Bassett Furniture Industries I 2026 Q3 Earnings Call

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 Spilman. We issued our news release and Form 10-Q yesterday after the market closed, and they are 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 1 less week of the 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 is 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 million to $2 million. I am pleased with the gains we have made on our strategic initiatives, 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 gain. Custom upholstery and custom motion upholstery in particular was very strong. Also on the domestic front, our BenchMade dining program had a nice quarter. 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 Chadduck. Heather is highly respected for her portfolio of 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 in-line fabrics that she has personally curated. Heather says the collection feels timeless but very organic and fresh. The Heather Chadduck collection for Bassett will be in retail stores next spring. Our priority remains growth from existing and 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. mid-size 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 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 2026 compared to the third quarter of fiscal 2025, unless otherwise noted. 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 IEEPA 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% 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.