Bassett Furniture Industries - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Bassett Furniture Industries' Q1 2025 Earnings Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a Q&A session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dru Ingram, Vice President and Controller. Please go ahead.

Dru Ingram (VP and Corporate Controller)

Thank you, Kevin, for the introduction. Welcome to Bassett Furniture's Earnings Call for the Q1 ending March 1, 2025. I'm Dru Ingram, Bassett's Controller. I am sitting in this morning for our CFO, Mike Daniel, who is out for an unexpected event in his immediate family. Please keep Mike and his family in your thoughts. 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, we will open up the call for a question-and-answer session. We will post the transcript of the call on Bassett's investor website within 48 hours of this call. Due to calendar shifts, our Q1 of the fiscal year had 13 weeks as compared to 14 weeks in fiscal 2024.

During today's call, certain statements we make may be considered forward-looking 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 provisions of the Private Securities Litigation Reform Act of 1995. The company cannot agree to or 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 ending November 30, 2024. Other filings with the SEC describing risks related to our business are available on our corporate website under the Investor tab. Now I'll turn it over to Rob for comments about our Q1. Rob?

Robert Spilman (President and CEO)

Thank you, Dru, and good morning, everyone. We are pleased to report improved operating results for our Q1 of 2025. The streamlining of our cost structure that began last year, coupled with higher levels of operating efficiency in both our wholesale and retail segments, combined to produce $4.8 million of improvement in operating profit. As I said last quarter, our strategic plan for 2025 was designed to weather another year of tepid demand and to keep us disciplined and focused on growth. Our management team is running with a leaner mindset, and we are accelerating new ideas and innovative products to position us well in providing quality home furnishings and design services. We're incorporating more technology into the customer experience and fine-tuning our marketing.

We plan for housing sales to remain slow, and we're working to react quickly to the ups and downs of economic data and changes from Washington. Last week's report that consumer confidence was plummeting was disconcerting, but we believe the steps we've taken will help us run efficiently and get through this tough furniture economy. Let's move to the results of our Q1. Consolidated sales were down by 5.1% for the Q1, which was due largely to the comparison of 13 weeks this year to last year's fiscal 14 weeks. On a normalized basis, sales revenue for the Q1 increased 2.2%. We had a strong December and January, due in part to the shorter time frame between Black Friday and Christmas. The sales environment was a little more challenging in February.

Our Presidents' Day promotional event was not as successful as last year, and we've since seen the industry get more aggressive with discounts and credit promotions. Wholesale orders were down by 8.4% for the quarter, or 1.4% normalized for the extra week. On a normalized basis compared to last year, orders from our store network increased 4.2%, with December and January posting higher increases and February reporting a decrease due to a very aggressive promotional environment around Presidents' Day. Orders from our traditional wholesale business, however, decreased 10% on a normalized basis, with February being the slowest month of the quarter. Orders from our outdoor furniture business were essentially flat on a normalized basis. We were pleased that on a normalized basis, written sales in our corporate stores for the quarter increased 5.4%, even with the softer February sales.

Although retail gross margins fell modestly, cost reductions from our retail warehouse consolidation program and lower marketing expense contributed to our improved results. Our retail warehouse consolidation plan is ongoing, and we expect additional improvement in this regard as the year progresses. I'm especially excited with even more progress coming from our e-commerce and our drive to improve Bassett's omnichannel model. The investments that we made and will continue to make in BassettFurniture.com are responsible for Q1 e-commerce sales being up 36%. While we have not seen higher web traffic so far this year, a higher rate of conversion is currently contributing to sales growth. We expect that with continued investments in omnichannel, we have opportunities for growth in traffic and conversion for the remainder of the year. We are being more prescriptive in our marketing efforts.

While we reduce marketing and advertising costs this quarter, we are disciplined about getting better returns from these investments. Direct mail was especially effective in supporting the launch of our Whole Home Copenhagen line and allows us to reinforce newness and our design services. We plan to incorporate direct mail more frequently in our promotional mix and in digital outreach activities for the remainder of the year. We continue to focus on our sales efforts outside of the store network. We reached a milestone when we signed dealer number 50 to our Bassett Custom Studio program in February. The 1,000 square feet concept from the recently acclaimed best custom upholstery company in the industry by Furniture Today is gathering steam. Part of the momentum we are seeing is attributable to last year's addition of 50 leather options to our True Custom Upholstery program.

We are also about to unveil a new product visualization and B2B ordering system that will simplify the experience for the retail salespeople and their clients at the store level. With the April High Point Furniture Market around the corner, we continue to integrate greater innovation and newness into our product line to drive higher sales. Three new efforts are particularly noteworthy. First, the Hideaway BenchMade domestic dining program, an extensive collection of tables and chairs in solid maple that features self-storing table leaves and an enhanced array of upholstered dining chairs. This program offers tremendous value in today's marketplace. Next are the two Whole Home product collections, Andor and Newbury, which will launch later this year. Both feature transitional styling and exciting combinations of finishes and materials. Third, we are building on our program of accent furniture to enhance our retail displays.

These products feature stone, metal, woven material, and leather combinations that are also conducive for web sales and round-out design projects. Tariffs have been top of mind across the industry for several months, culminating with President Trump's Rose Garden announcement 17 hours ago. Although 79% of our wholesale shipments in the Q1 were manufactured or assembled in the U.S., many materials such as fabrics or plywood used in the manufacturing process will now be exposed to tariffs, as will the remaining 21% that we bring in fully assembled. While the reciprocal tariffs are now known, there are additional tariffs on certain materials used in the manufacture of some of our products.

The entire industry is working with outside experts to gain clarity on this unusual situation. We will determine what this means for our pricing structure on goods that are affected over the next several days. We do firmly believe that the announced tariff policies will not positively influence the American consumer to invest in home furnishings until the effects of these policies are fully implemented and understood. On March 13th, we announced that our Board of Directors approved our regular quarterly dividend of $0.20 per share. Dividends augmented by opportunistic share repurchases remain a key piece of our capital returns to shareholders. Now I'll turn things back over to Dru for more details on our financials. Dru?

Dru Ingram (VP and Corporate Controller)

Thanks, Rob. In my commentary, the comparisons I will discuss will be the Q1 of fiscal 2025 compared to the Q1 of fiscal 2024, unless otherwise noted. As Rob mentioned earlier, there was an additional week from the prior year period compared to 13 weeks in the reported quarter. For the Q1, total consolidated revenue declined $4.4 million, or 5.1%, primarily due to the additional week in the prior year quarter. On a normalized basis, sales revenue increased $1.8 million, or 2.2%. This includes a normalized 4.2% increase in wholesale shipments and a 6.8% increase in retail delivered sales through our company-owned stores. Consolidated gross margins increased 170 basis points due primarily to better margins in the wholesale segment. SG&A expenses were 54% of sales, which was 400 basis points lower than last year as we reaped the benefits of last year's restructuring.

We reported consolidated operating income of $2.5 million compared to a loss of $2.4 million. Diluted earnings per share were $0.21 versus a loss of $0.14. Let me cover more details on the wholesale operations. Net sales decreased $1.8 million, or 3.2%, from the prior year period due primarily to the additional week in the prior year quarter. On a comparable basis, sales revenue increased 4.2%, or $2.1 million, consisting of a 6.1% increase in shipments to the retail store network and an 11% increase in Lane Venture shipments, partially offset by a 2.2% decrease in shipments to the open market. Gross margin increased 250 basis points over the prior year period, primarily due to improved margins in our Bassett Custom Upholstery business from manufacturing efficiency gains, increased margins in our Lane Venture operations due to improved customer mix, and improved margins in our imported Club Level business.

SG&A expenses as a percent of sales decreased 150 basis points, primarily due to the benefit of cost reductions implemented during the second half of fiscal 2024. Wholesale backlog at the quarter end was $19.5 million compared to $21.8 million at the end of last year and $19.5 million at the end of Q1 2024. Now moving on to our retail operations. Net sales decreased $460,000, or 90 basis points, due primarily to the additional week in the prior year quarter. On a comparable basis, sales revenue increased 6.8%, or $3.4 million. Written sales, orders written but not delivered, declined 2.1% from the Q1 last year. On a normalized basis, written sales were up 5.4%.

Gross margin for the quarter declined 80 basis points due to lower margins for inline and clearance goods as we became slightly more aggressive in cycling through unproductive inventory, which was part of our five-point restructuring plan from 2024. SG&A expenses as a percent of sales were down 370 basis points, primarily due to the benefit of cost reductions implemented during the second half of fiscal 2024, coupled with lower advertising and marketing costs and efficiency gains in our warehouse and delivery operations. Retail backlog at the end of the Q1 was $36.1 million compared to $37 million at the end of last year and $31.3 million at the end of Q1 2024. Our liquidity position remained solid. Although we generated a slight operating cash flow deficit for the quarter, it represented an improvement of $7.7 million over the prior year.

Our Q1 is typically our lowest of the four quarters for cash generation. We ended the quarter with $56.4 million in cash and short-term investments and have no outstanding debt. This year, we have projected a range of capital investment in our business of between $8 million and $12 million, primarily to cover remodels of existing stores, investments in technology, including e-commerce, and potential store openings. We continue to pay our quarterly dividend and repurchase shares opportunistically.

We spent $1.7 million on dividends and $721,000 on share buybacks in Q1. We remain committed to stockholder returns through dividends and paybacks. Through our restructuring, we made the necessary changes to our operations to return to profitability. As Rob said, we believe we have positioned Bassett well to weather today's challenges, and we are committed to investing in our business in a cautious, smart, and calculated fashion while providing our stockholders with a reasonable return. Now we'll open up the line for questions. Kevin, please provide instructions to do so.

Operator (participant)

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Anthony Lebiedzinski with Sidoti & Company. Your line is open.

Anthony Lebiedzinski (Senior Equity Analyst)

Good morning, and thank you for taking the questions and my sympathies to Mike and his family. I guess, first, and by the way, Rob, thanks for providing the color about the monthly trends. Just wondering, since then, as far as with consumer confidence dropping, as you noted, have you guys seen any meaningful change in the trends in your business since the quarter ended? Just curious to get your high-level thoughts about that.

Robert Spilman (President and CEO)

Anthony, good morning.

Anthony Lebiedzinski (Senior Equity Analyst)

Good morning.

Robert Spilman (President and CEO)

I would say after the election, we saw a spike in sales and activity. Our Black Friday was good, as we've noticed last quarter, and then December and January were pretty strong. As we've gotten farther into the year, I would say that our business has fallen off that pace, but back really to last year's pace that we saw in the first part of last year. On a year-over-year basis, we're kind of trending where we were a year ago with the notable bump that we got post-election in November, December, and January. Does that make sense?

Anthony Lebiedzinski (Senior Equity Analyst)

That's pretty helpful. Yeah, yeah. Yes, that certainly makes sense. Thanks for providing that color. As far as your inventory, it was up sequentially from last—I’m sorry, from the end of the fiscal year. Just wondering if you could comment on the health of that inventory and just wondering if you guys perhaps brought in some additional inventory to try to get ahead of the tariffs.

Robert Spilman (President and CEO)

We really did not consciously bring in extra inventory for the tariffs, but those collections that I mentioned, the Copenhagen, which we did last year, and it is selling well. One of those Whole Home collections, the Andor, we brought in in anticipation of the spring season. Those were really the primary drivers of increased inventory. Frankly, now that we know what happened yesterday, I am glad we did bring in that Andor ahead of the spring season. That is basically what happened. Of course, now we have a new ball game. We will be certainly discussing that today and in the next several days. That was really the driver.

Anthony Lebiedzinski (Senior Equity Analyst)

Gotcha. Speaking of the new ball game, as far as the announcement yesterday, I know it's still fresh, but just kind of initial thoughts as to the strategy, where you guys go from here. Just wondering if any of those imported products, could they be manufactured in the U.S., or is that just not feasible? We'd love to hear your thoughts on that.

Robert Spilman (President and CEO)

I think for us, that's not feasible. What we can do, of course, as I mentioned, 79% went in the box in the U.S., so we do have a solid domestic footprint. We will be looking at our mix, and we will be looking at really what the full effects of the tariffs are. We can certainly emphasize, excuse me, the domestic product more purposefully and more prominently if we choose to do so. We have some nice selling imported products and a couple that we introduced last year that are making a difference. We have to really study that. We do have some flexibility given that we have five factories in the U.S., and we can do some things. It is not as though we are totally relying on imports.

Anthony Lebiedzinski (Senior Equity Analyst)

Understood. Yes. Thank you very much, and best of luck.

Robert Spilman (President and CEO)

Thank you, Anthony.

Operator (participant)

One moment for our next question. Our next question comes from Brian Gordon with Water Tower Research. Your line is open.

Brian Gordon (Senior Research Analyst)

Good morning, everyone. I would also want to offer my sympathies to Mike and his family. I guess my question is sort of on the gross margins. They were very impressive in the quarter. I am wondering how sustainable these could be, especially given the majority of your production being domestic, even if there is an impact from the tariffs on that 21% of the business. It feels like assuming demand holds up reasonably well, that we could see these levels continuing through the rest of the year.

Robert Spilman (President and CEO)

Morning, Brian. This is Rob. Look, these are as high gross margin levels as we've ever achieved or right up there with it. As Dru mentioned in his remarks, the wholesale segment really contributed to that. Our retail margins were down slightly, but not very much. Of course, we had the corresponding reduction in the SG&A expenses. I do not see our gross margins going any higher than this in the short term. That is because we want to keep our retail inventory lean.

Anthony asked about increasing inventory, and I failed to mention that our retail inventory did go up some. Some of that is goods that we want to move out. We want to continue to keep that cash flowing, of course. The wild card is, of course, as of yesterday, knowing now what's going on with the imports, how do we react to that? If it stays like it is, we're going to have to increase prices at some level on this stuff. That's what today's about. We're really kind of huddling up and seeing. I don't see a big diminution in our gross margin coming, but I don't see it getting higher than it currently is or was for this quarter.

Brian Gordon (Senior Research Analyst)

Got it. Thank you. That's very helpful. In terms of the near-term strategy for addressing the tariffs, are you thinking about surcharges or list price increases or any other sort of mitigation strategy like that?

Robert Spilman (President and CEO)

We're thinking about everything, but we don't know the answer. We have been reaching out to our best customers and talking to them about this. What's their point of view? What do they see happening from our competitors? That kind of stuff. We are going to have to reach a conclusion on that. Frankly, since 4:00 P.M. yesterday, we've been talking about this, and we've been getting ready for this call. When we get off the call, we're going to have a big meeting. It is an unusual time, to say the least.

Brian Gordon (Senior Research Analyst)

Yeah. Certainly. Could you talk a little bit more about your plans for new store openings and maybe your targets for the design studios and how many in an ideal situation would you like to be at by the end of this year?

Robert Spilman (President and CEO)

If I tell you a number, you won't remember it so well on the design studios. We do see additional white space for us to grow this program, and I would say significantly. That is a big focus. Of course, all that is domestic product. We will be pushing that hard at the market coming up and between now and then. What was the second part of that?

Brian Gordon (Senior Research Analyst)

I was just asking about new stores as well.

Robert Spilman (President and CEO)

New stores, right?

Brian Gordon (Senior Research Analyst)

I think the number was like maybe two.

Robert Spilman (President and CEO)

That's right. We actually are in the throes. Jay, our General Counsel, is sitting in here, and he's been working with a couple of landlords. We usually don't reveal where they are until we get a little closer to the thing and get the thing signed. We will sign a couple of new leases in a very short amount of time. It's going to take some time to retrofit the store and turn it into a Bassett footprint. We are thinking probably very late in this year or early next year. Both are new markets for us, one of which we've been in before. We are excited about that.

Brian Gordon (Senior Research Analyst)

Yeah. Thank you. That is basically all the questions I have at this point. Good luck for the quarter.

Robert Spilman (President and CEO)

Hey, thank you, Brian. We'll be talking to you.

Operator (participant)

I'm not showing any further questions at this time. I'd like to turn the call back over to Rob.

Robert Spilman (President and CEO)

Thank you, Kevin, and thank everyone for tuning in today. We are pleased with the quarter and our progress. Certainly, the environment out there is not getting simpler. It is getting more complex. We are going to deal with that and persevere through this. We like what we have done with our cost structure, and we feel our product line is strong. We are just going to focus on dealing with this new environment and heading into, hopefully, a successful market in April. Thank you for your interest in Bassett, and have a good day.

Operator (participant)

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.