Bassett Furniture Industries, Incorporated Q3 FY2025 earnings call

• Despite industry challenges, the third quarter saw increases in revenue, operating income, and gross margin. The company has been working to lower operating expenses since summer 2024.
• The housing market remains slow, but the company is being nimble, focusing on product innovation, aggressive marketing, technology leverage, and adapting to industry challenges. Mortgage rates have slightly decreased, but a robust change in the industry is expected when home sales pick up.
• Approximately 80% of wholesale shipments are manufactured in US factories, but the company is impacted by tariffs from Vietnam and India, leading to a slight retail price increase in July.
• Orders increased 5.9%, driven by a 9.8% increase in company-owned retail stores. True custom upholstery drove wholesale improvement, with case goods seeing a double-digit increase offsetting a slight decrease in domestic custom wood lines. New whole home product collections like Copenhagen, Newberry, and Benchmade hideaway dining line are performing well. Outdoor sales were up 18%, and written retail sales increased by 2.4%.
• SG&A expenses as a percentage of retail sales decreased 590 basis points due to operating expense efficiencies. Marketing shifted from digital to a high-quality catalog and mailers, with spot TV placements in key markets showing positive results, enhancing the omnichannel experience.
• Website traffic declined slightly but conversion rates rose. The Bassett custom studio program has 57 locations, with orders up 35% and shipments up 38% in Q3. The Concord, North Carolina corporate store was reopened, and two new stores are planned for 2026. The company paid a quarterly dividend of 20¢ per share and spent $1.7 million on dividends and $400,000 on share buybacks in the quarter.

Consolidated sales increased $4.5 million or 5.9%. Excluding sales from Noah Home, which closed late in 2024, consolidated revenues increased 7.3%. Gross margin was 56.2%, representing a 320 basis point improvement over the prior year. For wholesale operations, net sales increased $3 million or 6.2%, with gross margins increasing 440 basis points. Excluding unproductive labor costs from the prior year's cyber incident, gross margins would have increased by 310 basis points. For retail store operations, net sales increased $4.6 million or 9.8%, but gross margin declined 40 basis points due to lower margins on in-line and clearance goods. Wholesale backlog was $16.6 million, and retail backlog was $32.2 million.

• The projected range of annual capital investment has been reduced to between $5 to $7 million, as build-outs of new stores have been pushed to early fiscal 2026 (previously between $7 million and $9 million).
• The company will continue to pay the quarterly dividend and repurchase shares opportunistically.
• The fourth quarter is typically the strongest quarter for business and cash generation.

• The company is impacted by tariffs on imported materials from Vietnam and India, which have led to slight retail price increases and uncertainty in consumer confidence.
• The housing market remains slow, affecting the furniture industry.
• Fluctuating tariff rules present challenges in day-to-day business operations.

Q: Anthony Lebiedzinski asked if August was the strongest month for both delivered sales and written sales, and about Labor Day holiday season and quarter-to-date trends.

A: Rob Spilman said August was the strongest month for delivered sales, and the trend continued through the Labor Day period and into September, with the company still fighting for orders despite the challenging environment.

Q: Anthony Lebiedzinski inquired about the extent of pricing due to tariffs and unit volume response to higher pricing.

A: Rob Spilman mentioned tariffs from Vietnam (20%) and India (50%), surcharges on imported goods, and uncertainty around consumer reaction to higher prices, noting the upcoming High Point Furniture Market would be a key topic for tariff discussion.

Q: Anthony Lebiedzinski asked about further upside to gross margins.

A: Mike Daniel stated that the gross margin range of 55-56% is where they expect to be, and improvement would need to be leveraged with expenses and higher sales.

Q: Anthony Lebiedzinski asked about the pipeline of additional new products.

A: Rob Spilman said the company has introduced many new products this year, particularly whole home collections, and would have a more focused introduction strategy moving forward but still has exciting new things to show at High Point.

Q: Doug Lane asked about the thought process behind segment reporting changes and the improvement and future outlook of wholesale gross margin.

A: Mike Daniel said the segment reporting change was fixing an immaterial error. Rob Spilman mentioned narrowing focus, efficient upholstery operation, and pricing strategies, but was cautious about further gross margin improvement due to tariff uncertainties.

Q: Doug Lane asked about quantifying the net tariff impact on financials.

A: Mike Daniel and Rob Spilman stated it was difficult to quantify due to various materials, tariffs by country, and the unprecedented nature of the tariff situation, but the company was navigating it relatively well.

Q: Doug Lane asked about market share gains with 80% US manufacturing.

A: Rob Spilman said the company hoped for market share gains, with some instances of benefit from domestic manufacturing, but had a better answer to this question expected in two weeks at High Point.

Q: Doug Lane asked when free cash flow would cover the dividend.

A: Rob Spilman said free cash flow has covered the dividend in the past and would again soon, noting the third quarter was unusual due to inventory and the slow third quarter, while Mike Daniel mentioned the fourth quarter is typically the strongest for cash generation