Good day, and welcome to the Bassett Furniture Industries, Incorporated Third Quarter 2025 Earnings Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Mike Daniel, CFO. Please go ahead.

Thank you, Michelle, for the introduction. Welcome to Bassett Furniture Industries, Incorporated's earnings call for the 2025 ended 08/30/2025. Joining me today is our chairman and CEO, Rob Spilman. We issued our news release and filed our Form 10-Q yesterday after the market closed, and it's available on our website. After today's remarks, we will open up the call for a Q&A session. We will also post a transcript of the call on Bassett's investor website following the call. During today's call, certain statements we make may be considered forward-looking 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, 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 11/30/2024. Other filings with the SEC describing risks related to our business are available on our corporate website under the investor tab. Now I'll turn things over to Rob. Rob?

Thank you, Mike. Morning, everyone, and thank you for joining us today. I'm pleased for the third quarter despite the continuing challenges in the industry, Bassett Furniture Industries, Incorporated reported increases in revenue, operating income, and gross margin. We also continue to look for ways to lower operating expenses, which continues the work that began in the summer of 2024. We plan that this year would remain impacted by the slow housing market, and that is very much the reality. We remain nimble in managing our business and are focused on driving innovation into our product lines, becoming more aggressive in our marketing initiatives, leveraging technology, and adjusting to the challenges affecting the industry in general. In short, we've adjusted to the new normal in furniture demand. We're pleased with our progress so far this fiscal year as we strive to be resilient in this environment. Mortgage rates have come down slightly from last quarter, and we've all seen the recent news about rate decreases. While it's slowly moving in the right direction for the housing market, we don't expect our industry to feel a more robust change until we can point to a sustained pickup in home sales. Many consumers are still cautious about making significant in-home furnishings and remain concerned about the price of houses and the lack of inventory. We're recognized as one of the premier quality brands for furniture, and we concentrate on creating custom design solutions for our customers that align with their personal style. The decisions and investments we've made in creating new lines, refreshing existing products, expanding e-commerce capabilities, and modifying our marketing activities are making a difference in our results. That said, while we can't control these areas, we have been adjusting to the impact that tariffs have on our supply chain…

Thanks, Rob. In my commentary, comparisons will be for 2025 compared to 2024 unless otherwise noted. As Rob previously noted, total consolidated revenue increased $4.5 million or 5.9%. Excluding sales from Noah Home, which closed late in 2024, consolidated revenues increased 7.3%. Gross margin at 56.2% represented a 320 basis point improvement over the prior year, driven by improved wholesale margins partially offset by slightly lower retail margins. Selling, general, and administrative expenses were 55.4% of sales, 440 basis points lower than the prior year, reflecting the benefits from last year's restructuring plan, ongoing cost optimization activities, and greater leverage of fixed costs due to higher sales levels. Operating income was $600,000 or 0.7% of sales as compared to a prior year loss of $6.4 million, which included a $1.2 million loss on the abandonment of a logistical services contract. Diluted earnings per share were 9¢, versus a loss of 52¢ in the last year's quarter. So let me cover a little more detail on our wholesale operations. Net sales increased $3 million or 6.2% over the prior year, consisting of a 9.2% increase in shipments to our retail store network, approximately 1% increase in shipments to the open market, and a 9.6% increase in Lane Venture shipments. Gross margins increased 440 basis points over the prior year. Excluding $600,000 of unproductive labor costs incurred during the temporary shutdown for the cyber incident last year, gross margins would have increased by 310 basis points. This margin increase was driven by improved pricing strategies in both the upholstery and wood operations, coupled with greater leverage of fixed costs from higher sales levels. SG&A expenses as a percentage of sales decreased 210 basis points, primarily due to the benefit of cost reductions implemented during the second half of fiscal 2024. Again, greater…

Thank you. If you would like to ask a question, please press 11. Please press 11 again. And our first question comes from Anthony Lebiedzinski with Sidoti. Your line is open.

Good morning, everyone, and thanks for taking the questions. Certainly nice to see the improvement in sales and profitability in the quarter. So, Rob, I think you said that August was your strongest month for delivered sales. Did you see the same case with your written sales as well? And, maybe if you could just comment on what trends you saw during the Labor Day holiday season, and any sort of commentary on the quarter-to-date trends would be very helpful.

That didn't take long to ask that question. We're predicting that was coming. What's next? Alright. So August was the best month of the three. We had good order momentum both at wholesale and retail. And I would say that trend has continued so far through the Labor Day period and into September. By any means, I wouldn't say we're happy with our level of sales, and we're fighting hammer and tong like everyone else for every order we can get our hands on. I wouldn't say the environment is really a lot different, but frankly, the last couple of months have been a little better than we've been slogging through since the end of the COVID boom.

That's great to hear. And then just in terms of dealing with the tariffs, you mentioned the increased pricing. Just wondering if you could comment on the extent of the pricing, as well as what you've seen as far as unit volumes, whether you've seen a notable change in response to the higher pricing that you put in.

Well, our primary areas of the world that are affected by this are Vietnam and India. And, of course, Vietnam has a 20% tariff, and India has the eye-popping 50% tariff. And so we have levied surcharges on those products from those countries, and we've had to increase those as they finally figured out what they were going to do on both of those countries. Hopefully, that's well, who knows what's going to happen? But that's basically what we're doing. So we still have a surcharge on our imported goods. What's really going to be interesting is two weeks down in High Point and how everybody's feeling about this and what everybody else is doing because obviously, we're not the only ones talking about this, and it's going to be the big topic down there. But I think on the new things, what we will do is roll the surcharge into the price of the goods and just not have a surcharge on both. That's what we're thinking about anyway. And then we'll address the rest of the lines at the end of the year. But for the short term right now, we have the tariff surcharges.

Understood. Okay. And then the gross margin was certainly impressive in terms of the year-over-year expansion. So certainly understand that the environment is still choppy, but then as revenue does eventually come back on a more consistent basis, hopefully sooner rather than later, how should we think about further upside to your gross margins?

Yeah. We were talking about this the other day. Honestly, I don't think you're going to see it improve dramatically. I mean, that 55-56 range is kind of where we think we're going to be. We're going to have to leverage that with expenses and more sales. I'm not saying we can't improve slightly, but I think that's kind of where we're going to be.

Gotcha. Okay. And then my last question before I pass it on to others. So, you talked about the success with your new product introductions, which is great to hear. How does your pipeline look for additional new products going forward?

Well, we've introduced a lot of stuff this year, particularly on these whole home collections, which we haven't done in a while. And we brought three of them out there. That's part of our cash flow deficit for the quarter. You see the inventory going up on those things. And some of those things just kind of came in at the end of the quarter. We really hadn't been able to ship them out. We've now shipped them out. So we're going to have a little more focused introduction strategy this market, although we still have plenty of new things. But we're going to absorb what we've just done. The good news on that, of course, is we're pleased with what's happening so far with that stuff. But we've got a lot of new exciting things, and we're looking forward to showing this to you in two weeks, Anthony.

Yep. Yeah. Looking forward to that, seeing you at High Point. Thank you very much, and best of luck.

Thank you. Our next question comes from Doug Lane with Water Tower Research. Your line is open.

Yes. Hi. Good morning, everybody. Just a housekeeping issue. I noticed that in your segment reporting, you moved some dollars last year out of custom upholstery into custom wood and case goods. And I just wanted to find out maybe what the thought process was there.

Frankly, that was fixing an immaterial error.

Okay. Fair enough. It's just, you know, you've never done that before, so it just kind of stuck out. Getting back to the margins, I think the impressive gain in the margins, particularly in the wholesale gross margins, is really this quarter and all year. What has been driving that improvement in the wholesale gross margin, and yet you're still cautious on the future outlook for gross margins?

Well, you know, we've narrowed our focus on our line. And we're selling more of a cycling, you know, fewer things in some cases, and we're getting some efficiencies that way. Our upholstery operation is running extremely well, and that's really been a major contributor. And we've really looked at our pricing strategies, which are hard to do when you've got all these tariffs going on. But I'd say a combination of those things. I just, you know, I don't want to publicly state that we can drive a lot past where we are right now because we're pleased with where we've ended up so far with all this. And so that's why I've exhibited a little caution on my answer to Anthony's question.

Not only that, Rob. Where we are in the tariff rollout, the tariff changes, how that gets rolled into the quote, cost, and how that's perceived. I think there's still uncertainty around how the consumer ultimately is going to react to the higher prices that are coming through on everybody's goods.

That's a good point. And there's just been an incredible amount of stuff going on this year for everybody. And, you know, we have half a sentence in there about fabrics, but fabric is a major deal for us. Half of our fabrics were from China. And, you know, we've had to discontinue a lot of our fabric line and reintroduce other things. And, of course, that's expensive too. Make all the swatches and get all that stuff out there and go through the inventory that you're having to drop. So it's been a real chaotic thing. It's kind of hard to really comment on the future as accurately as we hope to until this tariff thing blows over. If it ever blows over. I would say, you know, I don't know where we're going. But I hope that answered your question.

No. That's all fair. And it certainly has been chaotic and uncertain out there. And while we're on this subject, have you quantified what you expect the net tariff impact to be on your financials this year?

I'm not sure that I can.

I can tell you that I guess the philosophy has been we're still a little bit wrestling with the philosophy about, you know, how we price the goods. Are we going to price it so that with the tariff in there, we get the same margin? Or we get the same margin dollars? So I'd say to ultimately say what we think it's going to be, I don't think we can answer it. But that's kind of what we're wrestling with there a little bit. And there's so many little nuances to this, as I've just alluded to the fabrics, but the metal, the mechanisms, the componentry, the plywood, a lot I mean, it's or you'd really to really give an accurate answer to your question, you're going to have to dig through a lot of raw materials, finished goods, different kinds of materials, different country, different tariffs. It's kind of an unprecedented period, and I'm not saying that we totally realize the effect of all of this. But so far, we're navigating it relatively well.

No. And it changes every week, it seems. But on the flip side, with 80% of your manufacturing in the US, do you see an opportunity for market share gains here?

We hope so. You know, it depends on the category to a certain extent. I'm going to have a much better answer to that question in two weeks from now than I have right now. We have had a couple of instances that I can point to where the guys have said, hey, we got this because we're domestic. But I wouldn't say it's a landslide, but it does give us pause to think that we may benefit from this in some perverse way that the other guys won't. But, you know, there's still a lot of domestic upholstery out there, and that's the biggest portion of our business. And so, you know, and the tariff, maybe it'll help the upholstery business in general. There's certainly plenty of it made in America, right? Within a 10-mile radius of our factories down in North Carolina.

Okay. Fair enough. And just one last thing. I know your balance sheet is strong and your free cash flow is improving nicely, but it still doesn't cover the dividend. When do you think the free cash flow will be able to cover the dividend in the future?

Well, it has in the past. And, you know, I think it will again soon. But this quarter was a little unusual in the inventory and just the periodic slowness of the third quarter, which we experienced.

And I would say, Doug, the fourth quarter is typically our strongest quarter, both for business and for cash generation. Not saying that we know exactly what we'll do, but typically, the fourth quarter is the best quarter, and we generate usually really good cash flow.

Okay. Fair enough. Thanks, guys.

Thank you. There are no further questions at this time. I'd like to turn the call back over to Rob Spilman for closing remarks.

Alrighty. Thank you. And again, we've got to remain agile in the environment. The fluctuating tariff rules have made the day-to-day running of the business challenging. We are, as the question alluded to, somewhat insulated by our domestic manufacturing platform, but today's furniture industry is truly a global enterprise. Nevertheless, we are pleased to have posted growth in the quarter. Our new product lines are selling, and we look forward to unveiling new ideas to the marketplace in High Point, North Carolina in two weeks. Thank you today for your time and for your interest in Bassett Furniture Industries, Incorporated.

Thank you for your participation. You may now disconnect. Everyone, have a great day.