Prepared remarks
Good day, and thank you for standing by. Welcome to the Bassett Furniture Industries Q2 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will need to press *1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, J. Michael Daniel, CFO. Sir? Please go ahead.
Thank you, Michelle, for the introduction. Welcome to Bassett Furniture Industries' earnings call for the second quarter of fiscal 26, which ended May 30. Joining me today is our chairman and CEO, Robert Spilman. We issued our news release and Form 10-Q yesterday after the market closed, and it is available on our website. After today's remarks, Robert and I will open for questions. We will also post the 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 2000. 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. Robert?
All right. Thank you, Mike, and good morning, everyone. I will start with some insights on the second quarter, and Mike will get into more of the financial details. I will also discuss our strategic initiatives to drive further growth at Bassett. Operating profit on an adjusted basis improved in the second quarter on slightly lower consolidated revenue. As we moved through the quarter, positive traffic during April and May contributed to retail written sales being up 9.5%. Our Memorial Day promotion was especially strong: written sales up 14%, and 4% more traffic than last year. We saw these trends continue into June, which is a good start for the third quarter. Wholesale orders were up 5.2% for the second quarter, but shipments were down 2% as the increase in written sales was back-end loaded. We also generated $7.4 million of cash from operations during the period. Our consolidated gross margins grew by 90 basis points for the quarter, primarily due to improvements in wholesale margins on slightly lower revenue. Despite significant cost cutting in recent quarters, our SG&A has remained stubbornly high. Part of this is the higher percentage of overall sales that corporate retail represents, which has a structurally higher amount of SG&A compared to the traditional wholesale model. We did have some unforeseen expenses run through such as fuel surcharges that stemmed from the Iranian conflict. In any event, we are committed to improving our operating margin and our SG&A percentage is a major part of the picture. In keeping with last quarter's announced target, we remain focused on reducing our business expenses by an additional $1.5 million to $2 million on an annual basis. Although we have seen recent forecasts foretelling modestly better housing numbers in the second half of 26, we must generate higher sales in our existing store network and in the environment in which we operate today. We are not simply waiting on things to get better. Obviously, higher average sales per store means greater leverage of our fixed costs. That is why the quarterly 9.5% written sales increase was particularly encouraging. That said, our retail gross margins fell by 120 basis points in the quarter, partially due to more aggressive pricing of our clearance inventory. Accordingly, we plan to raise retail gross margin in mid-July by 200 to 250 basis points. Our marketing organization has begun to consistently deliver greater efficiency on investment as our adjusted media mix drove more foot traffic to our stores for the first time since the COVID boom. We engaged a new agency last year, and their analytics platform is giving us better understanding of our customer. We have also begun to use artificial intelligence to further reach our customers on a more personalized basis. Augmenting the more precise digital strategy is our growing utilization of direct mail, which we successfully reincorporated into the mix 18 months ago. We are excited about these results and believe that more fertile ground lies ahead due to our marketing efforts. We continue to benefit from the successful product introductions of 2025, both in upholstery and case goods. Several of these offerings have become top five items in their respective categories and offer a nice complement to our legacy custom programs that remain the hallmark of our assortment. At the April market in High Point, we had a very positive response to our introduction of opening price point lines, both in living room and bedroom. These collections will bolster our good-better-best strategy and will be available in Bassett stores and at independent dealers in advance of the important Labor Day selling events. Our second initiative is to generate growth from opening new corporate and licensed retail locations. On May 8, we opened a new 14,000-square-foot store in Cincinnati, which marks a return for Bassett to this important market. We spent almost two years researching the location, negotiating terms with the landlord, and converting the space in a highly trafficked retail center to our specifications. Early indications of traffic and written sales are encouraging. In fact, on the wholesale side, we sold more products in eight weeks in Cincinnati than we did all of last year. We will open a location of similar size and economics in Orlando in early October. In addition, just after the quarter ended, an existing open market dealer in Nashville, Tennessee converted an existing location into a new 12,000-square-foot Bassett home furnishing store. Currently, we have 59 corporate stores and 28 licensed stores in operation. We will also continue to evaluate opportunities to convert current licensed locations to corporate stores as owners retire and exit the business. Third, we continue to invest in ecommerce for a fully integrated omnichannel experience. We are seeing a return on this investment as web traffic was up more than 3% in the quarter. Perhaps more importantly, written web sales were up by 40%, marking seven of the last eight quarters with increases exceeding 20%. Contributing to that performance was a 24% increase in average order value. Upholstery sales saw the greatest jump, aided by an updated fabric module that improves the customization process. This is part of an overall improvement to the user experience including a new navigation menu that makes it easier for customers to shop and find products. Finally, the national home delivery program that we launched last fall is contributing as we reach customers where we do not have stores across the contiguous 48 states. Fourth, we plan to expand our overall wholesale business through several efforts. Outside the Bassett store network, we rely on two dedicated distribution concepts, Bassett Design Centers (BDC) and Bassett Custom Studio (BCS), which represent well over half of our open market business. Combined orders for the quarter rose by 1.3% while shipments fell by 4.5%. Behind these numbers, the BDCs contracted by 6.3% while the smaller footprint of the studio grew by 7.2%. Currently, we have 94 accounts on the books classified as BDCs, generally consisting of 3,000 to 5,000 square feet of floor space dedicated to our products. The newer studio concept is a 1,000-square-foot 'little sister' presentation of our true custom upholstery program. We opened four custom studios in the quarter bringing the fleet total to 64. We are auditing the results of both our Bassett partners and the less productive locations to drive higher levels of standardization and performance across both of our dedicated distribution concepts. Integrated into our initiative to grow wholesale is our expanded focus on increasing Bassett's share of the professional interior design channel. We have the breadth of assortment, fabric lines, custom capabilities, and the ability to upholster in a customer's own material (COM) that arms us with the product currency to effectively serve this disparate but growing channel. Our new High Point showroom location is more relevant to the design trade and will showcase all of these attributes in a much more forceful way than was accomplished in our prior location. We will also unveil a new product collaboration with an accomplished interior designer that we will begin to market later this summer. A natural extension of our wholesale outreach is our six-month-old Bassett hospitality division. Although we must be patient with our progress in gaining acceptance from this somewhat insular community, we have written some orders with entities as varied as hospitals, boutique hotels, and senior living communities. We have also recently quoted some large hospitality projects. This is a new business for us, and we are committed to learning the ropes and becoming a factor in this segment of the industry. This plan is our roadmap for growth and improved performance. Our organization is energized by recent order trends, and we are focused on getting the job done. Mike, I will turn things over to you.
Thank you, Rob. In my commentary, the comparisons I will discuss will be the second quarter of fiscal 26 compared to the second quarter of fiscal 25, unless otherwise noted. Total consolidated revenue was $83.8 million, a decrease of $0.5 million or 0.7%. This consisted of a $1.9 million or 6.3% decrease in sales to external wholesale customers partially offset by a $1.3 million or 2.4% increase in retail sales from our company-owned stores. Gross margin at 56.5% represented a 90 basis point increase when compared to the prior year, primarily driven by higher margins in the wholesale business and partially offset by lower margins in the retail business. Selling, general, and administrative expenses, excluding new store preopening costs, were 53.3% of sales, 60 basis points higher than the prior year. These preopening costs are related to our May opening in Cincinnati and include expenses related to our upcoming retail location in Orlando. Excluding $700 thousand of proceeds from business interruption insurance recorded in the second quarter of 25 as a result of a cyber incident in fiscal 24, SG&A expenses as a percentage of sales actually decreased 20 basis points as compared to 2025. Operating income was $2.2 million or 2.7% of sales, as compared to income of $2.5 million or 3% of sales in the prior period. Diluted earnings per share were $0.24 versus $0.22. Now I will cover more details on the wholesale operations. Net sales were $53.1 million, a 2% decrease compared to last year. This decrease was due to 5.5% fewer shipments to the open market, partially offset by a 1% increase in Lane Venture shipments to wholesale customers and a 0.8% increase in shipments to our retail store network. As previously discussed, we introduced the Lane Venture Outdoor brand to the Bassett Home Furnishing stores during the first quarter of 26 and have included those shipments to the store network in the 0.8% increase for the retail stores. However, including those shipments in the total Lane Venture brand, shipments of that brand actually increased 18%. Gross margins increased 110 basis points from the prior year period, primarily due to improved efficiencies in our domestic upholstery and wood operations, coupled with improved pricing strategies in our import wood offerings. SG&A expenses as a percentage of sales increased 90 basis points compared with the prior year period, primarily due to increased outbound freight expenses from higher fuel costs. Now moving on to the retail store operations. Net sales of $55.5 million represented a $1.3 million increase over the prior year. Written sales, the value of sales orders taken but not delivered, increased 9.5%. Gross margin at 51.2% represented a decline of 120 basis points, primarily due to lower margins on inline goods because the full effect of the mid-January price increase was not realized for the entire quarter, coupled with lower margins on clearance goods. We continue to be more aggressive in cycling through returned goods and phasing out floor samples. Total SG&A expenses, excluding new store preopening cost, as a percentage of sales decreased 50 basis points from the prior year. Excluding $569 thousand of proceeds from business interruption insurance recorded in the second quarter of 25, SG&A expenses as a percentage of sales decreased 150 basis points as compared to 2025. This decrease was primarily due to lower health insurance and workers' compensation costs from better claim experience and improved efficiency in the warehouse and delivery operation. During the quarter, we incurred $473 thousand of new store preopening costs associated with the new stores in the Cincinnati, Ohio market which opened late in the second quarter, and the Orlando, Florida market expected to open by the end of fiscal 26. Prior to opening a new store, we incur such expenses as rent, training costs, and other payroll-related costs. These costs generally range from $200 thousand to $400 thousand 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. Now, I will address our liquidity position. Our liquidity remains solid with $53.9 million of cash and short-term investments. During the quarter, we generated $7.4 million of operating cash flow, which ultimately increased our cash and short-term investments by $2.9 million during the quarter after taking into consideration our normal cash outflows for investing and financing activities. As we previously mentioned, Bassett opened one new store during the quarter and plans to open another new store by the end of the year. We have also begun construction of the tenant improvements for a new showroom in High Point that will be unveiled at the fall furniture market. As a result, we expect total capital expenditures to be between $10 million and $12 million for 2026, considerably more than the $4.5 million spent last year. Opportunistically, we continue to pay our quarterly dividend and repurchase shares. We spent $1.7 million on dividends and $500 thousand on share buybacks in the quarter. We remain committed to delivering shareholder returns through dividends and when appropriate, share buybacks. Now we will open up the line for questions. Michelle, please provide instructions to do so.
Questions and answers
Thank you. As a reminder, to ask a question, please press *1. To withdraw your question, please press *1 again. One moment for our first question. Our first question is going to come from the line of Anthony Lebiedzinski with Sidoti. Your line is open. Please go ahead.
Thank you very much, and good morning, everyone. Thanks for taking the questions. It's really nice to hear the positive trends in May and June. I'm curious: are you seeing this momentum across all your product categories, or is the strength in sales concentrated in your core upholstery segment? Could you provide some more color on that?
Good morning, Anthony. I would say slightly more in upholstery, but pretty good across the board in terms of the increase, with slightly more momentum in the upholstery segment.
Gotcha. That is encouraging to hear. As far as this momentum, I know you talked about changing some of your media partners and that helping. But is the reason for this that you are simply being more effective with your new product introductions or better marketing? What would you say are the core reasons for this, and how do you think about the sustainability of these positive trends?
I think we've brought in some new people over the last couple of years, and that's an important part of the equation. We are understanding our customer better. The analytics that our new agency is providing makes us more efficient with our investment dollars in terms of reaching the consumer. It's really a combination of things. We ask ourselves that question quite a bit—what's doing it?—and it's a mix of product, marketing, and improved execution. We do feel that we have some momentum in this area. As you mentioned, the improvement in April and May continued into June. Integrating AI into this is a big opportunity for us that we have just now gotten started with. But I think our formula is improving.
That is great to hear. So, looking at gross margin, you pointed out higher wholesale margin and lower retail margin. Given the various puts and takes—relative to price increases, input costs, and fuel surcharges—how should we think about gross margins going forward? You mentioned clearance activity at retail as well. Should we model consolidated gross margin improvement, or should we separate wholesale and retail?
I think we are at the level we are going to be to a certain extent on the wholesale side. The retail side is where we have opportunity. As I referenced, we plan to increase our retail margins in July, and the pricing model we have in place supports that. We obviously want to be good stewards of our balance sheet, and we wanted to move some of the clearance out more aggressively, which we did in the quarter, and that affected our margin. If we operate closer to our original target margin, you should see consolidated gross margin bump up as a result of better retail margin.
Just as you think about modeling: the 200 to 250 basis point retail margin improvement that Rob referenced will really not show itself until the fourth quarter. Very little of that will actually hit in the third quarter because we have to make the furniture and then deliver.
Of course. Thanks for that. Lastly for me: Bassett is primarily a domestic manufacturer, but you do have imports. Regarding Section 301 tariff refunds, did you see any of that yet, or do you expect any of that in the coming months? Could you comment on that?
We have seen some so far and we think there will be more to come. We do not know the magnitude entirely yet, and we will need to work with our public accountants to figure out how this flows through, but yes, we expect to see some of that, though we have not received definitive qualification on the exact extent.
Understood. Thank you very much and best of luck.
Thank you, Anthony.
Thank you. One moment for our next question.
I think both are the best.
Our next question is going to come from the line of Douglas Lane with Water Tower Research. Your line is open. Please go ahead.
Yes. Thank you, and good morning, everybody. Staying on the P&L: you mentioned on an adjusted basis the SG&A was down 20 basis points from last year. Are we now at a point where consolidated SG&A should be lower year over year on a go-forward basis, or are there other puts and takes I'm missing?
One thing to remember, and Robert pointed this out, is the mix could shift between retail and open-market wholesale. The more that sales mix shifts toward retail, the higher the SG&A percentage will be because retail carries more SG&A on a relative basis. However, we should be seeing the $1.5 million to $2 million cost savings start to show up in the third and fourth quarters. With all that said, you can model SG&A accordingly based on mix and the expected savings.
That makes sense. So maybe on a segment basis we should show some leverage on both segments, and then the mix will determine how that washes out on a consolidated basis. Is that a good way to look at it?
I think that is reasonable.
That makes sense. And then shifting to demand: the written orders news is good and the Memorial Day results were really strong. Maybe explain how the 4% more traffic converted to a 14% increase in sales—what is driving that higher average ticket?
We still have a lumpy model and some of these jobs are big. We wrote a couple tickets over $100,000 this quarter. When you get those kinds of orders, it really pops up the average ticket. It seemed like we got some big design jobs coming through disproportionately at the end of the quarter. I would attribute the higher average ticket to that.
Also remember that traffic has been declining consistently over several years, so conversion rates matter. We are doing a better job converting the traffic we have, which also helps lift average ticket and sales.
Okay. Can you talk a little bit about ecommerce? The numbers have been big and consistent. What do you sell over ecommerce specifically—what kinds of products? And do you measure whether those customers also go into your showrooms and make purchases?
Historically, ecommerce was mostly a closeout vehicle and then we began to sell more inline, primarily wood products and non-custom wood products. With recent enhancements and the navigation update, we have begun to sell more upholstery and more custom upholstery on the website than we have historically. That targeted customer and improved user experience have been driving a disproportionate amount of the increase. Regarding overlap, our clientele platform allows us to track customer behavior, and, yes, many of our web customers also shop in the stores. The web is part of a broader ecosystem for us.
I know we talked about new stores in Orlando in October, so we'll have new store expenses throughout the remainder of the year. Have you made any comments about store openings after Orlando?
We have discussed a domestic move next year to Melville, New York. That will essentially be a trade-out of a store we plan to close in Garden City/Westbury and move slightly east and north to a location near the Walt Whitman Mall. It will be a smaller location with better store economics. That is what we've announced so far.
Will that have a new store cost called out, or will it just be sort of below the surface with one store going away and another store opening?
Unfortunately, the way this account works, even though in most of these cases we are not actually paying rent when we take possession of the empty shell, we have to charge rent when we get the keys to the empty shell. It is a noncash charge but it does hit earnings, and you don't get relief from that until you open the store. In our case, you then have to wait another 30 to 45 days to get meaningful revenue because we have to make the furniture and deliver it. It is kind of a front-end-loaded drag that we have to absorb when opening these big stores. We think the openings are significant enough to call out. Regarding Cincinnati: while it opened in May, we will not have sales ringing the register until June, and you have to build up the backlog. So you'll have a couple of months of drag associated with that opening as backlog builds.
Okay. Finally, on the new opening-price-point product you launched at the spring market, you mentioned it will be in stores by Labor Day. Is there an impact to margins from the opening price point or are you able to accommodate it at segment-level margins?
For the most part, we will be able to accommodate it on the retail side. We priced it slightly sharper on the wholesale side. This is not new to our industry—this product is designed to provide unit throughput to cover fixed expenses in our factories. Generally, when we are successful moving the units through, we like the end result.
Okay, that is helpful. Thank you.
Thank you.
I'm showing no further questions at this time. I would like to hand the conference back over to Robert Spilman, Chairman and CEO, for any further remarks.
Okay, Michelle. Thank you for giving us some of your time today, everyone, and for your interest in Bassett. We are excited about the changes we are making and confident in our ability to deliver for customers and shareholders. We look forward to reporting again in October on the eve of the debut of our new High Point showroom on October 15, when we swing the doors for the first time. Have a wonderful holiday weekend on this special Fourth of July.
This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone have a great day.