Bassett Furniture Indus (NASDAQ:BSET) reported second-quarter financial results on Thursday. The transcript from the company's second-quarter earnings call has been provided below.
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Summary
Bassett Furniture Industries saw improved operating profit on adjusted basis despite a slight decrease in consolidated revenue, with retail written sales up 9.5% and wholesale orders up 5.2% in Q2 2026.
Consolidated gross margins grew by 90 basis points, driven by better wholesale margins, though retail margins fell due to aggressive clearance strategies. Plans to increase retail gross margins by 200-250 basis points in mid-July were announced.
Notable strategic initiatives include expanding retail locations with new store openings in Cincinnati and Orlando, enhancing e-commerce with a 40% increase in written web sales, and integrating AI for personalized marketing.
Management remains focused on reducing SG&A expenses, targeting $1.5 to $2 million annual savings, and increasing sales per store to leverage fixed costs.
The company has a strong liquidity position with $53.9 million in cash and short-term investments, and plans for $10 to $12 million in capital expenditures for 2026.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the Bassett Furniture Industries Q2 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Daniels, CFO. Sir, please go ahead.
Mike Daniel, Senior Vice President And Chief Financial Officer
Thank you, Michelle, for the introduction. Welcome to Bassett Furniture Industries earnings call for the second quarter of fiscal 2026, which ended May 30. Joining me today is our Chairman and CEO, Rob Spillman. We issued our news release and Form 10-Q yesterday after the market closed and it's available on our website. After today's remarks, Rob and I will open up 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'll turn things over to Rob. Rob.
Rob Spillman, Chairman and CEO
All right, thank you, Mike, and good morning, everyone. I'll start with some insights on the second quarter and Mike will get into more of the financial details. I'll 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 move 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 with 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 were 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 SGA has remained stubbornly high. Part of this is the higher percentage of overall sales that corporate retail represents, with a structurally higher amount of SGA compared to the traditional wholesale model. And 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 margins and our SGA percentage is a major part of the picture.
In keeping with last quarter's announced target, we remain focused on reducing expenses by an additional 1.5 to $2 million on an annual basis. Although we have seen recent forecasts foretelling modestly better housing numbers in the second half of 2026, we must generate higher sales in our existing store network. 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 margins 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 fits. 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 very positive response to our introduction of open and 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 for 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 specific 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 license location to corporate stores as owners retire and exit the business. Third, we continue to invest in E-Commerce for a fully integrated Omni Channel 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 don't have stores in all 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 the BDC and Bassett Custom Studio. The BDCs, which represent well over half of our open market business. The combined orders for the quarter rose by 1.3%. 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 counts on the books classified as BDCs, generally consisting of 3 to 5,000 square feet of floor space dedicated to our products. The newer studio concept is a 1000 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 best 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 line, custom capabilities and the ability to upholster and customers own material known as 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 6-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'll turn things over to you.
Mike Daniel, Senior Vice President And Chief Financial Officer
Thank you, Rob. In my commentary, the comparisons I'll discuss will be the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025. Unless otherwise noted, total consolidated revenue was $83.8 million, a decrease of $500,000 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 $700,000 of proceeds from business interruption insurance recorded in the second quarter of 2025 as a result of a cyber incident, in fiscal 2024, 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'll 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% less 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 in the Bassett Home furnishing stores during the first quarter of 2026 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 phased-out floor samples. Total SG&A expenses, excluding new store preopening costs as a percentage of sales, decreased 50 basis points from the prior year, excluding $569,000 of proceeds from business interruption insurance recorded in the second quarter of 2025. 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 $473,000 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 2026. Prior to opening a new store, we incur such expenses as rent, training costs, and other payroll-related costs. These costs generally range between $200,000 to $400,000 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 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've 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 and $12 million for 2026, considerably more than the $4.5 million spent last year. We continue to pay our quarterly dividend and repurchase shares opportunistically. We spent $1.7 million on dividends and $500,000 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. Michelle, please provide instructions to do so.
OPERATOR
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question. And our first question is going to come from the line of Anthony Lebudzinski with Sidoti. Your line is open. Please go ahead.
Anthony Lebudzinski, Sidoti
Thank you very much and good morning everyone and thanks for taking the questions. Certainly nice to hear the positive trends in May and June. So just actually just curious as you're seeing this momentum here, just wondering if you're seeing this across all your product categories or is the strength in sales concentrated in your core upholstery segment? Just wondering if you could provide some more color on that.
Rob Spillman, Chairman and CEO
Good morning, Anthony, this is Rob. I would say slightly more in upholstery but, you know, pretty good across the board in terms of the increase. But slightly more momentum in the upholstery segment.
Anthony Lebudzinski, Sidoti
Gotcha. Okay, that's encouraging to hear. Okay. And as far as like this momentum, I know you talked about changing some of your media partners. I think that's helped. But as far as like the reason for this, I mean, is it the fact that you are just being more effective with your new product introductions or better marketing? I mean, what would you say is like the core reasons for this and how do you think about the sustainability of these positive trends?
Rob Spillman, Chairman and CEO
Well, I think we've got some new folks in here that have joined us over the last couple years. That's an important part of the equation. I think we are understanding our customer better. I think the analytics that a new agency is providing with us is making us more efficient in our investment dollars in terms of reaching the consumer. It's really a combination of things and we asked that same question around the office quite a bit. What is doing it?
But it's a combination of things and we do feel that we've got some momentum in this area. And we pointed out, as you just mentioned, the quarter and the April, May and we've seen the same kind of thing in June. So I think we just stay on this track. Integrating AI into this is a big opportunity for us that we've just now gotten started with. But I think our formula is just improving.
Anthony Lebudzinski, Sidoti
That's great to hear. So as we look at the gross margin, you pointed out to higher wholesale margin, lower retail margin. So given the various puts and takes relative to price increases and input costs and Rob, you mentioned fuel surcharges, how do we think about the gross margins going forward? I know you also mentioned the clearance activity at retail. So as we look at either consolidated gross margins or if you want to separate those, how do we think about gross margins here on a go forward basis?
Rob Spillman, Chairman and CEO
Well, I think we are at the level we're going to be to a certain extent on the wholesale side. I think the retail side is where we have opportunity referenced that we were going to increase our margins in July and we think the pricing model that we have can withstand that. And you know, we obviously want to be good stewards of our balance sheet and we want to move some of this clearance out more aggressively and we did in the quarter and that affected.
So if we, if our original input margin is slightly higher than we've been operating under recently, I think you'll see that consolidated gross margin bump up as a result of better retail margin.
Mike Daniel, Senior Vice President And Chief Financial Officer
Anthony, just as you're thinking about modeling, just remember that as we're talking about the pricing or the 200 to 250 basis points that really won't show itself until the fourth quarter. So very little of that will actually hit in the third quarter.
Rob Spillman, Chairman and CEO
As you know, that's because we've got to make the furniture and then deliver.
Anthony Lebudzinski, Sidoti
Of course. Yeah, thanks for that. Okay, gotcha. And then lastly for me before I pass it on to others, obviously, Bassett is primarily a domestic manufacturer, but you do have some imports. Just wondering, as far as the IPA tariff refunds, did you see any of that or do you expect any of that here in the coming months? Here they're just wondering if you could comment on that.
Rob Spillman, Chairman and CEO
We have seen some so far and we think there'll be more to come. We don't know the magnitude of it entirely yet. And then of course, we have to work with our public accountants to figure out how this flows through. But anyway, yes, we do expect to see some of that and we haven't received definitive qualification on exactly the extent of it.
Anthony Lebudzinski, Sidoti
Understood. Okay, well, thank you very much and best of luck.
Rob Spillman, Chairman and CEO
Thank you.
OPERATOR
Thank you. And one moment for our next question. And our next question is going to come from the line of Doug Lane with Water Tower Research. Your line is open. Please go ahead.
Doug Lane, Water Tower Research
Yes, thank you. And good morning everybody. Staying on the P and L, you mentioned on an adjusted basis, the SG&A 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 is there other puts and takes I'm missing here?
Mike Daniel, Senior Vice President And Chief Financial Officer
Well, one thing to remember, and Rob pointed this out, is the mix could shift with how much is retail versus how much is wholesale, open market, wholesale and that mix, the more that's retail, the higher the SG&A number. You know, just the dollars, however we should be seeing, we pointed that out, that 1.5 million to 2.5 million, the 2 million cost savings that will really start showing its head in the third quarter and the fourth quarter. So with all that said, you can figure out where that's going to put the SG&A.
Doug Lane, Water Tower Research
Okay, that makes sense. So maybe on a segment basis I 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?
Mike Daniel, Senior Vice President And Chief Financial Officer
I think that's reasonable.
Doug Lane, Water Tower Research
Okay, that makes sense. And then shifting to demand with the written orders news is good. The Memorial Day news was really good. Maybe explain how the 4% more traffic converted to 14% increase in sales. What's driving that higher average ticket?
Rob Spillman, Chairman and CEO
Well, you know, Doug, we still have a lumpy model and some of these jobs that we do are big. I mean, we wrote a couple tickets over $100,000 this quarter. And so when you get those kind of things, it really pops up the average ticket. And it seemed like we got some big design jobs coming through disproportionately, maybe on a historical basis at the end of the quarter. So that's what I would attribute that to.
Doug Lane, Water Tower Research
And just remember, I mean traffic has been going down pretty consistently over the last, I don't know, however many years. But there's also the conversion rate that you gotta factor in there. We're doing a better job of what we do have converting.
Anthony Lebudzinski, Sidoti
Okay, can you talk a little bit about your E-Commerce? They have been big numbers and they've been consistent. So help us understand, what do you sell over E-Commerce specifically, what kind of products, and do you measure? Is there a way for you to measure how much of those customers also go into your showrooms and make purchases?
Rob Spillman, Chairman and CEO
Well, we, you know, historically, well, way back in the beginning of E-Commerce we were mostly a closeout vehicle, frankly. And then we began to sell more in line and that was primarily wood product and non-custom wood product. But with some of these enhancements and the navigation that I referred to, we have begun to sell more upholstery and more custom upholstery on the website than we have historically. So that I would say that that's really what's been driving from a product point of view, a disproportionate amount of the increase.
And the second part of the question I'm trying to remember, what was that?
Anthony Lebudzinski, Sidoti
Oh, it was just on is there a way for you to measure if people that buy online also go into your showrooms and buy there?
Rob Spillman, Chairman and CEO
Well, with our clientele platform we basically can track all of that. And yes, we can see that. I mean, I can't tell your percentage, Doug, off the top of my head here. But generally speaking, our web customer is a Bassett customer that also shops in the store. So it's really just part of a broader ecosystem is the way to look at it.
Anthony Lebudzinski, Sidoti
That makes sense. Now I know we've talked about new stores in Orlando in October, so we'll have new store expenses, I guess throughout the remainder of the year. Have you made any comments about store openings after Orlando?
Rob Spillman, Chairman and CEO
We have talked about domestic next year in Melville, New York and that is a will actually be a trade out of a store that we're going to close in Garden City, Westbury. It's got several names for the same place, but anyway we call it Westbury, but others call it Garden City, but anyway we're going to move east on Long Island and slightly north to Belleville near the Walt Whitman Mall there. A smaller location, better store economics. And that's what we've announced so far.
Doug Lane, Water Tower Research
And so that's a little bit different. Will that have new store costs called out or will it just be sort of below the surface with one store going away, another store open?
Mike Daniel, Senior Vice President And Chief Financial Officer
Unfortunately, the way this accounting works, even though in most of these cases we're not actually paying rent, we have to charge the rent when we get the keys to the empty shell. So that's kind of irritating, frankly, but that's what we have to do. So it's a non-cash charge, but it does hit your earnings and you don't really get relief from that obviously until you open the store. And then in our case, you've got to wait another 30, 45 days to get any revenue because we've got to make the furniture and deliver it.
So it's kind of a front-end loaded bad guy that we have to absorb into going to these new stores. And you know, we think they're significant enough that we call it out.
Rob Spillman, Chairman and CEO
And Doug, he likes to blame me for that.
Doug Lane, Water Tower Research
Yeah, yeah, that's my problem. I don't really get the logic. But anyway, Doug, to answer your question, there's a couple of things I want to point out. So yes, there will be new store pre-opening costs associated with Melville. The other piece to that where Rob was talking about, you don't ring the register for one to two months after you start the store. I think we may have some backlog coming over from the Garden City store. So we don't have that kind of those losses that happen in the first couple of months of the opening.
Mike Daniel, Senior Vice President And Chief Financial Officer
Now, did want to point out for Cincinnati, while it opened in May, we won't have any sales to ring the register until June and you kind of have to build up the backlog. So you're going to have a couple of months of losses associated with after it opens because you're, you're building up the backlog, if you will.
Doug Lane, Water Tower Research
Oh, I got it. So we're still going to have Cincinnati here in the third quarter.
Anthony Lebudzinski, Sidoti
Okay. And just finally on the new opening price point, products you launched the spring market, looks like you mentioned they'll be in the stores Labor Day. Is there an impact to margins from the opening price point or are you able to accommodate it at segment level margins?
Mike Daniel, Senior Vice President And Chief Financial Officer
For the most part we'll be able to accommodate. We'll definitely be able to accommodate it on the retail side. We did price it slightly sharper on the wholesale side. But this is not anything new for us or from the industry really. It's something that you need some unit throughput to cover your fixed expenses in these big factories. And that's what this is designed to do. And generally speaking, when we do that, and if we're successful in moving the units through, we like the answer at the end of the day.
Anthony Lebudzinski, Sidoti
Thank you.
OPERATOR
Thank you. And I'm showing no further questions at this time. And I would like to hand the conference back over to Rob Spilman, chairman and CEO, for any further remarks.
Rob Spillman, Chairman and CEO
Okay. Michelle. Thank you for giving us some of your time today, everyone, and for your interest in Bassett. We're excited about the changes we're 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. So have a wonderful holiday weekend on this special Fourth of July.
OPERATOR
This concludes today's conference call. Thank you for participating, and you may now disconnect, everyone. Have a great day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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