Tandy Leather Factory Inc (TLF) 2003 Q4 法說會逐字稿

Good afternoon and welcome to the Leather Factory (technical difficulty) (OPERATOR INSTRUCTIONS). I would now like to turn the call over to our host, Mr. Ray Thompson.

Thank you for joining us for our 2003 earnings conference call. I'm Wray Thompson, CEO. We have Shannon Greene, our Chief Financial Officer and Ron Morgan, our President, also in attendance today. On this call, we'll discuss our 2003 results, as well as provide some general indication of our plans and expectations for 2004.

Some of the positives in 2003 were -- the Tandy leather store chain grew from 14 stores to 26 stores during the year and revenue from the Tandy store operations increased 144 percent due to new store openings and an increase in sales per store. It is important to note that this growth was completely funded from internal cash flow. While Tandy's contribution to our consolidated operation is increasing, I still don't think we have seen the true impact that Tandy Leather can have on the financial results of our company overall. I will further illustrate that a little bit later in the call.

Also, our gross profit margins improved as a result of purchasing efficiencies and the continued increase in retail sales and our operating cash flow increased over 133 percent from last year. We continued to improve our balance sheet by reducing our debt by 2.4 million and we refinanced our debt with a new Wells Fargo credit facility, resulting in a low-interest rate and reduction in fees.

Finally as a part of effort to increase our visibility to Wall Street, we added a seasoned institutional investor to our Board and have undertaken a focused process to increase our institutional investor presence. Primary areas for improvement are, one, greater sales growth in the leather factory distribution centers; two, containment of our operating expenses. Realistically, the Leather Factory operation will achieve modest growth at 2-4 percent per year. As far as operating margins go, we have not been as successful in 2003 as we would have liked in containing our operating (technical difficulty). While operating expenses can be difficult to control in the middle of an expansion, this will be a major focal point for management in 2004. Shannon will provide quarterly and annual financial information later in the call, but I think it is worth sharing some quick sales figures for the months of December and January just to give you an idea of the potential when we get everything working right at the same time. Our sales gain in December alone was 21 percent, compared to December a year ago. Leather Factory's gain was 10 percent for the month; Tandy sales reached a median for the first time in a month and their sales gain was 62 percent.

For those of us who discount these kind of figures because it is a holiday shopping season, let me remind you that we set new sales records in January and February of 2004, also. I am not going to suggest that these kinds of sales results can happen every month, but we certainly started 2004 with a bang. The Leather Factory distribution centers had a modest gain for 2003, giving the increased competition from the expansion of the Tandy stores and the resetting of several of our national accounts late in the year, we feel pretty good about the Leather Factory sales results. Tandy Leather's results are little more exciting. Stronger sales growth than what appears to be solid opportunities for that to continue. We're on-target with our store openings and are not seeing any indication at this point for unexpected changes in these plans. After Shannon goes through the 2003 results and I'll talk a little that about our expectations for 2004. I would now like to turn the call over to Shannon Greene, our CFO.

Thank you, Larry. I will quickly go through the earnings release that went out this morning and try to provide some more detailed information for you. For the year ended December 31, 2003, consolidated sales were up 5 percent from 39.7 million to 41.7 million. Leather factory sales were 30.7 million compared to last year's sales of 30.3 million, an increase of 1.2 percent. Tandy sales were 9.2 million, compared to last year 7.4 million, an increase of 24.8 percent. Cushman sales were down 216,000 to 1.8 million, compared to 2 million year ago, a decrease of 10.6 percent. As I sated in our third quarter earnings conference call, the entire Cushman operation is immaterial to our consolidated results and does not fit our specialty retail business model. We're still assessing, however, our long-term strategic options for this subsidiary. Consolidated gross profit for the year was 54.4 percent, an improvement over last year of 0.7 percent. The Leather Factory's gross profit margin was virtually unchanged -- 53.2 versus 53.5 -- and Tandy's gross profit was 63 percent versus 59.5 last year. Consolidated operating expenses were 18.6 million, up 1.4 million or 8 percent over last year. 1.2 million of this increase was attributable to Tandy. The Leather Factory's operating expenses were up 376,000 for the year and Cushman's operating expenses were down 161,000. Income from operations was $4.1 million for the year, down 34,000 compared to 2002.

For the fourth quarter, consolidated sales were up 5.9 percent from 9.9 million t 10.5 million. Leather Factory sales were 7.3 million compared to last year of 7.5 million, a decrease of 3 percent. Tandy sales were 2.9 million, compared to last year of 1.9 million, an increase of 47.6 percent. Cushman sales were 359,000 for the quarter, compared to 476,001 a year ago, a decrease of 25 percent. Consolidated gross profit for the fourth quarter was 54.3 percent, a decline of 0.2 percent over the fourth quarter of '02. Leather Factory's gross profit was 52.8 percent, compared to 54.2 percent last year. Tandy's gross profit was 62.8 percent versus 61.8 percent last year. Consolidated operating expenses for the fourth quarter were 4.8 million, up 270,000 over last year’s fourth quarter. Tandy's fourth quarter operating expenses were up 490,000, The Leather Factory's expenses were up 51,000, Cushman's operating expenses were down 271,000. Income from operations was 910,000 for the quarter, up 25,000 over fourth quarter of '02.

During 2003, we continued to strengthen our balance sheet. At December 31, total assets were 19 million, cash increased 1.1 million, accounts receivables were down 100,000 and inventory decreased by 1.6 million. Total liabilities are 4.5 million at December 31 compared to 8.5 million at the end of '02, a reduction of 47 percent. We refinanced our debt in November of '03 moving to Wells Fargo Bank Texas, which allows us to classify our revolving credit line as long-term rather than current. More importantly, however, is that our total bank debt dropped $2.4 million in 2003. I would point out that the refinance itself with its two-year maturity is not what caused the reclassification of our debt from a current liability to a long-term liability; rather, our new agreement eliminated the restricted cash requirement which was the trigger for the current classification in years past. As a result of, I'd also point out that there is no restricted cash on the balance sheet at the end of this year.

Our debt to equity ratio is under 0.12 and our current ratio is 6.16. EBITDA for 2003 was 4.7 million. Free cash flow, which is defined as EBITDA less capital expenditures, was $4.3 million for the year and our enterprise value defined at market cap less cash, plus debt, was 50.8 million at December 31st, and as of this past Friday, it was 58.3 million.

Some specifics regarding the Tandy stores. Tandy's 2003 results are as follows. Sales are 9.2 million, gross profit margin is 63 percent, operating income of the 26 stores in existence at year-end was 10.35 percent. When you throw your corporate allocations in, operating income for Tandy was 6.5 percent. Specifically for the stores that were opened in 2002 of which there were 14, their sales were 6.68 million, gross profit was 62.8 percent, the operating income for those 14 stores was 13.3 percent. Average sales per Tandy store is still running at 35,000 a month. The range of average sales per store per month ranges from 65,000 to 22,000. There are four Tandy stores with an operating loss as of year end. Two of the four were opened in August, the other two were opened in the first quarter of 2003. We're working diligently to make necessary adjustments to get these stores profitable and expect we will see remarkable improvement in 2004.

Leather Factory Warehouse distribution center results are as follows -- sales for the year are 30.6 million, gross profit margin was 53 percent, the operating income at the distribution center level was 13.9 percent with corporate allocations 11.3 percent. The range of average sales per month per store, excluding our Fort Worth superstore so as not to skew the average, ranges from 95,000 to 31,000 a month. There are five The Leather Factory distribution centers whose sales are over $1 million for the year, and all of the distribution centers were profitable for 2003.

Overall, we are pleased with our 2000 results, although as Ray indicated, we have some work to do on our operating margins. We met our goal with regard to the Tandy store expansions in that we were able to open 12 new stores while paying down debt. With the exception of the two stores opened in the first quarter of 2003, the Tandy stores are profitable within the internally allowable timeframe. I would now like to turn the call over to Wray.

Thanks, Shannon. We look forward to a solid year in 2004. We should begin to see the results of our growth strategy as stores open over the past two years reach a level of maturity. As I indicated at the beginning of this call, we're noticing continued momentum in our business with a very strong January and I might add, and February. This year, we plan to open 10-15 new Tandy leather stores and estimate total sales for 2004 to be in the range of $46-$47 million. Assuming average diluted shares outstanding in 2004 are roughly 11 million shares and the effective tax rate is between 35 percent and 37 percent, we expect basic earnings per share for 2004 will be in the 34-37 cent range and diluted earnings per share will be in the 32 to 34 cent range. This represents an earnings-per-share growth of approximately 30-40 percent over 2003. In the third quarter of 2003, Shannon stated that she expected earnings-per-share to grow at about 20 percent, but after finishing the year, we are thinking we should be able to do slightly better than that in '04.

In summary, we believe that we have laid a lot of groundwork and are beginning to see the fruits of our labor. Our goal is continue this momentum in 2004 and achieve additional increases to shareholder value. That is all I have. Operator, we're ready to take questions.

(Operator Instructions). Will Lyons (ph), Westminster Securities.

Hi, guys. Congratulations on another strong quarter. It looks like you've started to achieve a lot of the goals you set for yourself a little over a year ago. I have a couple of questions. Firstly, you mentioned in the press release that your operating earnings were up a bit this year because you spent more on advertising and investor relations. Could you give us some detail on what is happening there and what the plans are for 2004?

With regards to advertising, or investor relations or both?

Both.

Real quick on investor relations, and I'll let Ron get into the advertising. For those of you that have followed us at all in the last couple of years, we tried several different things with regards to investor relations, trying not to spend too much money, but trying to get in front of the right people with the long-term goal of increasing stock price and shareholder value and getting noticed by the proper institutions. That can be very expensive with little results, or can be fairly expensive with good results. Bottom line is we spent probably double in '03 that we spent in '02. And to give you some specifics, we spent $200,000 in '02 on what we would define as investor relations -- public company type stuff spent $400,000 in '03. Probably was not the smartest way to spend that kind of money. We're going to be a little bit more focused in 2004. We tried to do five or six different things in '03, seeing what seemed to make the most impact or be the most effective and what we discovered was we did not do any of them really well. So we will watch investor relations expenses and cash being spent, we'll be a little more diligent in 2004 hopefully to continue the trend we're seeing with stock price and the value, but without having to spend so much money.

On advertising and the big difference between 2002 and 2003 is, there's two or three things that caused it, but probably the number one is that remember in 2002, we began opening the Tandy stores. Prior to that, they were just a mail-order center. They had approximately 60,000 customers. And as we opened the Tandy stores, we're going in and mining old lists of customers that were available to the Tandy stores when they were existing. And each time we go into an area, we start mining our old mailing list, which causes us to spend a little bit more money. And then all of a sudden as we mine those lists, those customers begin to add to our mailing lists and it increases our overall mailings out. We will continue in 2004 to spend a lot of money advertising. We will spend between 6 and 7 percent of our sales in our direct-mail program each year, which will cause our dollars to go up. But as a percent to business, our sales, we will have generally be our program.

I see. Okay. Wray, you mentioned a focus on getting more institutional interest in the shares. What is the current insider holding percent and institutional holdings and what specifically are you doing on the institutional side?

Really, the insider holdings, I think that between Ron and Robin Morgan and myself, and the ESOP (ph), we have about 54 or 55 percent of the stock. We have a few institutional holders. The young man that just joined our Board, Mike Neri (ph), bought a half million shares. He is probably the largest institutional holder and there are three or four that will have from 50-100,000 shares, but no more than that. We'd just like to see some more institutions in our stock.

Of course, but you do feel that is rising?

Yes, I do.

Obviously with Mr. Neri's purchase? Okay, thanks.

(Operator Instructions). Will Lyons, Westminster Securities.

Shannon, for a guy who's got to try to figure out what your earnings are going to be each quarter over the next year, something stuck out to me that I like to see and I was wondering what sort of continuation we would see. On the day sales in receivable and inventory, those have been dropping pretty steadily over the last few quarters. Can you talk about how you have achieved that and how much further can each of those go down? And is that a goal of your or is that something happens (indiscernible)?

Are you talking the collection days?

Collection days, and also inventory on hand relative to sales.

One of the things that we always watch in inventory, we can control our inventory turns calculations based on the inventory level throughout the whole system. And we guide inventory pretty lean at the end of December and we are relatively pleased with that. It's one of those magic dials that we have to be really careful of. If we get inventory too lean, sales begin to suffer because it takes us too long to get product in the door (multiple speakers).

Do you have new systems in place, or is this just something you've been working on and achieving the reductions you were looking for?

There's nothing new in place. We just -- at the end of '02, our inventory was really heavy. We had too much. Truthfully, I kind of think based on what January and February did, we probably got inventory December '03 maybe a little too lean and it's kind of the ripple effect. If you get it too lean, your sales are going to begin to fall some and we had a really strong January and February. So inventory is coming in right now. That is one of those things with as much importing as we do and the lead times that's required on that, it's very hard to manage that inventory level and keep it at the right level day in and day out, but it is something that we spend a lot of time on because obviously, we can spend off a lot of dollars tied up in inventory rather quickly if we're not careful. So the operations guide, the buyers and Ron spend a large portion of their days watching inventory levels, staying ahead of what is selling well, what is on order, how quickly it's going to come in, how quickly we can turn it to the stores. So I don't want to say we get lucky on our inventory turns (indiscernible), but it is a hard one to get right all of the time.

Well, there's some art to it, but it looks like you've applied a little science as well.

Astute (ph) management always helps a little bit. That's kind of our standing joke. When we do it right, it's astute management; but when we do it right (ph), it's someone else's fault. So that's kind of the answer on inventory. With regards to receivables, we have got a pretty aggressive, conservative in terms of how we issue credit, aggressive in terms of the collections credit manager that has been onboard with us for several years. He continues to amaze me with what he is doing. He does not let accounts get out there very long. And I think overall, we did a fairly good job with the state of the economy and small businesses struggling in general over the last couple of years. I think we have done relatively well with our accounts and the collection of accounts. We had two last year, two companies, that went bankrupt. If I threw the names out there, you would know one of them. And so we lost between the two companies, the bad debt was about 50 grand. We all beat ourselves up about it because we think we should've seen it coming. Should not have been quite that lenient with them, but hindsight is always 20/20. But we watch receivables pretty hard. We are especially careful right now just because of the economy doing what it is doing and as it gets better, customers can pay better, but we have been in this business a long time and tend to be very careful about seeing what is coming I guess and picking up the subtle indications that businesses may be having trouble, and so I think that the safest time on our days outstanding.

Is Tandy Leather an all-cash or a credit card business? There's no receivables there in the sense of --

Will, there's a little bit, but they are predominantly cash and credit card. They do -- their open accounts are generally like schools. Schools that order will get automatic open accounts. But generally speaking, the majority of all their businesses going to be cash and credit card.

Okay, thanks.

Paul DeShawn (ph), a private investor.

Hello. Given the explosive growth in China, some of the Asian countries experiencing growth that they haven't seen for over a decade and the emerging countries as well growing very rapidly, after the Tandy is fully digested and the mailing list mind, is there something over the horizon in the longer-term might unfold in that direction?

We keep looking overseas. We have some good dealers that we talk to regularly. In fact, I'm going to visit with our dealer in London in May, and he is one of our better ones. When I was with Tandy, we had a good distribution system set up in the UK, Japan and Australia, and we are probably not as strong right now as Tandy was back when I was with them. But there is certainly some good customers. Australia is a wonderful country for leather, a lot of cowboys. So that would be a good one. Japan has always been strong. They are very craft-oriented. They believe in holding classes, teaching down to the minutiae. They will teach them anything. But the classes are grueling classes. I've sat through some of them. They really work them over, but they also build a very good customer for as. So we're looking. I would not say that we have anything on the horizon.

Certainly, you have a full platter at the moment, but there is growth in the longer-term as well?

Yes, I think so.

Thank you.

Thank you.

(Operator Instructions). There are no further questions at this time.

Thanks, everybody, for participating in our call today. On behalf of Ron Morgan, Shannon Greene and myself, we appreciate your interest in the Company and welcome your questions at any time. Thank you, Wray Thompson.

Thank you for participating in this afternoon's teleconference.