BSET - NASDAQ

Hello, and thank you for standing by, and welcome to Bassett Furniture Industries Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Mike Daniel, CFO of Bassett Furniture. Sir, you may begin.

Thanks, Rob. In my commentary, the comparisons I will discuss will be the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023, unless otherwise noted. Total revenues decreased $17.1 million or 17%. Consolidated gross margins were comparable to the prior year at 52.5% versus 52.6%. Adjusted for the additional and unusual inventory reserves that I'll discuss shortly, consolidated gross margins were 55.7% versus 53.6%. We had a consolidated operating loss of $8.5 million as compared to operating profit of $2.5 million for the second quarter of 2023. Included in the current quarter were several significant and unusual expenses due to the restructuring plan Rob previously enumerated, including $2.9 million of asset impairment charges associated with retail store tenant improvements and the lease right of use assets for underperforming stores and warehouse consolidation; $1.8 million of asset impairment charges and $500,000 of inventory valuation charges associated with the wind down of Noa Home Inc.; $700,000 of asset impairment charges and $700,000 million of inventory valuation charges associated with the consolidation of our domestic wood manufacturing operations; and finally, $1.5 million of additional inventory valuation charges in both our wholesale and retail operations in anticipation of the sell-off of more discontinued product over the course of the next couple of quarters. As a result of the restructuring plan and the charges taken, we expect to realize annual cost savings of between $5.5 million and $6.5 million starting with fiscal 2025. Now, I'll provide information regarding our wholesale operations. Net sales decreased $9.2 million, or 15%, from the prior-year period due primarily to a 19% decrease in shipments to the open market, a 16% decrease in shipments to our retail store network, partially offset by a 2% increase in Lane Venture shipments. Gross margins increased 110 basis points over the prior year, primarily due to the expected improvement in the Club Level leather business. As this product line is internationally sourced with extended lead times, we received significant amounts of inventory during the second and third quarters of 2022 just as product demand was weakening due to the market downturn in home furnishings. Also, the ocean freight costs associated with the majority of the product received were at significantly higher cost than we are currently being realized on current product receipts. In addition, we realized a favorable adjustment in our warranty and returns reserve due to improved diligence and efficiency in handling claims. These increases were partially offset by $1.7 million of additional inventory valuation charges previously discussed and decreases in the gross margins for our domestic upholstery and wood operations due to deleverage of fixed costs and labor inefficiencies due to the lower sales volumes. SG&A as a percentage of sales increased 170 basis points, primarily due to reduced leverage of fixed costs from decreased sales. Now, moving on to our retail store operations, net sales decreased $10.3 million, or 17%, from the prior-year period. Written sales, the value of sales orders taken but not delivered, declined 2.5% from the second quarter of 2023. Gross margin was flat with the prior period because higher margins on in-line goods were offset by lower margins on clearance goods. In addition, we had $500,000 of increased inventory valuation charges previously discussed due to the strategy to be more aggressive in selling clearance goods to better control inventory levels. SG&A expenses as a percentage of sales increased 570 basis points, again, primarily due to decreased leverage of fixed cost from lower sales volumes. As Rob discussed, we have announced that we will be winding down the operations of Noa Home Inc. As part of that, we recorded a $1.8 million charge to write off the previously recorded intangible asset for the trade name and $500,000 of inventory valuation reserves to prepare for an orderly sell-through of the inventory. Finally, let's turn to balance sheet and capital allocation. We ended the quarter with $60.5 million in cash and short-term investments. We generated $5.8 million of operating cash, funding all of our capital expenditures, dividends and share repurchases for the quarter. Given the current state of business, we have cut back our prior plans for capital expenditures. Now we plan to spend an additional $4 million to $5 million over the back half of the year, with the majority of that spending on limited retail store remodels. We will also continue to buy back shares opportunistically as the share price warrants. Our financial condition remains solid and provides us with the platform to weather the current economic storm while executing our plans for generating sales growth. Now, we will open up the line for questions. Twanda, please provide instructions to do so.

Thank you. [Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

Good morning, gentlemen, and thank you for taking the questions. Can you hear me, guys?

Yeah, we got you.

No. And Anthony, I think that the goal here is for 2025 to have all the savings baked in. And certainly, we'll have some -- like on the consolidation of the wood furniture plants, we'll still have some cost involved and some inefficiencies in getting that together during the third quarter, but theoretically and hopefully, the fourth quarter we'll be clean with that. But again, 2025, we do expect to realize $5.5 million to $6.5 million in 2025.

Hey, Anthony, let me jump in real quick on what Rob was talking about on the reserves because I know you're asking about modeling questions. I would say for the back half of the year, we might have slightly lower margins, because of the mix of what we're trying to sell-through. The things we took the reserves on, remember that only brings it up to a zero gross margin, if you will. So, there could be the back half of the year a little bit less or lower margins. And then, on a go-forward basis, in 2025, again, we should be back to the margins that Rob is referring to.

Got you. Well, thank you, gentlemen, and best of luck going forward.

Thank you. Please stand by for our next question. Our next question comes from the line of Budd Bugatch with Water Tower Research. Your line is open.

Yeah. And to tag along here, since you're comparing that 17% down compared to Q2 of last year, we were still selling through backlog. And you can see that, if you go back to Q1 of 2023, our retail backlog was $42 million. At Q2 of '23, the next quarter, it was down to $33 million, and it's been pretty consistent since then. So, I think that's a way of saying it feels like we've hit the bottom. As we said, we were down 2.5% written for the quarter, but down 17% because we were selling really through the backlog.

Yeah. That's the way the math works from the stuff you disclosed in the Q. So, that's what I think. I mean, it looks like you're bouncing along the bottom here at this point in time because you shrunk that delta now for the last couple of quarters. My next question is, the math on the income statement in terms of the tax, the tax shield is 11%. And I know you report GAAP and we respect that, and you don't adjust, but we've got two significant items in this particular period that I think may have different tax treatments. The inventory valuation -- additional inventory valuation charge and the asset write downs. Can you kind of parse out what the tax consequences of those items are?

So, two things. Let me first say the two charges associated with Noa, the $1.8 million and the $500,000, I take no tax benefit on that. So that's the first thing to consider. Then, in terms of the other, there's really no difference in the tax treatment on the other restructuring charges and the inventory charges. It's just baked into the year-end rate. Now given where we are with our permanent differences and being in a loss, things you'd normal, which you would expect 25%, 26% blended rate, it just doesn't all work out in that fashion. So, I don't know if that answers your question, but...

Oh, it certainly brings the math into better alignment. And the 25%, 26% is assuming a 21% federal and then the balance between state and other kinds of discrete items?

Correct.

And so, what would be -- what with the losses, is it still in that low-20%s or mid-20%s kind of range? Is that about where it works out?

You have to back out the losses associated with Noa, which we don't give you...

$2.3 million, yeah.

We don't give you the actual loss generated by Noa. It's buried in the corporate and other...

I got you.

...section. So, you really can't do the math because we don't give you the numbers of the actual loss that's generated by Noa.

But if we take the $2.3 million and take that out of the tax equation, it gets kind of the percentages to come somewhat more into alignment...

Right. But then you'd also have to back out the losses from Noa outside of the charges taken.

Got you. Okay. Well, we're going to -- we'll take a stab at it and we'll see what commentary we can get on that point in time. On the benefit that you see next year in fiscal '25 of 5.5% to 6.5%, does that coming ratably over the years? Is that coming quarter-by-quarter at the same level? Or do you see it build during the year?

Well, the idea is that it would be starting the 1st of December, which is our first day of the 2025 calendar -- fiscal year. So, really starting with the first quarter.

Okay. As I said, just a few more detail. There's a difference between the $2.7 million valuation charge to inventory that you showed, I think that affected the income statement in the gross margin and the $3.8 million showing on the cash flow is additional inventory valuation. What accounts for that difference?

Well, so we take a charge every month, a regular charge to put stuff into our reserve. And that delta that you're referring to, $2.7 million versus $3.8 million, that's kind of $500,000 a quarter run rate. And you can kind of compare that to last year, we say $2.5 million or $2.475 million. Within that $2.475 million was another $1 million extra charge. We didn't talk about it at least -- we did talk about it, but we didn't give you the number last year and we didn't provide an adjusted gross margin last year, but in the press release, you saw that back table that shows how we reconcile the $1 million charge. So, normally, it's $500,000 roughly a quarter, and that's what -- for both years, that's what the normal charge was.

I think we broke it out in 10-K last year at the end of the year, but yeah, that's -- you're right. We don't normally break that out.

Thank you.