Bassett Furniture Industries Inc (BSET) Q3 2026 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Bassett Furniture Industries Q3 2026 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today mike daniels chief financial officer please go ahead thank you latonya for the introduction welcome to the bassett furniture industries earnings call for the third quarter of fiscal 2026 which ended august 29 2026 joining me today is our chairman and ceo rob spillman we issued our news release and form 10q yesterday after the market closed and they're available on our website. After today's remarks, Rob and I will be open for questions. We will also post a transcript of this call on Bassett's Investor Relations website following the call. During this call, certain statements we make may be considered forward-looking statements and inherently involve risks and uncertainties that could 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. Other filings with the SEC describing risks related to our business are available on our corporate website under the investors tab. Now, I'll turn things over to Rob.

Rob? Thank you, Mike. Good morning, everyone. We are pleased to report a 3.4% increase in consolidated revenue, bolstered by increases in both retail and wholesale sales. All product categories were positive, with domestic upholstery leading the way. Written retail sales from company-owned stores increased 4.4 percent, continuing the momentum from the second quarter in spite of one less week of a Labor Day promotion in the quarter compared to last year. Wholesale written orders were up 7.9 percent, led by double-digit gains in domestic upholstery and the Lane Venture Outdoor Division. Operating profits showed nice improvements thanks to sales increases in key product categories, improved expense control, and tariff refunds that offset tariff costs that were embedded in our balance sheet. It's important to note that Bassett imports less than 25% of our products. Therefore, refunds are much lower for us than for others. Mike will give you more color on the net impact of tariff refunds in his financial review. Consolidated gross margins grew by 130 basis points, primarily due to improved wholesale margins and to a lesser extent tariff refunds. While retail gross profit fell by 80 basis points, we are encouraged by the gross margin improvement that we have seen since the pricing strategies that we implemented in July have started to take effect. The full four-week Labor Day promotion that's spilled into the current quarter generated a 9% written sales increase with improved written gross margins. We've made progress on reducing operating expenses, which remains a key goal for a management team. SG&A, excluding pre-opening costs for the Orlando store, was 150 basis points lower than last year's third quarter. We're on track to meet our goal of reducing the annual run rate of expenses by an additional $1.5 to $2 million. I'm pleased with the gains we've made on our strategic initiative, especially those to grow sales from new and existing stores. Our marketing team's ability to optimize and refine the media mix continues to produce positive outcomes. We had excellent response to our 84-page fall catalog, which featured curated room layouts and styling tips, along with new collections. We have improved the visual presentation of our products on the website, helping consumers on their path to fully experience the Bassett brand. These efforts are paying off with e-commerce written sales up 48% this quarter and website delivered sales rising more than 42%. Average order value on the web was up 33% which was propelled by stationary and motion upholstery categories. Our technology investments during the past two years continue to enhance the website presentation and navigation. benefiting the user experience and driving the sales results that i just mentioned once again our domestic custom furniture products drove the majority of our written wholesale sales game custom upholstery and custom motion upholstery in particular was very strong also on the domestic front our bench made dining program had a nice quarter and once again lane venture performed very well. Our product team continues to seek new expressions of comfort and innovation to add to the assortment. We are extremely excited about the debut of our new 44,000 square foot showroom at the High Point Market on October 15th. We are in a new location designed to provide greater traffic and visibility while inspiring customers with a broad range of new products. Our teams have worked hard to enhance the styling and appeal of the Bassett brand, which is embodied in the new showroom presentation. We recently announced our partnership with Birmingham-based interior decorator and textile designer Heather Chaddick. Heather is highly respected for her portfolio of design projects and for her successful line of textiles. Highlight of our events in High Point will be the launch of a major new collection on which Heather collaborated with our internal team. The whole home collection features 30 furniture pieces with five finishes and 70 in-line fabrics that she has personally curated. Heather says the collection feels timeless but very organic and fresh. The Heather Chattuck Collection for Bassett will be in retail stores next spring. Our priority remains growth from existing in new stores and we're happy to add another location bringing our corporate retail store total to 60. Tomorrow we are opening a new store in Orlando which has a similar footprint to the 14,000 square foot store we opened in May in Cincinnati. These are important markets and position us in quality real estate, catering to our targeted demographic profile. We rely on our two dedicated distribution concepts, Bassett Design Centers and Bassett Custom Studios, for growth in the open market. Our 94 Design Centers and 64 Custom Studios currently represent over half of our wholesale business outside of the Bassett Store network. With the low end of the market dominating so much of furniture retail in U.S. mid-sized towns, we view our dedicated dealer network as our local showcase of well-crafted custom home furnishings. Our executive team has been traveling to these Bassett partner locations this summer with the goal of strengthening our collaboration with the dedicated network. We have been gathering input to formulate enhancements to the concepts for 2027 and beyond. For the quarter, shipments to our dedicated concepts were essentially flat, while orders increased by 4.2%. The natural extension of our wholesale outreach is our Bassett Hospitality Division, now operating for about nine months. We have had several orders, but acknowledge that this effort will take time while we are gaining a foothold in the hospitality segment. All in all, we were pleased with our third quarter trajectory. Housing remains slow and mortgage rates are in lockstep with the Federal Reserve's recent rate increases. The ongoing effect of high inflation rates on the U.S. consumer continues to be a major concern. That said, we remain optimistic about managing these challenges. Now, I'll turn things over to Mike. Thank you, Rob.

In my commentary, the comparisons I'll discuss will be the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025, unless otherwise noted. And let me start by discussing the $2.8 million in tariff refunds that we received from U.S. Customs and Border Protection as a result of the U.S. Supreme Court's February 2026 decision in validating the IEPA tariffs imposed by the President in 2025. Of this amount, $1 million was recorded as an increase in gross profit for this quarter, with additional amounts to be recorded primarily in the fourth quarter of 2026. Tariff costs are capitalized into inventory at the time they are incurred and subsequently recognized in the income statement when those goods are sold to a third party. of high tariff costs recognized in the quarter were substantially offset by the tariff refund income that we recorded. As Rob pointed out, we import less than 25% of our products. Total consolidated revenue was $82.8 million, an increase of $2.7 million, or 3.4%. This consisted of a $2.3 million or $4.5 million increase in retail sales from our corporate-owned stores and a $400,000 or 1.4% decrease or increase in sales to external wholesale customers. Gross margin of 57.5% represented a 130 basis point increase when compared to the prior year. Primarily driven by the previously discussed tariff refund and partially offset by lower margins in the retail business. The margin increase was also due to a higher mix of retail sales, which carry a higher gross margin than third-party wholesale sales. Selling general and administrative expenses, excluding new store pre-opening costs, was 53.9% of sales, 150 basis points lower than the prior year. This decrease was driven primarily by increased leverage of fixed costs on higher sales in our retail segment, coupled with lower corporate expenses. Operating income was $2.8 million, or 3.4% of sales, as compared to income of $593,000, or 0.7% of sales in the prior period. Deluded earnings per share were $0.24 versus $0.09 last year. I'll now cover more details on our wholesale operations. Net sales were $53.7 million, up 5.7% compared to last year. This increase consisted of a 7.5% rise in shipments to the retail store network, a 28% increase in lane venture shipments to wholesale customers, and 3.7% more shipments to open market. As previously discussed, we introduced Lane Venture Outdoor Brands in the Bassett Home Furnishing Store during the first quarter of 2026 and have included those shipments to the store network in the 7.5% increase for the retail stores. In total, shipments of Lane Venture were up 44%. Gross margins rose 150 basis points primarily due to the previously discussed IEPA tariff refund along with improved margins in both the domestic wood and the Lane Venture operations. The increase was partially offset by lower margins in the imported wood and upholstery which carried tariff costs. SG&A expenses and percentage of sales were flat as the effects of greater leverage of fixed costs from higher sales were offset by greater outbound freight expenses, primarily driven by higher fuel costs. Now moving on to our retail store operations, net sales of $54.2 million represented a $2.3 million, or 4.5% increase over the prior year. Written sales, the value of sales orders taken but not delivered, increased 4.4%. Gross margin at 51.5% is a decline of 90 basis points, primarily due to lower margins on inline goods from increased promotional activity. Total SG&A expenses, excluding new store pre-opening costs, as a percentage of sales decreased to 130 basis points due to greater leverage of fixed costs from higher sales levels and lower advertising and marketing costs, partially offset by higher employee costs. During the quarter, we incurred $144,000 of new store pre-opening costs associated with our Orlando location opening tomorrow. Before opening a new store, we incurred such expenses as rent, training costs, and other payroll-related costs. These costs generally range between $200,000 and $400,000 per store. depending on the location and the period of time between when we take physical possession of the store space and the opening. Now I will cover our liquidity position, which remains strong with $53.4 million of cash in short-term investments. During the quarter, we generated $6.1 million of operating cash flow. We also spent $4.3 million on capital expenditures, which was significantly higher than the recent run rate. This increased spending was primarily related to the Orlando store that opens tomorrow in the build out of our new showroom in High Point. We expect capital expenditures in the fourth quarter to be between $2 and $4 million. and updating our full capital expectations for 2026 to range between $9 million and $11 million versus our prior forecast of $10 million to $12 million. We continue to pay our quarterly dividend and repurchase shares optimistically, or opportunistically, I should say. we spent $1.7 million on dividends and $126,000 on share buybacks in the quarter. We remain committed to delivering shareholder returns through dividends and, when appropriate, share buybacks. Now we'll open up the line for questions. Latanya, please provide instructions on how to do so.

Sure. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile our Q&A roster. Our first question will be coming from the line of Anthony Lebedinsky. Zidoti, your line is open.

Thank you very much, and good morning, everyone, and certainly nice job improving the top and bottom line in the quarter. So, you know, as we look at the reported revenue, can you give us just a rough idea as far as the impact of pricing versus unit volumes that you saw in the quarter bikes digging that out right now at the yes that last quarter thanks yeah well just you know as we think about you know all the noise with the that's a good question given what's going on in the world today.

Here we go. So yes, on the wholesale side, units were down slightly. I won't give the exact percent, but it was low single digits. And unit price was up, and I would say up in the less than double-digit range.

Gotcha. That's on the wholesale side.

And on the retail side, pretty similar.

Let's just leave it at that. okay fair enough okay gotcha and then you know certainly it was encouraging to hear that you guys did very well during your Labor Day promotion with your written sales just curious did you see any notable regional differences throughout the country or was it more or less kind of consistent now it's pretty consistent all the regions were we're up that's good to hear okay and then And, you know, so earlier this year, you guys opened a new store and acquired another dealer store, and you're about to open a new store in Orlando tomorrow. You know, so as we kind of look forward, I mean, how do we think about the additional store locations in F-27 and beyond? Just kind of what's the latest thinking on that?

We will open two stores next year, Anthony, and honestly beyond that we don't have one in the queue. We are looking at upgrading existing locations as part of, you know, our consideration on future capital expenses. But at the moment, we have two for $27.

And, Anthony, let me just add, one of those is a reposition, so there'll be a closure in an opening. So it's net up one.

Gotcha. Okay. Thanks for that. Okay. And then my last question before I pass it on to others. So, as it relates to your comment about being more aggressive with Black Friday promotions, can you provide more details as to what your plans are? How do we think about the impact that may have on margins?

I don't think it's going to have a big impact on the margin, Anthony. It's just Black Friday has grown into such a big event and closes the year that we just want to make sure that we end the year with a bang. But I don't anticipate a diminution of margin as a result.

That's good to hear. All right. Well, thank you very much, Rob and Mike.

Thank you. Thank you, Brad.

And our next question will be coming from the line of Linda Bolton-Wiser of Water Tower Research. Your line is open, Linda.

Yes. Hi. Thank you. So I just wanted to ask about, you know, your retail sales growth in the quarter was pretty good. And you've had, you know, a couple quarters here of pretty decent growth. However, the growth is not as strong as what you saw in FY25. So just stepping back in terms of the larger picture, I'm wondering, like, how would you characterize consumer behavior right now? I mean, are they still buying to replace things that they bought during the pandemic, and here it is six years later, and they want to buy something new? And if so, what do you think is making the slower growth? Is it just the concern from the war in the Middle East? And then what general impact do you think the higher mortgage rates, interest rates will have on your business going forward? Do you think it will flow it even further? Thank you.

Well, Linda, this is Rob. We haven't met yet. Look forward to meeting you. But, look, there's a lot of facets to the answer to your question. I would say that for us, we feel the consumer remains cautious. We have nice interests and project business, which is an appreciable part of our business. So the bigger ticket business was very good in the quarter. trigger, but I do feel that folks are taking longer to pull the trigger. We are doing the work and they may not always pull the trigger, so it's not what I would characterize as an easy environment at the moment for us. I would say, yes, just the momentum, and this is not unique to us by any means, and you can certainly read about it and you know about it. Just the general malaise in the housing sector, we were looking for more of an uptick nationally than we've experienced this year, and it hasn't materialized in that regard. And certainly, if you raise mortgage rates further than they were, that is not providing a tailwind in that regard. So I think our guys did a nice job of closing the business that, you know, came through the door. And, again, our project business has been strong. But cautious, conservative, and you can understand why. There's a lot of uncertainty out there right now.

And, Linda, I would add to what Rob said. If you look at the pace of business over the course of the year, and you look back at our first quarter, our first quarter was pretty slow. So, I think we were up nine and a half percent written in Q2, and we did see a nice pickup in the May timeframe, and we had a very successful Memorial Day event. The other thing I would say is if you look at our quarter, you have to remember at least Labor Day last year was basically two days after the quarter end last year compared to this year, which was a week and two days after quarter end. So there's a weak time shift in that promotion, and that's why Rob pointed out that for the four-week promotion, we were actually up 9%, but it doesn't show, at least in the pace of business for the quarter, because a big chunk of that ends up in the fourth quarter.

Okay. Thank you. That's very helpful color. So, turning to margins, your gross margin was up nicely, and I think it was up even if you want to strip out, you know, that positive refund effect. So it was up year-over-year.

Do you think with more effect from the retail price increase in the fourth quarter that the gross margin can be up even more year-over-year? let's say excluding the tariff refund, do you think that could be the case in the fourth Well, we are still in the first month of the fourth quarter, Linda, but seeing the retail gross margin strategy on a piece of paper yet, on a P&L, but the written margins are looking better for the month of September and retail, so we are very hopeful that that's going to materialize. We think it will. So that is something that will help us in the fourth quarter. I don't expect to see a lot of difference in the wholesale margin. So So we do have that going for us, it's hard to quantify at this moment because we instituted a new pricing strategy in mid-July, and those deliveries will be showing through on the P&L here this month, or begin to show this month.

Okay, thank you. And then I'm just curious on the SG&A expense. It was up slightly in dollar terms both year-over-year and sequentially from the second quarter. I'm just wondering like your one and a half to two million of savings, is that primarily reflected in SG&A or not? And did we see any of that in the quarter or are we going to see more of a positive effect of that in the fourth quarter?

Yes. So during the quarter, we essentially did realize all of the quarterly effect of that $1.5 million to $2 million. But when you look at the SG&A by itself, you've got to remember more of our sales, consolidated sales came from retail which carries more SG&A expense. So I think you know as you're analyzing that SG&A that's kind of the big difference.

Okay that's helpful thank you. And then you know I noticed that your inventory reduction was very, very good in the quarter, and it did boost your operating cash flow, which was quite strong, even excluding that tariff refund. So what is going on there? Why did the inventory come down so much? And then can we expect more inventory reduction in the fourth quarter?

You want to talk about the tariff?

Well, keep in mind there's a chunk in inventory related to the tariff that's going to be coming through on the P&L this quarter. But ex that, we still had nice reduction in inventory, primarily around, frankly, imported product.

Our club-level motion product inventory came down nicely, and we've been working on that. Also, we're doing less of the cut-and-sew fabric, where we bring the kits in from offshore. It's still important to us, but our consumers are gravitating more and more to the special order, and that's cut-and-sewn domestically, so we don't have the carrying cost of the pre-sewn kits. So we're certainly working hard to continue reductions, but I don't think you're going to see something in this next quarter as dramatic as you just saw this quarter.

Okay, sounds good. And then my last question just has to do with, you know, sort of your capital allocation policy. your cash dividends per year are nearly seven million dollars and in most of the recent years you have been using balance sheet cash to pay the dividend and I'm not sure how it's going to turn out this year but it looks like that might be the case again for FY 26 that you'll use balance sheet cash to pay at least part of it do you have you considered reducing the dividend just to be able to invest more behind growth initiatives in your business?

We consider the dividend every quarter. We think it's a very important part of what we do. We think our cash balance is appropriate and strong, you know, and yes, every quarter we discuss capital allocations for whether it be growth or return to shareholders. But, you know, I think Bassett has a history of returning dividend to shareholders. And I don't think we're anywhere near a situation where we would feel like we're under pressure on the dividend. And, you know, frankly, we We need to any kind of capital expenses based on the returns that we receive from those, and so we're pretty conservative about that. So yes, we certainly look at all these things as we should and as appropriate, and obviously we would pay the dividend out of operating cash flow. That's our objective, but we do view the dividend as an important part of the picture, so long as the board feels the same way.

And one thing I'd add to that, Linda, is keep in mind that the fourth quarter is our best cash generation quarter. So, you know, as you look at it right now, certainly get that, come to the conclusion you just did for the year, and hopefully the cash will come through as we expect for the fourth quarter.

Great. That sounds good. Thank you very much for taking my questions.

Thank you, Linda.

Thank you. I'm showing no further questions. I would now like to turn the call to Rob Spillman, Chairman and CEO, for closing remarks.

Thank you very much. We look forward to seeing some of you soon in our new showroom in High Point. We look forward to touring you around this space. We're very excited about it. I'll close by just saying thank you for your interest in Bassett Furniture and for your support of our business. Good day.

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