIARIES MAY 31, 2014 (Dollars in thousands except share and per share data)

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