Bassett Furniture Industries (BSET) Q3 2026 earnings call transcript

Thank you, LaTanya, 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 will 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%, 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%, 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 spilled into the current quarter generated a 9% written sales increase with improved written gross margins. We have made progress on reducing operating expenses, which remains a key goal for our management team. SG&A, excluding pre-opening costs for the Orlando store, was 150 basis points lower than last year's third quarter. We are on track to meet our goal of reducing the annual run rate of expenses by an additional $1.5 to $2 million. I am pleased with the gains we have 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 design projects and for her successful line of textiles. The 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 inline 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 are 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. midsize 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 acknowledged 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 through these challenges. Now, I will turn things over to Mike.

Thank you, Rob. In my commentary, the comparisons I will discuss will be the third quarter of fiscal 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 invalidating 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. The 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, 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 and 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 will now cover more details on our wholesale operations. In retail 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 LaneVenture 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 LaneVenture 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 LaneVenture 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 and 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.

Anthony, you asked that last quarter.

That's a good question given what's going on in the world today. Yes, here we go. So yes, on the wholesale side, units were down slightly. I won't give you 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.

That's on the wholesale side. And on the retail side, pretty similar. Let's just leave it at that.

No, it was pretty consistent. All the regions were up.

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 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 will be a closure and an opening. So it's a one.

I don't think it's going to have a big impact on the March, Anthony. It's just Black Friday has, for us, 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 acceptable diminution of margin as a result.

Thank you. Thank you, Anthony.

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 for us, we feel the consumer remains cautious. We have nice interests and project business, which drives an appreciable part of our business. So the bigger ticket business was very good in the quarter. 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. I think we were up 9.5% 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 week 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.

Well, we are still in the first month of the fourth quarter, Linda. It ends tomorrow. So we haven't seen 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 at 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. 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.

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 as you're analyzing that SG&A, that's kind of the big difference.

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. I will now turn the call over to management for the special order. That is cut and sewn domestically so we don't have the carrying cost of the pre-sewn kits. We are certainly working hard to continue production. I don't think you will see something in this next quarter as dramatic as you just saw this quarter.

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. And yes, every quarter we discuss capital allocations for whether it be growth or return to shareholders. But 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 need to bet 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, you know, obviously we would strive to pay the dividend out of operating cash flow, and we haven't done it every year, but we've done it a lot of years. So 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.

Thank you, Linda. Thank you.

Okay. 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.