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Initiating Coverage of Bassett Furniture Industries, Inc.: A Survivor Pursuing Success

We are initiating coverage of Bassett Furniture Industries, Inc. publicly traded under the ticker BSET. Bassett primarily operates in two segments: Retail and Wholesale. A third segment, Corporate & Other, accounts for corporate and unallocated expenses, as well as the operating results of Noa Home, a recent e-commerce acquisition. Bassett's Retail segment accounts for the results of 57 company-owned Bassett Home Furnishings stores (BHFs). For FYE November 2023, sales were ~$236MM (~60% of consolidated) and posted a ~$0.5MM operating loss. In its Wholesale segment, Bassett’s 30+ independent, commission-compensated sales reps sell its manufactured and sourced furniture and furnishings to: (1) 57 corporate BHFs; (2) ~31 independently owned licensed BHFs; and (3) ~1,000 multi-line furniture retailers that sell its products, often in galleries dedicated to Bassett. In FYE November 2023, Wholesale gross sales were ~$249MM (~$145MM, net [37% of consolidated revenues] after eliminating sales to company-owned entities). Operating income was ~$31MM. Bassett’s story is a classic American tale. Founded early in the 20th century, Bassett grew and was the world’s largest wood furniture manufacturer by 1960. In its early years, Bassett spawned several long-standing major furniture companies. Furniture demand growth was strong post-WW II, coincident with housing growth. When growth cooled, Bassett and its peers became tied to the macroeconomy, as they are today. Initially a wood furniture manufacturer exclusively, management turned to other furniture category acquisitions and non-operating investments to bolster sales and profits. In the 1990s, a flood of Asian imports disrupted legacy manufacturer/retailer relationships. By then, ~40% of Bassett’s sales were concentrated to only a handful of large retailers, many of which began importing directly. To combat the looming disintermediation, Bassett pivoted to company-branded retail to widen, diversify, and manage distribution. Bassett’s retail strategy has migrated and matured. Today, it owns 57 of the 88 (about two-thirds) BHF network stores. Bassett’s leadership aim is to improve the sales productivity and profitability of the network. In recent years, it upgraded its merchandise selection and quality, and added needed customer services, including complimentary in-home design. Its Tampa store, which just opened, is impressive. Herein, we show that BSET, like other cyclical stocks, delivered excess returns from price gains only intermittently, suggesting that investors trade BSET over the cycle opportunistically: increase exposure before expansions and reduce exposure during expansions. Bassett’s solid financial condition and consistent cash dividend buffer total returns in the event of investor mistakes in timing entries and exits.