Bassett Furniture Industries, Incorporated (NASDAQ:BSET) reported tepid second-quarter fiscal 2024 results, with earnings and net sales missing the Zacks Consensus Estimate and declining year-over-year. The company's quarterly performance was impacted by the challenging housing market, as consumers are prioritizing experiences over home investments.

In the second quarter, Bassett reported a net loss of $7.2 million, compared to net income of $2.1 million in the prior-year period. Annual net income for fiscal 2023 was -$3.17 million. Revenue for the quarter decreased 17% year-over-year to $83.4 million, while annual revenue for fiscal 2023 was $390.1 million. Operating cash flow for the quarter was $5.8 million, while annual operating cash flow for fiscal 2023 was $18.7 million. Free cash flow for the quarter was -$1.9 million, while annual free cash flow for fiscal 2023 was $1.2 million.

The company's Wholesale segment reported a 15% decline in net sales, while the Retail segment saw a 17% decrease. The Corporate and Other segment, which includes the Noa Home e-commerce business, experienced a 52% drop in net sales. Gross margins remained strong, expanding 210 basis points to 55.7% in the quarter, excluding the impact of additional inventory valuation charges.

To address the challenging market conditions, Bassett announced a comprehensive restructuring plan. The key elements of the plan include:

1. Driving organic growth through Bassett branded retail locations, omnichannel capabilities, and enhanced customization positioning. 2. Rationalizing U.S. wood manufacturing from two locations into one primary location supported by a small satellite operation. 3. Optimizing inventory and discontinuing unproductive product lines. 4. Improving the overall cost structure and investing capital in the refurbishment of current corporate retail locations. 5. Closing the Noa Home e-commerce business.

The company expects the restructuring plan to generate annual cost savings of $5.5 million to $6.5 million starting in fiscal 2025. Bassett also announced an 11% increase in its quarterly dividend, demonstrating confidence in its growth potential and cash flow.

Business Overview

Bassett is a leading retailer, manufacturer, and marketer of branded home furnishings. The company operates a network of 88 Company-owned and licensee-owned Bassett Home Furnishings stores, as well as distributing its products through other wholesale channels, including multi-line furniture stores. Bassett's product offerings include custom-order furniture, free in-home or virtual design visits, and coordinated decorating accessories.

The company's strategy is to leverage its strong brand name, custom manufacturing capabilities, and network of retail stores to provide consumers with a unique combination of stylish, quality furniture and accessories, along with a high level of customer service. Bassett also distributes its products through other wholesale channels, including multi-line furniture stores, many of which feature Bassett galleries or design centers.

In 2018, Bassett added outdoor furniture to its offerings with the acquisition of the Lane Venture brand. The company's outdoor furniture products are distributed through independent sales representatives, while the Bassett Outdoor brand is marketed exclusively through the Bassett Home Furnishings store network.

Bassett's manufacturing operations are primarily located in the United States, with factories in North Carolina, Virginia, and Alabama. The company also sources certain casegoods and leather upholstery offerings from foreign plants, primarily in Vietnam and China. Over 75% of Bassett's wholesale revenues are derived from products manufactured in the United States.

Financials

As of June 1, 2024, Bassett had a current ratio of 2.02 and a quick ratio of 1.21, indicating a strong liquidity position. The company's debt ratio was 0.32, and its debt-to-equity ratio was 0.63, suggesting a conservative capital structure.

Bassett's gross profit margin for the second quarter of fiscal 2024 was 52.5%, while the adjusted gross profit margin, excluding the impact of additional inventory valuation charges, was 55.7%. The company's operating profit margin was -10.1% for the quarter.

Liquidity

The company ended the second quarter with $60.5 million in cash and short-term investments. Bassett generated $5.8 million in operating cash flow during the quarter and used $1.9 million in free cash flow, which was used to fund capital expenditures, dividends, and share repurchases.

Outlook and Risks

Bassett's management is optimistic that the company's restructuring plan, backed by its strong financial position and consistent cash dividend, will help grow revenue, reduce costs, and strengthen operating margins. The company expects the back half of fiscal 2024 to be a reset for its business, with the hope that consumer demand will improve and the company's unique competitive advantages will allow it to increase market share and deliver long-term shareholder returns.

Risks to Bassett's business include continued macroeconomic pressures on the furniture industry, such as elevated home prices, high mortgage rates, and general inflationary tension. The company also faces risks related to its ability to effectively manage its supply chain, including the cost and availability of raw materials and the impact of tariffs and trade policies. Additionally, the company's performance is tied to the health of the housing market and consumer spending on home furnishings.

Conclusion

Bassett Furniture is navigating a challenging macroeconomic environment with a comprehensive restructuring plan and a focus on driving long-term growth and profitability. The company's strong balance sheet, consistent cash dividend, and unique competitive advantages in custom manufacturing and retail distribution position it well to weather the current storm and capitalize on an eventual rebound in consumer demand for home furnishings. While the near-term outlook remains uncertain, Bassett's proactive approach and long-term strategy suggest the company is well-equipped to deliver value for shareholders over the long run.