Note 11 - Leases

9 Months Ended

Aug. 29, 2020

Notes to Financial Statements

Lessee, Operating and Finance Leases [Text Block]

11. Leases

During the first quarter of fiscal 2020, we adopted ASU 2016-02, Leases (Topic 842) and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

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 retail and logistical services segments. We also lease tractors and trailers used in our logistical services segment, and local delivery trucks used in our retail segment. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Our real estate lease terms range from one to 15 years and generally have renewal options of between five and 15 years. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet this criteria are included in the lease term at lease commencement.

Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determine our incremental borrowing rate by applying a spread above the U.S. Treasury borrowing rates. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. Some of our leases contain variable rent payments based on a Consumer Price Index or percentage of sales. Due to the variable nature of these costs, they are not included in the measurement of the ROU asset and lease liability.

We adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard and recognizing the cumulative impact of adoption in the opening balance of retained earnings. We elected the package of transition expedients available for expired or existing contracts, which allowed the carry-forward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.  In addition, we have elected the practical expedient to not separate lease and non-lease components when determining the ROU asset and lease liability and have elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. We have also elected the hindsight practical expedient to determine the lease term for existing leases. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term. We have made an accounting policy election to not recognize ROU assets and lease liabilities on the balance sheet for those leases with initial terms of one year or less and instead such lease obligations will be expensed on a straight-line basis over the lease term.

Adoption of the standard resulted in the recording of additional net lease-related assets and lease-related liabilities of $146,585 and $151,672, respectively, as of December 1, 2019. The difference between the additional lease assets and lease liabilities, net of the $1,302 deferred tax impact, was $3,785 and was recorded as an adjustment to retained earnings. This adjustment to retained earnings primarily represents the impairment of right-of-use assets associated with certain underperforming retail locations. Our estimates of the fair value of the impaired ROU assets included estimates of discounted cash flows based upon current market rents and other inputs which we consider to be Level 3 inputs as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurement and Disclosure (see Note 3). Our adoption of this standard did not have a material impact on our consolidated statements of operations, comprehensive income or cash flows.

We have negotiated with a number of our landlords to obtain relief in the form of rent deferrals or abatements of rent currently past due as a result of the effects of COVID-19 on our business. At August 29, 2020, the unpaid rent was $2,769 which primarily represents rent deferred to fiscal 2021 and is included in other current liabilities and accrued expenses in our accompanying condensed consolidated balance sheet. In accordance with FASB Staff Q&A - Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic ("FASB Staff Q&A") issued in April 2020, we have elected to account for any lease concessions resulting directly from COVID-19 as if the enforceable rights and obligations for the concessions existed in the respective contracts at lease inception and as such we will not account for any concession as a lease modification. Guidance from the FASB Staff Q&A provided methods to account for rent deferrals which include the option to treat the lease as if no changes to the lease contract were made or to treat deferred payments as variable lease payments. The FASB Staff Q&A allows entities to select the most practical approach and does not require the same approach be applied consistently to all leases. As a result, we expect to account for the deferrals as if no changes to the lease contract were made and will continue to recognize lease expense, on a straight-line basis, during the deferral period. For any abatements received, we will account for those as variable rent in the period in which the abatement is granted. For the three and nine months ended August 29, 2020, we were granted abatements against rent totaling $657.

Supplemental balance sheet information related to leases as of August 29, 2020 is as follows:

Operating leases:
Right of use assets	$	120,889
Lease liabilties, short-term		28,211
Lease liabilties, long-term		117,009
Finance leases:
Right of use assets (1)	$	1,322
Lease liabilties, short-term (2)		249
Lease liabilties, long-term (3)		1,072

(1)	Included in property & equipment, net in our condensed consolidated balance sheet.
(2)	Included in other current liabilites and accrued expenses in our condensed consolidated balance sheet.
(3)	Included in other long-term liabilites and accrued expenses in our condensed consolidated balance sheet.

Our right-of-use assets under operating leases by segment as of August 29, 2020 are as follows:

Wholesale	$	8,028
Retail		95,815
Logistical services		17,046
Total right of use assets	$	120,889

The components of our lease cost for the three and nine months ended August 29, 2020 are as follows:

	Quarter Ended			Nine Months Ended
	August 29, 2020			August 31, 2020
Lease cost:
Operating lease cost	$	8,441		$	26,005
Financing lease cost:
Amortization of right-of-use assets		46			103
Interest on lease liabilities		13			29
Short-term lease cost		423			1,221
Variable lease cost (net of abatements received)		(624	)		(560	)
Sublease income		(395	)		(1,183	)
Total lease cost	$	7,904		$	25,615

Supplemental lease disclosures as of August 29, 2020 and for the nine months then ended are as follows:

	Operating			Financing
For the nine months ended August 29, 2020:
Cash paid for amounts included in the measurements of lease liabilities	$	25,113		$	124
Lease liabilities arising from new right-of-use assets		5,426			1,426
As of August 29, 2020:
Weighted average remaining lease terms (years)		6.3			5.0
Weighted average discount rates		5.01	%		4.56	%

Future payments under our leases and the present value of the obligations as of August 29, 2020 are as follows:

	Operating Leases		Financing Leases
Remainder of fiscal 2020	$	9,354	$	95
Fiscal 2021		33,740		382
Fiscal 2022		30,431		382
Fiscal 2023		25,350		382
Fiscal 2024		18,462		311
Fiscal 2025		15,125		197
Thereafter		38,127		33
Total lease payments		170,589		1,782
Less: interest		25,369		461
Total lease obligations	$	145,220	$	1,321

We sublease a small number of our leased locations to our licensees for operation as Bassett Home Furnishings (“BHF”) network stores. The terms of these leases generally match those of the lease we have with the lessor. Minimum future lease payments due to us under these subleases are as follows:

Remainder of fiscal 2020	$	379
Fiscal 2021		1,260
Fiscal 2022		1,070
Fiscal 2023		754
Fiscal 2024		648
Fiscal 2025		588
Thereafter		157
Total minimum future rental income	$	4,856

Lease Guarantees

We also have guaranteed certain lease obligations of licensee operators. Lease guarantees range from one to ten years. We were contingently liable under licensee lease obligation guarantees in the amount of $1,802 and $1,776 at August 29, 2020 and November 30, 2019, respectively.

In the event of default by an independent dealer under the guaranteed lease, we believe that the risk of loss is mitigated through a combination of options that include, but are not limited to, arranging for a replacement dealer or liquidating the collateral (primarily inventory). The proceeds of the above options are expected to cover the estimated amount of our future payments under the guarantee obligations, net of recorded reserves. The fair value of lease guarantees (an estimate of the cost to the Company to perform on these guarantees) at August 29, 2020 and November 30, 2019 was not material.