Good day and thank you for standing by. Welcome to Bassett Furniture Industries Q3 2024 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. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Daniel, CFO. Please go ahead.

Thank you, Gigi, for the introduction. Welcome to Bassett Furniture's earnings call for the third quarter ending August 31st, 2024. Joining me today is our Chairman and CEO, Rob Spilman. We issued our news release yesterday after the market closed, and it's available on our website. After today's remarks about our quarter, we will open the call up for a Q&A session. We will post the transcript of the call on our investor site within 48 hours of this call. In addition, we filed the 10-Q this morning, and that's available on our website under SEC filings on the Investor Relations tab. During today's call, certain statements we make may be considered forward-looking and inherently involve risks and uncertainties that 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. For more information, including important cautionary notes, please see the company's annual report on Form 10-K for the fiscal year ended November 25th, 2023. Other filings with the SEC describing risks related to our business are available on our corporate website. Now I'll turn the call over to Rob for comments about our third quarter. Rob?

Thank you, Mike. Good morning, everyone, and thank you for joining us for today's call. The integration of our industry with the weak US housing market continued to pressure sales during our third quarter. Although mortgage rates have started to ease since the Fed's 50 basis point rate cut three weeks ago, overall housing affordability and inventory availability remained impediments in the short-term. Our industry is ready for a transformational shift in the next several quarters and Bassett plans to benefit as it happens. I also want to mention two events that have occurred subsequent to the third quarter that will potentially have a bearing on our fourth quarter, Hurricane Helene and the East Coast dock strike. Many customers and employees were deeply affected by the devastating effects of Hurricane Helene. Our thoughts are with them. Hurricane Helene impacted our distribution center in Catawba County, North Carolina and it was shut down due to damage and power outages for two days during the first week of October. We've recovered as quickly as possible to get shipments back on track. The larger longer-term impact on our logistics and distribution systems are related to the damage to the I-40 infrastructure, which is our main route to the west. And while the East Coast dock strike was just three days, the impact on our business has pushed shipments back one to two weeks. Now let's move on to the discussion of our third quarter results. Like last quarter, revenue in both our wholesale and retail segments was down with greater pressure on our retail business due to the higher level of associated fixed costs. Heading into the quarter, our Memorial Day event and our subsequent 4th of July event, both produced increases compared to last year. But the in-between weeks were especially difficult…

Thanks, Rob. In my commentary, the comparisons I will discuss will be the third quarter of fiscal 2024 compared to the third quarter of fiscal 2023, unless otherwise noted. But before I get into the results, I want to provide more context on our cyber incident that occurred in July. As we reported in our SEC filings, our IT team detected unauthorized occurrences on a portion of our systems. The team immediately took steps to contain the issue by shutting down those systems. We activated our incident response plan and quickly began working with external cybersecurity consultants to assess and monitor the activity by an unknown threat actor. The system shutdown interrupted Bassett's manufacturing plants for one week, which resulted in delays on some wholesale and retail orders. By July 17th, we essentially had all systems up and running. We were able to recover all data from backups and began fully operating as normal within two weeks. We do not believe that any consumer personal information was compromised. This issue resulted in an estimated loss of between $1 million to $2 million for the third quarter and we're in the process of filing a claim with our insurance provider and expect to receive the proceeds in the fourth quarter. So for the third quarter, consolidated revenues declined $11.6 million or 13% primarily due to a 16% decrease in wholesale sales and a 10% decrease in retail sales through our company-owned stores. Consolidated gross margins increased 140 basis points to 53.0% due to improved margins in both the retail and wholesale segments. This was partially offset by $609,000 of unproductive labor cost incurred during the temporary shutdown resulting from the cybersecurity incident. Excluding these unproductive labor costs, our consolidated gross margin would have been 53.8% as compared to 52.7% in the…

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

Good morning, gentlemen. Thanks for taking the questions. So first, just a quick comment for me. I mean, certainly, despite the difficult environment, nice to see the company maintaining a strong balance sheet. So I guess as far as my first question, so obviously Q3 was, we had the normal shutdown during 4th of July. You had the cyber-attack issue. So you were really only operational for 10 or 11 out of the 13 weeks. So it looks like the weekly revenue on an adjusted basis improved actually from the second fiscal quarter. Your customer deposits also were up sequentially as well. So how should we think about in that context as far as the results and kind of your near-term outlook. I know you mentioned the hurricane and the port strike issue. But just wondering also if you could just comment as to what you've seen so far as far as the Labor Day. I know it's a multiple part question, but hopefully, you can address all that.

Hey, Anthony, this is Rob. Good morning.

Good morning.

There's a lot to unpack there. I would say July was really tough because we only have operated a week and a half or so in the month. Our 4th of July was good, as I said in my remarks, and so is Memorial Day, in between was very soft. We have historically, things start getting better at the back half of August, leading into Labor Day. This was no exception this year. And September is one of the stronger months for us in the stores and in general for the year. And it has -- it's definitely better, slightly better during that time period. But I'd still say if you just overlay this with past years, we're still in a tough environment. That's the way I would describe it.

Understood. Okay. Your average ticket was up. What's driving that? And how sustainable do you think that is?

Our average ticket is about where it's been. It will be down one quarter to be up. We're right around that $4,000 mark. And so that's -- it's kind of lumpy depending on the size of the design projects that we have. So I would not say that, of course, everybody would like to have a bigger average ticket all the time. But we're as interested as we are in that, we're also interested in store traffic and transactions and all of the above. So I think our average ticket has basically been in this high $3,000 right at $4,000 range for the last couple of years. And it's -- I expect it to stay in that range.

Okay. And then in terms of the gross margin improvement, so even with the headwind of paying your workers that $600,000 you had a nice improvement from last year. So I'm just curious when business recovers and given the improvement that you're making to the business with the restructuring efforts, what kind of gross margin could we see in a better environment. I'm not -- we'd love to hear your thoughts on that.

I think we could improve -- further improve the gross margin. There are challenges, of course, with absorption. We put two factories together this quarter, which is a tough thing to do. We had to really embark upon a new model along the path. That hurt our margins. We did not, in addition, we did this right in July and early August. So not only do we have the cyber event, we had that going on. And so the first couple of weeks of that consolidation of those plants was lumpy as it often is, unfortunately, over the years, we've had to do some of this. And but it got better as the month of August ensued. So it's hard for me to quantify exactly where this could be, but I do think we still can move some -- see some progress in gross margins over -- on the wholesale side in the future and frankly we expect to. Now the flip side of that is we want to offer value, and this is a very competitive market at the moment. So as we price our goods and settlement retail, we definitely want to -- at least on the opening price point side, for sure, have some recognizable value. But overall I feel pretty good about the trajectory of our gross margin and the ability to further improve it.

That sounds good. And my last question, as far as the Bassett Design Studio concept, how many stores is that in right now? And what is your expectation for the end of the fiscal year?

Well, we now have 40 of these out in the field. They're not all set up yet because we've -- we got seven of them in the month of September. So we just made the deal. But -- so the -- we haven't shipped all the goods and the fixtures and all that yet. We had said earlier in the year, we want to have 50 of these signed and we've got the upcoming market at High Point and we have reconfigured our showroom to make this a major focal point of the effort down there and look forward to seeing you and showing it to you. So I think we could still get that 50 we talked about earlier. The bigger question is the long-term potential of this. Now we do not sell entry-level goods. We sell better goods and there are certain markets where you just don't have the demographics to support this, but we are very encouraged and slightly surprised a little bit, frankly, that with the reception that we're getting to this thing with some of the markets that we didn't really necessarily count on. So over time, we think between this and then our next iteration of our dedicated distribution footprint, of course, is our Bassett design center, which is the full blooded with the case goods and everything around it, what we used to call a gallery back in the day and then stores. So this is a great way to get into the Bassett program and extensively for the dealers and it's a proven piece of our line that we do every day. So very excited about the potential and the enthusiasm around it so far.

Well, that sounds great. Yes, I look forward to seeing that at High Point and I'll pass it on to others. Thank you very much, gentlemen.

Thank you, Anthony.

Thank you. Our next question comes from the line of Brian Gordon from Water Tower Research.

Good morning, Rob. Good morning, Mike. Thank you for taking my questions today. I want to dig in a little bit on an earlier question. I think if I got this right in your remarks that you said that orders at retail were down something like 4.8%. And given the cyber event, that would come to something like 11% of production days by itself. I know that you had mentioned something like 15% of production days were missed. But part of that, I assume was the planned July 4th shutdowns.

Right.

If we back out that cyber, would it be fair to say that shipments might have been down something closer to 5% from wholesale?

Thinking about that question. Keep in mind that we do catch up, we're still taking orders on the wholesale side during that shutdown time and --

Talking about the holiday.

Yes, yes. And we were taking orders during the cyber event.

Got an interim.

We just got an interim. So and I'm not sure I follow your math on 5%. Give me that a little bit more context on that.

Yes. I mean so I was just trying to do some back of the envelope. So I mean we have 13 weeks and five days of production a week I was assuming. So if you're down to something like 58 days versus 65 that gets to 11%?

Yes. And we were down, but keep in mind, we were also down that same amount last year because we're closed for that week of July 4th.

Right. But I'm talking about the seven days specifically for the cyber.

Okay. So, well, it certainly did not help our shipments. But we were essentially able to catch up on the majority of the shipments that we missed the -- I think the real issue when you kind of peel back the onion is on the retail side, where although we were open and theoretically taking orders, we had several customers that would come in and not write an order because we were doing it on paper. So I think when you really think about what you -- the sales you lost, it was really during that time period on the retail side where people were coming in, but essentially turning around and leaving because we didn't have our systems up and running. So that's really the main thing that affected our sales and our shipments for the quarter.

I'll add one other comment to that, Brian. And that is as we -- I mean we've shut down a week for the 4th of July for my lifetime around here and in North Carolina is kind of a traditional -- most furniture companies I know did the same thing. And but it takes a little bit of time to get the wheels turning again when you come back from that week off. And also in our case, where we have really captive distribution system, we don't have a lot of different freight lines coming in here and doing this. But so in other words, the loads are depleted. You have to build the loads up again. And so when you have that factor and then immediately after a day, you shut down again for over a week like we just, Mike said, then it just exacerbated all that. So the efficiency in the pipeline and getting these loads built back and filling the trucks and getting them out there definitely affected our July and into August. We did catch up some of that is. It was just an inefficient really and in the factories too. All this stuff did affect us and back to Anthony's question on the gross margins, that's definitely played there. But I would say that it's slightly affected us, but we caught up a good part of it is what I would say.

No, thank you for that. That definitely helps kind of understand the impacts of that. I mean, the reason why I'm asking is, it does seem like when we take a look at the retail orders and if we were to back out the inefficiencies and then the cyber event that we may be close to a bottom that we might be seeing something like a bottom being put in from a demand perspective? Would you agree with something like that?

Well, that, of course, is a great observation and question and the one we ask ourselves all the time. And in all candor, we were asking ourselves this time last year. In the post-COVID melt-down I guess of retail business around the whole industry. And we had nine consecutive months last year of pretty much the same business and we came into this year saying, hey, but I think this is a trend now . We've kind of we're bumping along the bottom, and this thing is going to come back at some point. Well, it went down again this year. So that really surprised the heck out of us, to be honest with you. But it does feel in the last -- if I take the third quarter we just reported kind of the back part of that, the last several weeks of that and then into September that we're -- I think we've reached the bottom of this thing. Now, the question is, how long do you stay on the bottom? And because we're not seeing, in our case, even though we'll have a very good week, but then we'll get a couple of tough weeks. So we're not seeing the momentum that we want to see. And of course, we're doing everything in our power to try to make that happen. So but if you can't come up until you reach the bottom. So, from that perspective, I do feel like we're there.

And let me add, Brian, if you look at the retail written last quarter, it was down 2.5%. Retail written this quarter down 4.8% and as you point out on the cyber -- the effects of the cyber, I think you could come to that assumption that we are sort of bumping along on the bottom.

Yes, that's all very encouraging. I mean so kind of shifting a little bit to thinking about growth for next year, you kind of put that number something like 50 designed studios by the end of the year. Do you have any kind of thoughts on how big that could be as we look to fiscal year '25. And then kind of the follow-on question to that would be, I know there's been no store openings planned for the end of the year, but how many new stores might potentially be in the works? I know you said on the last call that you were actually traveling in July to look at some sites. How many of those might be in the works?

Well, honestly, I would say at the moment, we've got one market that we're looking at. We're still working on the economics of that. And so -- but that's -- at the moment all we have planned is one new market, one new store. And we should recent kind of conclusion on that decision in the next few weeks. And so, honestly, what we're really doing is looking inward on our current fleet to refurb that. I also alluded to the increase in e-commerce that we're seeing, again, on small basis or base, but nevertheless, encouraging, and some good things are happening there. In terms of the custom studio, it's so new. It's six months in and it's really difficult to say. But I think we're going to see steady growth in that program. Now, will we sign another 50 next year? Honestly, I don't know. But I do think that, that will provide growth for us. And again the ones that have opened already are doing well. We report on that every Monday in our market review and that's encouraging to see. So those are the kind of things we're counting on for next year.

Great. Thank you very much. And really excited to see the new product at High Point when we come visit.

Brian, listen, thank you, and I can't have the call in without a recognition of Budd. We miss him. And he was and you were encouraging us to do conference calls, which we hadn't done in the past. This is our second one. And we miss him, and but you're doing a great job. I know he'd be proud of what's going on with your organization and looking ahead.

Thank you.

Thank you. I would now like to turn the conference back over to Rob Spilman for closing remarks.

Okay. Thank you, Gigi. And I just want to thank everyone for your interest today in Bassett and for the questions we did receive. As we said, our restructuring plan is well underway and is designed to align our cost structure with our current revenue and it's something we're focusing on every day around here. We look forward to launching the new collections I talked about growing the Bassett Custom Studio, further connecting with the interior design community and advancing our omnichannel presence as we head into the upcoming High Point Market and on into 2025. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.