Earnings Call Transcript - BSET Q1 FY2026

Operator

Good day and thank you for standing by. Welcome to the Bassett Furniture Industries first quarter 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

Mike Daniel, Analyst — Other

your first speaker today. Mike Daniel, please go ahead. Thank you so much, LaTanya, for the introduction. Welcome to Bassett Furniture Industries earnings call for the first quarter of fiscal 2026, which ended February 28th of 2026. Joining me today is our chairman and CEO, Rob Spillman. We issued our news release in Form 10-Q yesterday after the market closed, and it's 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?

Rob Spilman, Chairman

Thanks, Mike. Good morning, everyone. First, I'll provide some perspective on the quarter and then lay out our initiatives going forward to grow the Bassett business. After a solid start to the first seven weeks of fiscal 2026, the pace of business slowed abruptly in mid-January. As a result, consolidated sales declined by 2.2 percent due to a variety of factors. Against the backdrop of ongoing weak residential housing activity, severe weather interrupted both wholesale and retail sales, as well as product distribution flow due to warehouse closures. We rely heavily on retail traffic during weekends. More than 50% of the retail fleet was closed due to weather through one weekend in January, followed by more than 25% of our locations being closed the following weekend. On the positive side, we benefited from changes to our marketing strategy this year, which expanded our President's Day promotional event to three weeks. This helped us drive retail sales up for the back half of February. While written sales were essentially flat for the first quarter, we had a double-digit increase in written orders for the back half of February. These sales will be delivered in the second quarter. We had margin pressure on our retail business from our decision to eat the tariff impact until midway through the quarter. In fact, retail gross margins were down 170 basis points because we did not pass this along on goods sold in the fourth quarter that were delivered in the first quarter. With the tariff costs now included in the retail pricing, we expect to see improved retail margins going forward. Wholesale margins decreased slightly primarily due to lower volume in our domestic upholstery operation. Mike will cover the details on the financials shortly. We've been conservative in designing our plan, but SG&A for the quarter remained higher than we like for the revenue we delivered, and we're addressing this. We're operating in a macro environment of challenging housing, higher political tensions, which continue as headwinds for our top line. To combat this, we have several initiatives in the works that are projected to save between $1.5 and $2 million annually, starting late in the second quarter. Looking ahead, we have organized our strategic thinking around five key initiatives to grow the Bassett business. The first is to generate comp store growth. We have a strong brand in Bassett. We feel good about the product offerings we have in place, and we're excited about what we have coming. Consumer response to our updated case goods collections has been good. We've also had good reception to the recent introductions of the Z4 Sleeper and the Hideaway Dining Programs. Customers continue to love our true custom upholstery program, the most significant piece of our business, which showed a 6% increase in retail-written sales in the first quarter. At the upcoming April High Point Market, Bassett will introduce new opening price point upholstery collections that offer excellent value with customized options for the consumer. As we shared previously, the Bassett Outdoor line has been absorbed into the Lane Venture brand to further leverage the strong reception and rich history behind Lane Venture. which is now more than 50 years old since we acquired lane venture in 2017 bassett invested in domestic manufacturing infrastructure to offer custom options and to improve lead times in addition to our teak and wicker offerings our domestic aluminum product now represents 45% of our outdoor sales. Second, we expect further growth to come from investing to open additional retail store locations, both corporate and licensed. As we announce, we will open corporate stores in Cincinnati and Orlando this year and will relocate a store on Long Island. The Cincinnati store is under construction and we will begin work on our new Orlando location next week. Given the escalation of retail rents and construction costs since COVID, we will meticulously research the sales potential of future locations before we commit to a new store. Both the Cincinnati and Orlando locations have taken almost two years to come online by the time they open later this year. Also, we have opportunities to convert some current licensed locations to corporate stores as owners retire and exit the business. We have just finished this kind of conversion in the greater Philadelphia market. The retirement of independent furniture operators with no succession plan is a trend that has picked up steam in the past several years. And the best that licensed stores are not an exception. Under the right circumstances, the trend represents an opportunity for us to continue growing in existing markets by leveraging customer relationships and our brand. Third, we are investing to increase e-commerce sales and build a successfully integrated omni-channel experience. Retail customers are responding well to the enhancement in our e-commerce site, allowing them to see the full breadth of our offerings. The investments we've made in presentation and functionality allow us to reach many more markets where we don't have physical locations. And late last year, we began national home delivery to previously unserved geography. While overall traffic was down in the first quarter, more customers are generating more frequent transactions. Inversions was up 130% for the quarter, resulting in a 28% increase in orders. Our goal is to use our website to reach younger, higher income demographics to represent a strong growth opportunity. Fourth, we are enhancing the model for Bassett design centers, which remain a critical part of our wholesale growth strategy. With a footprint of 3,000 to 5,000 square feet, the BDC is the best representation of our brand outside of a Bassett home furnishings store. During the first quarter, we added two Bassett design centers and currently seek to improve the visual merchandising standards and marketing programs for the VDC fleet this year. The Little Sister Bassett custom studio concept at 1,000 feet serves as a wholesale gateway way for us as we have opened 60 studios in the two years since its inception. The custom studio product offering focuses exclusively on the merits of our true custom upholstery program. No inventory is required and the turnaround time is short. The studio model is a great way for the open market to test the Bassett brand. We aim to convert the best customers under the studio into full Bassett Design Centers and recently completed three such conversions. Fifth, we are focusing on building the interior design channel. We believe that the styling of our assortment and our ability to customize our products beautifully fit the needs of today's interior designers. We are enhancing our technology platform to cater to designers. And we are working with our independent wholesale sales force to equip them with the tools and mindset to adapt to the current world of design. To showcase our brand in a more design-centric fashion, this summer we plan to relocate our wholesale showroom to better target this growing channel in time for the October fall market. Demolition is now progressing and extensive renovations are already taking place. This new Consolidate showroom will include the LaneVenture brand, which historically has had showrooms stay separate from Bassett. In concert with the design effort, we are developing the hospitality and commercial channel by leveraging the quality and brand equity behind the Bassett name. The launch of the Bassett Hospitality Division is underway, and we will go after contract business across various commercial areas, from hotels to senior living. We have put the team in place, but this will take time to gain traction. This five-point strategy articulates the blueprint that our management team is employing to ensure a bright future for Bassett. The challenging macro environment that we have experienced since the COVID boom makes for a difficult balance between investing to grow while controlling or cutting operating expenses. In short, we are doing both, reshaping our organization and technology to compete in a changing world and deliver improved shareholder returns. With that, I'll turn things over to Mike for details on the first quarter results.

Mike Daniel, Analyst — Other

Thank you, Rob. In my commentary, the comparisons I'll discuss will be the first quarter of fiscal 2026 compared to the first quarter of fiscal 2025 unless otherwise noted. Total consolidated revenue was $80.3 million, a decrease of $1.8 million, or 2.2%. This consisted of a $700,000 decrease in revenue from our retail stores and a $1.1 million decrease to our external wholesale customers, primarily due to the impacts of winter weather on store operations and retail and wholesale logistics. Gross margin at 56.2% represented an 80 basis point decrease when compared to the prior year, primarily driven by lower margins in both the retail and wholesale business. Selling general and administrative expenses, excluding new store pre-opening costs, were 54.7% of sales, 70 basis points higher than the prior year, reflecting reduced leverage of fixed costs due to lower sales levels. Operating income was $1.2 million, or 1.4% of sales, as compared to income of $2.5 million, or 3% of sales in the prior period. Diluted earnings per share were $0.13 versus $0.21. Now let me cover more details on our wholesale operations. Net sales were $53 million, essentially flat to last year. Net sales were impacted by a 0.6% increase in shipments to our network and a 2.6% increase in lane venture shipments to wholesale customers, partially offset by a 5.3% decrease in shipments to the open market. As previously discussed, we introduced the Lane Venture brand in the Bassett Home Furnishing stores during the first quarter, 2026, and have included those shipments in the above change in the 0.6% increase for the retail stores. Including those shipments in the total Lane Venture brand, shipments of that brand increased 32%. Spittments were negatively impacted by winter weather because our major distribution centers were closed for multiple days during the quarter. Gross margins decreased 50 basis points for the entire period as margin decreases by some upholstery operations due to reduced leverage of fixed costs that were partially offset by improved margins in the Bassett case good operations due to improved pricing strategies. SG&A expenses as a percent of sales were essentially flat compared with the prior year period. Now, moving on to our retail store operations, net sales of $52.5 million represented an $800,000 or a 1.4% decrease, again, primarily due to the impacts of the winter weather. Written sales, the value of sales orders taken but not delivered, decreased 0.2%. Gross margin at 51.5% represented a decline of 170 basis points due to lower margins on inline goods as we did not institute a price increase related to the increased tariff costs until mid-January. Total SG&A expenses as a percent of sales increased 20 basis points, primarily due to the pre-opening costs associated with the new stores in Cincinnati and Orlando, and reduced leverage of fixed costs due to lower sales levels, partially offset by improved efficiency in the warehouse and delivery 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 $200,000 to $400,000 per store, depending on the overall rent cost for the location, and the period between the time when we take physical possession of the store space and the time of the store opening. These costs should be higher in the second quarter. Now, let me address our liquidity position. Our liquidity remains solid with $51 million of cash in short-term investments. With the first quarter historically being the lowest in cash generation, operating cash flow was a negative $5.5 million, dollars, which also included certain negative working capital changes, which were expected. As we previously mentioned, we plan to open two new stores, relocate another store, and move our existing High Point showroom during the year, which will result in additional capital spending for tenant improvements. As a result, we expect total capital expenditures to be between eight and $12 million for 2026, considerably more than the $4.5 million we spent last year. We continue to pay our quarterly dividend and repurchase shares opportunistically. We spent $1.7 million on dividends and $147,000 on share buybacks in the quarter. We remain committed to delivering shareholder returns through dividends and, when appropriate, share buybacks. Our board also approved a $0.20 dividend to be paid May 29th. Now we'll open up the line for questions. LaTanya, please provide instructions to do so.

Operator

Certainly. 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 11 again. Please stand by while we compile our Q&A roster. One moment for our first question. And our first question will be coming from the line of Anthony Lebedinsky of Sidoti. Your line is open, Anthony.

Anthony Lebedinsky, Analyst — Sidoti

Good morning, everyone. Yeah, thanks for taking the questions. So just, you know, thinking about the retail margins, can you help us better understand the impact of the delayed price increases that you took in mid-January and how that should impact the second quarter?

Rob Spilman, Chairman

Well, that's unfolding as we speak, Anthony, but we have seen since we implemented that, you know, the tariff thing last year was difficult for the whole industry to deal with, and everybody had their own take on it. And, of course, we've got a wholesale consideration and a retail consideration, so I'm giving you a little bit of the logic behind our decision. So we increased wholesale and retail prices in July, and then there were some further adjustments to the tariffs. And at that point in the fall, we said, you know, given the environment, we don't want to put on another price increase within 60 days of what we just did. So we elected to go with, and as we've mentioned already and you're asking about, at that 170 basis point decline. But I can't predict exactly how these margins will come through in the quarter, but they will be closer to what we had last year than what we just reported. And so I can't give you any more insight than that. Mike, maybe you can help. I don't know if we'll get all the way back up to 170 patients' points, but we are seeing improved margins so far this quarter since we have implemented the increase.

Anthony Lebedinsky, Analyst — Sidoti

Okay, yeah, thanks for that. So, you know, given the recent spike in fuel prices, are you thinking about potential additional pricing actions and or surcharges to offset the higher delivery and shipping costs? I'm just wondering how you guys are thinking about what's been going on since your quarter ended.

Rob Spilman, Chairman

On a retail side situation with J.B. Hunt, evening surcharges weekly on that, which fluctuates with diesel prices. So, yes, that's already happening. Also getting increases from petroleum derivatives, and those are fairly significant, and we will have to pass those along in the next. They actually have not been implemented yet, but there are various dates in the next few weeks that these things will take effect. We will have to adjust for those increases.

Mike Daniel, Analyst — Other

And, Anthony, yeah, on the freight surcharge, fuel surcharge side, we do turn and build back from a wholesale perspective the freight or the freight surcharge that we are charged from our freight partner. So, yes, that fluctuates along. that surcharge that we fill out fluctuates with what we're getting charged

Anthony Lebedinsky, Analyst — Sidoti

from our partner gotcha got it okay and then just wondering you know if you can comment on the trends that you've seen in the business since the the end of your quarter and which coincides with the start of the conflict in Iran whether you've seen any noticeable differences in trends. I know your target customer is generally a higher income consumer, so maybe not as much impacted by fuel prices as lower income consumers, but obviously we've seen the stock market react negatively since then. So just wondering if you could talk at a high level as to what you've seen so far the first few weeks of the uh of your current quarter much more of the same i would say um anthony it we

Rob Spilman, Chairman

haven't uh had a tremendous decline of an uptick either so it's still you know grinding it out uh pretty much the way i would describe it we uh you know obviously this is easter weekend and we're We'll close on Sunday, and the week around Easter is always a tough week, so we're going to deal with that. More of the same is what we're seeing. Not a lot.

Anthony Lebedinsky, Analyst — Sidoti

Gotcha. Well, thanks very much for the help, and best of luck.

Rob Spilman, Chairman

Thank you.

Operator

Thank you. And our next question will be coming from the line of Doug Lane of Water Tower Research. Your line is open.