Bassett Furniture Industries Inc Q3 FY2024 Earnings Call

Good day and thank you for standing by. Welcome to Bassett Furniture Industries Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Daniel, CFO. Please go ahead.

Thank you, Gigi, for the introduction. Welcome to Bassett Furniture's earnings call for the third quarter ending August 31st, 2024. Joining me today is our Chairman and CEO, Rob Spilman. We issued our news release yesterday after the market closed, and it's available on our website. After today's remarks about our quarter, we will open the call up for a Q&A session. We will post the transcript of the call on our investor site within 48 hours of this call. In addition, we filed the 10-Q this morning, and that's available on our website under SEC filings on the Investor Relations tab. During today's call, certain statements we make may be considered forward-looking and inherently involve risks and uncertainties that cause actual results to differ materially from management's present view. These statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The company cannot guarantee the accuracy of any forecast or estimate nor does it undertake any obligation to update such forward-looking statements. For more information, including important cautionary notes, please see the company's annual report on Form 10-K for the fiscal year ended November 25th, 2023. Other filings with the SEC describing risks related to our business are available on our corporate website. Now I'll turn the call over to Rob for comments about our third quarter. Rob?

Thank you, Mike. Good morning, everyone, and thank you for joining us for today's call. The integration of our industry with the weak US housing market continued to pressure sales during our third quarter. Although mortgage rates have started to ease since the Fed's 50 basis point rate cut three weeks ago, overall housing affordability and inventory availability remained impediments in the short term. Our industry is ready for a transformational shift in the next several quarters, and Bassett plans to benefit as it happens. I also want to mention two events that have occurred subsequent to the third quarter that will potentially have a bearing on our fourth quarter, Hurricane Helene and the East Coast dock strike. Many customers and employees were deeply affected by the devastating effects of Hurricane Helene. Our thoughts are with them. Hurricane Helene impacted our distribution center in Catawba County, North Carolina and it was shut down due to damage and power outages for two days during the first week of October. We've recovered as quickly as possible to get shipments back on track. The larger longer-term impact on our logistics and distribution systems are related to the damage to the I-40 infrastructure, which is our main route to the west. And while the East Coast dock strike was just three days, the impact on our business has pushed shipments back one to two weeks. Now let's move on to the discussion of our third quarter results. Like last quarter, revenue in both our wholesale and retail segments was down with greater pressure on our retail business due to the higher level of associated fixed costs. Heading into the quarter, our Memorial Day event and our subsequent 4th of July event, both produced increases compared to last year. But the in-between weeks were especially difficult as consumers stayed on the sidelines. The third quarter is always our weakest reporting period. This year's combination of the annual July 4th weekly operational shutdown, followed by the cyber-attack that we suffered meant that our manufacturing facilities were shut down for over 16% of the quarter's workdays. Consolidated gross margin was 53%, up 1.4% from last year, but slightly lower on a sequential basis. Wholesale gross margins improved by 50 basis points despite lower volume, largely driven by improvement in club level margins. Inventories were down more than $10 million year-over-year and slightly down sequentially, reinforcing our belief that we can run with leaner inventory. Retail gross margins improved by 210 basis points to 53.7% attributable to higher home delivery income and better margin on clearance inventory. Our average ticket was $3,900, up 5%, while total retail written sales were down 5%. 41% of retail sales were design makeovers also down slightly from last year. We remain focused on top line enhancements in both retail and open market efforts. Initial sell-through of our fall upholstery introduction was very strong heading into Labor Day. The reception of a leather option to our true custom program produced strong sales in the quarter and should be an important feature going forward. Since the end of the third quarter, we have added nine new Bassett custom studio dealers to the program. We have made the custom studio a centerpiece of our showroom at the upcoming Fall High Point Furniture Market. We also plan to support the outreach with trade advertising, something we have not done in several years. Last quarter, we initiated a five-point restructuring plan to set Bassett up for improved long-term operational and financial performance. We made good progress during the quarter on executing this plan, and we believe that we are better positioned as a result. Point one of our strategic plan was to drive organic growth through Bassett branded retail locations, omnichannel capabilities and enhanced customization positioning to expand our dedicated distribution footprints. We are remaking a significant portion of the product line in the upcoming quarters to address new styling and price point opportunities. In case goods, we will launch three major collections beginning this fall and culminating in the spring of 2025. The three imported collections are comprehensive bedroom, dining and occasional and entertainment product offerings. On the domestic front, we are expanding our successful Origins dining program this fall. Our solid wood Bench Made program will also undergo a makeover over the next two seasons. In upholstery, strong sales in our domestic motion assortment warrant expansion of the category, especially in our recliner line. We have a targeted outreach to the interior design community underway as well, recognizing the growing importance of this channel throughout the industry. For the second consecutive year, we will operate a designer showroom in InterHall and High Point at the fall market in two weeks. We contacted more than 400 designers and design firms at the spring market and are encouraged by their recognition of our strength for the design trade. We have continued to invest in our multiyear cross-functional digital transformation this year even in these challenging times. E-commerce sales are still a small portion of retail revenue. We are optimistic about the potential of our omnichannel capabilities and we're excited to see double-digit e-commerce growth this quarter. With these investments, we expect stronger Bassett brand and design presentations to complement our in-home makeover proficiency. Point two of our plan was to rationalize US wood manufacturing from two sites into one primary location supported by a small satellite operation. As expected with any rationalization, there was some disruption in August during the transition, which impacted margins. This consolidation is now complete, and we are seeing improved overhead absorption with operating one location. Point three was to optimize inventory and drop unproductive lines. We are continuing on this path as part of the domestic wood plant consolidation strategy. As expected, this reduction of clearance and slow-moving products affected margin in the third quarter, but it's designed to strengthen the overall productivity of our line and of our stores. Point four was to improve overall cost structure of both wholesale and retail businesses. In retail, we are consolidating warehouse operations after the closure of three warehouses during the second quarter. In today's reported quarter, we moved facilities in East Texas and Oklahoma into our North Texas home delivery center and also consolidated two Virginia facilities into one. This process will continue until we realize the completion of our new footprint. In wholesale, in addition to the aforementioned wood plant consolidation, we have completed our plan to move out of a major West Coast wholesale distribution center, which resulted in a $1.2 million charge this quarter. We continue to thoroughly review the SG&A structure of both retail and wholesale to further identify opportunities to pare operating expenses. On the capital side, we are beginning a program to refurbish certain stores within the retail fleet, with the recently completed Greensboro, North Carolina store being the first. Our last point in the restructuring plan was to close Noa Home, the mid-price e-commerce furniture retailer headquartered in Canada with operations in Canada, Singapore, the US, and the United Kingdom. This work is still in progress as we planned. No operations and remaining inventory will wind down by the end of this current fiscal year. Our capital spending plans for the fiscal year are primarily complete. We will continue to purchase shares opportunistically and drive returns to shareholders through dividends, including the regular quarterly dividend that our Board of Directors approved this week. We continue to have a strong balance sheet, but it's imperative for us to improve profitability. That means we continue to evaluate the efficient use of our resources so that we can align Bassett's operating expense structure with projected revenue. Getting these pieces in place, along with the launching of new products and services I mentioned earlier, are expected to better position ourselves for the eventual turnaround in consumer demand. Now I'll turn it over to Mike for more details on our financials. Mike?

Thanks, Rob. In my commentary, the comparisons I will discuss will be the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023, unless otherwise noted. But before I get into the results, I want to provide more context on our cyber incident that occurred in July. As we reported in our SEC filings, our IT team detected unauthorized occurrences on a portion of our systems. The team immediately took steps to contain the issue by shutting down those systems. We activated our incident response plan and quickly began working with external cybersecurity consultants to assess and monitor the activity by an unknown threat actor. The system shutdown interrupted Bassett's manufacturing plants for one week, which resulted in delays on some wholesale and retail orders. By July 17th, we essentially had all systems up and running. We were able to recover all data from backups and began fully operating as normal within two weeks. We do not believe that any consumer personal information was compromised. This issue resulted in an estimated loss of between $1 million to $2 million for the third quarter and we're in the process of filing a claim with our insurance provider and expect to receive the proceeds in the fourth quarter. So for the third quarter, consolidated revenues declined $11.6 million or 13% primarily due to a 16% decrease in wholesale sales and a 10% decrease in retail sales through our company-owned stores. Consolidated gross margins increased 140 basis points to 53.0% due to improved margins in both the retail and wholesale segments. This was partially offset by $609,000 of unproductive labor cost incurred during the temporary shutdown resulting from the cybersecurity incident. Excluding these unproductive labor costs, our consolidated gross margin would have been 53.8% as compared to 52.7% in the prior year, which included $900,000 of additional inventory valuation charges. We reported a consolidated operating loss of $6.4 million compared to a loss of $3.2 million for the third quarter of 2023. And nonrecurring factors impacting the operating loss were the estimated loss from the cyber incident and the $1.2 million loss on the logistical services contract that Rob mentioned earlier. Based on the progress Rob discussed in the restructuring plan, we are on target to realize our projected annual cost savings of between $5.5 million and $6.5 million starting with fiscal 2025. Now I'll provide information regarding our wholesale operations. Net sales decreased $8.8 million or 16% from the prior year period due primarily to a 22% decrease in shipments to the open market, a 13% decrease in shipments to our retail store network and a 6% decrease in Lane Venture shipments. Gross margins for the three months ended August 31st, 2024, increased 50 basis points over the prior year, primarily due to the expected improvement in the club level leather business that Rob previously highlighted. This improvement was partially offset by lower margins in the Bassett custom upholstery business due to deleverage of fixed costs from lower sales volumes and $609,000 of unproductive labor costs or 1.3% of sales incurred during the temporary shutdown from the cybersecurity incident. While SG&A expenses decreased $500,000, SG&A expenses as a percentage of sales increased 240 basis points due to reduced leverage of fixed costs from lower sales volumes. Wholesale backlog at quarter end was $18.5 million as compared to $19.4 million at the end of the second quarter. Now moving on to retail store operations. Net sales decreased $5 million or 9.6% from the prior year period. Written sales, the value of sales orders taken but not delivered, declined 4.8% compared to the prior year period. Gross margin for the quarter improved 120 basis points over the prior year period due to higher margins in both in-line and clearance goods and higher delivery income. While SG&A expenses decreased $2.2 million, SG&A expenses as a percentage of sales for the quarter increased 150 basis points, again primarily due to decreased leverage of fixed costs from lower sales volumes partially offset by reduced advertising and fixed delivery costs. In our goal to increase efficiency at the store level, we have redirected our customer service functions at our centrally located call center to each individual store. This transition eliminated 30 positions. Responsibility now for customer engagement on scheduling deliveries, taking payments and handling issues is now at the store level, which enhances local relationship building and engagement. We kept a small staff at our central call center to handle product claims. Retail backlog at the end of the third quarter was $33.3 million up from $31.5 million at the end of the second quarter. Finally, let's turn to the balance sheet and capital allocation. We ended the quarter with $56.2 million in cash and short-term investments. We limited our operating cash flow deficit for the quarter to $400,000. In addition to the estimated $1 million to $2 million loss related to the cyber incident, we historically have increased cash outflows during the third quarter as we pay our annual premiums on company-owned life insurance, fund a significant portion of our annual property and casualty insurance renewal and give our manufacturing workers vacation pay for the week of July 4th when the plants are shut down. Last quarter, we mentioned our plans to spend an additional $4 million to $5 million of capital investments in our business over the back half of the year with the majority of that spending on limited retail store remodels. As the pace of business continued to be weak during the quarter instead of the $10 million we had planned to spend for fiscal 2024 at the end of Q2, we now expect the annual total to range between $6 million to $8 million or $1.5 million to $2.5 million for the fourth quarter. Our financial condition remains solid and provides us with a platform to weather the current economic storm while executing our plans for the future. As Rob previously said, we will complete the planned restructuring activities during the fourth quarter, while continuing to challenge our cost structure so that we can align operating expenses with our revenue. It's imperative for us to improve profitability so that Bassett provides our shareholders a reasonable return. Now we will open up the line for questions. Gigi, please provide instructions to do so.

Thank you. Our first question comes from the line of Anthony Lebiedzinski from Sidoti.

Good morning, gentlemen. Thanks for taking the questions. So first, just a quick comment for me. I mean, certainly, despite the difficult environment, nice to see the company maintaining a strong balance sheet. So I guess as far as my first question, so obviously Q3 was, we had the normal shutdown during 4th of July. You had the cyber-attack issue. So you were really only operational for 10 or 11 out of the 13 weeks. So it looks like the weekly revenue on an adjusted basis improved actually from the second fiscal quarter. Your customer deposits also were up sequentially as well. So how should we think about in that context as far as the results and kind of your near-term outlook. I know you mentioned the hurricane and the port strike issue. But just wondering also if you could just comment as to what you've seen so far as far as the Labor Day. I know it's a multiple part question, but hopefully, you can address all that.

Hey, Anthony, this is Rob. Good morning. There's a lot to discuss. I would say July was particularly challenging since we operated for only about a week and a half during the month. Our 4th of July performed well, as I mentioned earlier, and so did Memorial Day. However, the period in between was quite slow. Historically, we see improvements towards the end of August as we head into Labor Day, and this year was no different. September tends to be one of our stronger months, both in stores and overall for the year. This September was definitely better, though still only slightly improved during that timeframe. If you compare this with previous years, I would say we are still facing a tough environment. That's how I would describe it.

Understood. Okay. Your average ticket was up. What's driving that? And how sustainable do you think that is?

Our average ticket is about where it has been. It may decrease one quarter to increase later. We are right around the $4,000 mark, and it can vary depending on the size of the design projects we undertake. While a larger average ticket is desirable, we are also focused on store traffic and transactions. Our average ticket has generally been in the high $3,000 to $4,000 range for the past couple of years, and I expect it to remain in that range.

Okay. Regarding the improvement in gross margin, despite the challenge of compensating your workers with that $600,000, you achieved a notable enhancement compared to last year. I'm interested to know, when business picks up and considering the improvements from your restructuring efforts, what gross margin could we anticipate in a more favorable situation? I would appreciate your insights on that.

I believe we could enhance our gross margin. There are challenges, particularly with absorption. This quarter, we consolidated two factories, which is a difficult process. We had to adopt a new model during this transition, which impacted our margins. Additionally, this took place right in July and early August. Not only did we face the cyber event, but we were also managing this consolidation, making the initial weeks quite turbulent as is often the case. Over the years, we've encountered similar situations, but things improved as August progressed. While I find it challenging to specify exactly what our margins could be, I believe we can still achieve progress in gross margins on the wholesale side moving forward, and we anticipate this. Conversely, we also want to provide value in a highly competitive market. Therefore, when pricing our goods at retail, especially at the entry-level, we aim to ensure recognizable value. Overall, I'm optimistic about the direction of our gross margin and our capacity to improve it further.

That sounds good. And my last question, as far as the Bassett Design Studio concept, how many stores is that in right now? And what is your expectation for the end of the fiscal year?

We currently have 40 of these in operation. Not all are fully set up yet, as we received seven of them in September and are still in the process of shipping the goods and fixtures. Earlier this year, we aimed to have 50 signed, and with the upcoming market at High Point, we've reconfigured our showroom to highlight this effort. I'm hopeful we can still reach that 50 target. The broader question is about our long-term potential. We focus on selling higher-quality products, and some markets lack the demographics to support this, but we are encouraged and somewhat surprised by the positive reception in markets we didn’t initially expect. Over time, we believe that along with our next version of our dedicated distribution, including the Bassett Design Center—which encompasses all the related products—we'll enable dealers to engage more effectively with the Bassett program. This is a strong aspect of our product line, and I'm excited about the potential and enthusiasm we've seen so far.

Well, that sounds great. Yes, I look forward to seeing that at High Point and I'll pass it on to others. Thank you very much, gentlemen.

Thank you, Anthony.

Thank you. Our next question comes from the line of Brian Gordon from Water Tower Research.

Good morning, Rob. Good morning, Mike. Thank you for taking my questions today. I want to dig in a little bit on an earlier question. I think if I got this right in your remarks that you said that orders at retail were down something like 4.8%. And given the cyber event, that would come to something like 11% of production days by itself. I know that you had mentioned something like 15% of production days were missed. But part of that, I assume was the planned July 4th shutdowns.

Right.

If we back out that cyber, would it be fair to say that shipments might have been down something closer to 5% from wholesale?

Thinking about that question. Keep in mind that we do catch up, we're still taking orders on the wholesale side during that shutdown time.

Talking about the holiday.

Yes, yes. And we were taking orders during the cyber event.

Got an interim.

Yes. I mean, so I was just trying to do some back of the envelope. So I mean we have 13 weeks and five days of production a week I was assuming. So if you're down to something like 58 days versus 65 that gets to 11%?

Yes. And we were down, but keep in mind, we were also down that same amount last year because we're closed for that week of July 4th.

Right. But I'm talking about the seven days specifically for the cyber.

Okay. It certainly did impact our shipments. However, we managed to catch up on most of the shipments we missed. The real issue lies on the retail side, where we were open and technically taking orders, but many customers would come in and leave without placing an order because we were relying on paper for transactions. So, when considering the sales we lost, it primarily occurred during that period when customers visited but left without purchasing because our systems were not operational. This was the main factor affecting our sales and shipments for the quarter.

I'll add one other comment to that, Brian. We've traditionally shut down for a week around the 4th of July here in North Carolina, which most furniture companies also do. It takes some time to get back into the swing of things after that break. Additionally, because we have a very controlled distribution system with limited freight lines, it means loads are depleted and need to be built back up. When you factor in that we then shut down again for over a week, as Mike mentioned, it made the situation even more difficult. The efficiency of getting loads back together, filling trucks, and shipping them was definitely impacted in July and into August. We did manage to recover some, but it was still inefficient, particularly in the factories. All of this affected us and, in response to Anthony's question about gross margins, it played a role. I would say it slightly impacted us, but we recovered a good part of it.

No, thank you for that. That definitely helps kind of understand the impacts of that. I mean, the reason why I'm asking is, it does seem like when we take a look at the retail orders and if we were to back out the inefficiencies and then the cyber event that we may be close to a bottom that we might be seeing something like a bottom being put in from a demand perspective? Would you agree with something like that?

That's a great observation and question that we frequently consider. Last year, following the post-COVID downturn in the retail sector, we experienced nine consecutive months of relatively stable business. As we entered this year, we thought we were on a stable trend, but then we saw further declines, which genuinely surprised us. However, I believe that in the third quarter, particularly in the latter weeks and into September, it seems we've hit the bottom. The real question now is how long we will remain at this bottom. While there are times when we have a strong week, we also face some challenging weeks, so we haven't quite achieved the momentum we are striving for. We're doing everything we can to change that. Ultimately, you can't start to improve until you've reached the bottom, and I feel like we've arrived at that point.

And let me add, Brian, if you look at the retail written last quarter, it was down 2.5%. Retail written this quarter is down 4.8%, and as you point out regarding the cyber effects, I think you could assume that we are kind of bumping along on the bottom.

Yes, that's all very encouraging. I mean so kind of shifting a little bit to thinking about growth for next year, you kind of put that number something like 50 designed studios by the end of the year. Do you have any kind of thoughts on how big that could be as we look to fiscal year '25? And then kind of the follow-on question to that would be, I know there's been no store openings planned for the end of the year, but how many new stores might potentially be in the works? I know you said on the last call that you were actually traveling in July to look at some sites. How many of those might be in the works?

Well, honestly, I would say at the moment, we're focused on one market that we're currently evaluating. Right now, we only have plans for one new market and one new store, and we expect to reach a decision on that within the next few weeks. What we're primarily doing is assessing our existing locations for refurbishment. I also mentioned the increase in e-commerce that we're experiencing, although it's on a small scale, it's encouraging, and positive developments are occurring there. Regarding the custom studio, it’s only six months old, so it’s hard to predict. However, I believe we will see steady growth in that program. As for whether we will sign another 50 next year, I genuinely don’t know, but I do think it will contribute to our growth. The studios that have already opened are performing well, and we track that progress in our weekly market reviews, which is encouraging. These are the areas we are relying on for next year.

Great. Thank you very much. And really excited to see the new product at High Point when we come visit.

Brian, listen, thank you, and I can't have the call in without recognizing Budd. We miss him. He was and you were encouraging us to do conference calls, which we hadn't done in the past. This is our second one. And we miss him, but you're doing a great job. I know he'd be proud of what's going on with your organization and looking ahead.

Thank you.

Thank you. I would now like to turn the conference back over to Rob Spilman for closing remarks.

Okay. Thank you, Gigi. And I just want to thank everyone for your interest today in Bassett and for the questions we did receive. As we said, our restructuring plan is well underway and is designed to align our cost structure with our current revenue and it's something we're focusing on every day around here. We look forward to launching the new collections I talked about, growing the Bassett Custom Studio, further connecting with the interior design community and advancing our omnichannel presence as we head into the upcoming High Point Market and on into 2025. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.