Tandy Leather Factory Inc (TLF) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the The Leather Factory's first quarter 2004 conference call. My name is Louise, and I will be your coordinator for today. At this time all participants are in listen-only mode.

We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance, please press star followed by zero and the coordinator will be happy to assist you.

Before I turn the call over to Mr. Thompson, I want to call your attention to the fact that these conversations will contain forward-looking statements to the extent The Leather Factory management speaks today of any future event or makes other forward-looking statements.

You are reminded of the inherent uncertainties of looking into the future, that there are risks to The Leather Factory that could prevent the events from occurring in the manner foreseen.

Please see The Leather Factory's form10-K for 2003, and their subsequent form10-Q for their discussion of some of these risks. Copies of these documents are available through the SEC EDGAR system or from the company's Investor Relations office.

Also statements made today by management of The Leather Factory are made as of this moment and The Leather Factory and its management disclaim any duty to the update of those statements.

I would now like to turn the call over to your host, Mr. Wray Thompson. Thank you. Mr. Thompson, you may begin your conference.

Thank you. Thank you for joining us for our first quarter 2004 earnings conference call.

I'm Wray Thompson, CEO, I have our CFO, Shannon Greene, and our President, Ron Morgan. On this call we will discuss our first quarter results as well as provide an update on our plans for the year.

Overall we are pleased with the first quarter results and are happy to report record sales for the quarter. Our first quarter consolidated sales increased 15%, and income from operations increased 30% over the first quarter of 2003.

We realized the increase in our consolidated growth profit margins this quarter over last year for reasons we will explain in more detail a little later in the call. Operating cash flow was positive this quarter which contrasts nicely against the first quarter of 2003 when operating cash flow was negative by $1.6 million.

Our balance sheet continues to improve.

We reduced our debt this quarter by half a million dollars. Accounts payable increased somewhat due to negotiations with some of our vendors for longer payment terms. I believe we're doing a good job of maintaining reasonable inventory levels while expanding our base of stores.

Our first quarter accomplishments included all 3 operating segments reporting sales gains. The Leather Factory wholesale centers achieved a 3% sales gain this quarter which matches our internal targets.

Gross margins improved almost 2 percentage points. We're still working on operating margins, but did begin to see some minor impact during the first quarter.

We reduced our employee head count in some of our central units and negotiated lower pricing on supply purchases, just to list a few examples of what we are doing in this area. I think you will see a more significant impact as the year progresses.

The Tandy Leather retail operation continues to build with substantial revenue growth although the majority of the growth is from the new stores. The Tandy Leather retail store chain grew from 19 to 29 stores during the 12 months ended March, 2004.

As a result Tandy sales increased 70% in this quarter over last year. We've opened 4 new stores so far this year and we're still maintaining our commitment of funding this growth from internal cash flow.

Tandy's gross margins were down slightly for the quarter, but we made remarkable improvement in our operating margins. We negotiated lower credit card merchant fees during the quarter as well as tightened up on our supply purchases throughout the system which contributed to the cost savings.

Cushman reported a solid sales gain for the quarter which is encouraging given its losses over the last few years. Cushman is not a significant contributor to our financial success, but it does contribute to our consolidated earnings.

I'll now turn the call over to Shannon Greene, our CFO, to provide further details on financial results, and then we'll talk about our plans for the rest of the year. Thank you.

Thank you, Wray. The earnings release went out early this morning, but for those of you who haven't had a chance to go thought it yet, I'll go through it quickly.

As a reminder, so as not to keep repeating the dates, the comparisons I'll provide are for the first quarter '04 to the first quarter '03 unless otherwise indicated.

First quarter consolidated sales increased 15%. Current quarter sales were $12.8 million compared to 2003 first quarter sales of $10.6 million. Other factory sales were $8.4 million this quarter compared to $8.2 million a year ago, an increase of 3%.

Tandy sales were $3.2 million compared to last year of $1.9 million--an increase of 70%. Cushman sales were $571,000--compared to $494,000 a year ago--an increase of 15%. Consolidated gross profit margin for the quarter was 55.2%, improving over last year's gross profit margin of 53.5%. Other factories gross profit margin improved from 52.4 to 54.2%.

Tandy's gross profit margin was 60.8% currently versus 63.3% last year. Consolidated operating expenses were $5.3 million--or 43.3% of sales in the current quarter compared to $4.5 million or 42.9% of sales last year. The Leather Factory reported operating expenses totaling 41.4% of its sales, versus 41.1% last year.

Tandy reported operating expenses totaling 51.3% of its sales currently, compared to 55.5% last year. Cushman's operating expenses were 27.2% of its sales this year versus 24.6% last year. Income from operations was $1.4 million for the quarter, up $331,000, or 30% compared to the first quarter of '03. As Wray mentioned, we do believe our financial position is continuing to strengthen as evidenced by our balance sheet.

Total assets were almost $21 million, from December 31 to March 31 cash decreased $50,000. Accounts receivable increased $1.2 million--primarily due to sales to our national accounts in the first quarter, and inventory increased by $300,000.

Current liabilities increased $1.2 million--due primarily to the increase in accounts payable and income taxes payable. Our debt balance with Wells Fargo Bank was slightly less than $1.3 million at March 31, a reduction of $525,000 since December.

More importantly, that balance is just slightly over $1 million as of today. For those of you who know my opinion about debt, I suppose it goes without saying that I'm pleased with our continued progress toward an eventual balance of zero.

Our debt to equity ratio is under .08. Current ratio at March 31 is 4.69. EBITDA for the first quarter was $1.6 million. Free cash flow--which is EBITDA less capital expenditures--was $1.5 million, and our enterprise value defined as market capital less cash plus debt was $55.4 million at March 31.

Some specifics regarding the Tandy stores' performance in the first quarter. Sales again were $3.2 million. Gross profit was 60.8%.

Operating income was 9.5%. For the stores that were opened in 2002, and there were 14, their sales in this quarter was $1.7 million. Their gross profit percentage was 61.2% and their operating income was 10.7%.

For the stores that were opened in 2003--of which there were 12--their sales were $1.2 million.

Gross profit was 61% even, and their operating income was 11% even. In this first quarter of 2004 average sales per store per month was almost $38,000.

The range of average sales per store per month during the first quarter ranged from $62,000 to $24,000 at the Tandy stores. There are 2 of the 29 stores with an operating loss as of the end of March, and they were stores that were opened in this first quarter.

The third store opened in the quarter is already reporting a year-to-date profit. Leather Factory wholesale center results are as follows: Sales again were $8.4 million.

Gross profit percentage was 54.2%, operating income was 12.8%. The range of average sales per location per month excluding our Fort Worth superstore was $102,000 to $35,000. Twenty-seven of the 30 wholesale centers posted year to date profits as of the end of March.

Of the 3 stores that had losses, 1 of them we moved during the quarter and incurred moving expenses and costs associated with resetting up that store, including new phone and utility service which caused the operating loss.

The other 2 stores each had 1 customer account that we wrote off in the quarter that caused the operating losses at those 2 units. I would reiterate Wray's comment regarding our positive opinions about our first quarter financial results, and the performance at the wholesale centers and retail stores, collectively and individually.

We're on track with our Tandy store expansion in 2004 while our debt balance continues to drop.

All of the Tandy stores are generating profits within the expected time frames, and The Leather Factory centers are showing signs of strengthening sales.

I am now going to turn the call over to Ron Morgan, our President, to discuss further some details regarding our gross profit margin.

Thank you, Shannon. We did several things in the first quarter that impacted our gross profit margin.

As Shannon indicated, The Leather Factory's gross margin increased by 2% for the quarter.

This improvement was caused primarily by an increase in retail sales at The Leather Factory wholesale centers. Retail sales grew at the - at those centers because we decided to list all of our wholesale center locations in our retail flyers that normally are only mailed to Tandy retail customers.

As a result, more customers were made aware of the availability of our product at 30 more locations than in previously known about. From The Leather Factory's perspective it was a good decision.

Tandy gross margins decreased by approximately 2.5% in the quarter.

The main reason for that decline was that we put a particular leather on sale and featured it in the - that leather in our flyers to our Tandy customers. In addition, we were probably too aggressive in our sales prices of that leather.

As a result we sold more leather in the Tandy stores than we've done before. This helps to explain why Tandy's sales were so remarkable, but it also accounts for the gross profit decline.

As we stated before, leather is our lowest margin seller. However, it's what brings customers in to our stores.

A customer can purchase -- remember, our business strategy is based on the concept of a one-stop shop. A customer can purchase all of his leather and supplies from one place.

So we intentionally sell leather at lower margins in order to get customers in the door, then make up for those low margins by selling tools, snaps, dyes, et cetera at a significantly higher margins. When Tandy stores sell leather in one month versus another month the gross margins are going to decrease some.

In hindsight, I think we could've had - made a little better margin on the leather sold at the Tandy stores by featuring the leather in our flyers at a slightly higher price without sacrificing too much on the sales side.

While we're talking about gross profit margins, I think it is relevant to point out that there is a potential for some negative pressure on our gross margins in the next few quarters. Predominantly as a result of the fluctuations in metals-- primarily steel and copper, and in the leather markets.

The issue is not a new problem. We deal with cost fluctuations on a continual basis.

As a result of higher fuel costs, the supply and demand issues surrounding metals, as well as normal fluctuations in the leather market, we are seeing some price increases for some of our products--or at least vendors talking about the possibilities of raising prices.

We monitor our costs almost on a daily basis in an attempt to minimize and stay ahead of these type issues. But there is always the possibility of pressure on our gross margins if we are unable to react quickly or negotiate successfully.

Given that many of the items in question are important and I think we're in pretty good shape as far as pricing through the second quarter, but we may see a slight drop in gross margins starting in the third quarter.

That being said, the retail business that Tandy is generating may be enough to offset any downward pressure from the cost side.

We will continue to monitor these issues and do the best we can to minimize the risks of such possibilities. I'll turn the meeting back over to Wray.

Thanks, Ron. For the most part, I think we're off to a good start for 2004. At this point we don't have any reason to expect our plans regarding this year to change.

We still plan to open 10-15 new Tandy Leather stores during the year. We've opened 4 already and have got another 6-10 to go. We're not changing our sales and earnings guidance for 2004 at this point.

I reiterate, we're estimating sales in the range of 46 to $47 million, and diluted earnings per share in the range of 32 to 34 cents. Assuming average diluted shares outstanding of approximately 11 million shares. In summary, we'll continue doing what we're doing and as a result, we believe our 2004 financial performance will be solid. Our goal is to produce positive results that increase shareholder value. And having said that, operator, we'll take questions now.

Thank you. Ladies and gentlemen if you wish to ask a question, please press star followed by one on your touch tone telephone.

If your question has been answered or you wish to withdraw your question, please press star followed by two. Again, that is star one to ask a question. Your first question comes from Max Bowser from Bowser Reports. Please proceed.

Hello, Wray?

Yeah, Max.

Yeah, she sort of mangled the name, as you know it is Bowser.

I know who you are.

Yeah, right! Hey, I got three questions for you, Wray.

Alright, could you just do them one at a time?

Yeah, right. Number one, when you open a store, how long does it take before it becomes profitable? I'm sure it varies store to store.

Before it becomes profitable?

Yes, Uh-huh.

Well, we opened one this year that's already profitable.

Uh-huh.

And normally, these stores have been breaking out in 3 to 4 months, Max.

3 to 4 months?

Yeah.

Oh, that's great.

And we're, I think Shannon will quickly tell you that when we open them we're expensing everything that - every expense we incur. Nothing's spread out over the year.

Now, the second question is stores that have been opened over a year, are the sales per store up or down on average?

They're all up a little.

Uh-huh.

Even though we keep opening them and you'd think it would spread the customer base out, they're holding their own.

Uh-huh. Okay. Well, that leads to my third question. How do you decide where to locate a new store?

Max, when you ask, there's three of us in this room, and if you ask me I'm going give you my opinion, and then when you ask Ronnie, and he'll give you a different one.

Shannon may give you a different one yet. After Ronnie and I spent 35 years in Tandy Leather company, of course, we saw all the sales sheets and every city that was reporting, we know where the best stores were.

Uh-huh.

And we know their track record, and we knew which ones were profitable and which ones weren't.

Yeah, Uh-huh.

And really what we are trying to do, Max, is go back into cities that we knew furnished Tandy with good profitable stores.

Yeah, uh-huh.

That's all.

I see. It sounds logical. Finally, I said three but I have got one more. I want to confirm, you said, is it this year that you expect sales to be $46 million to $47 million?

That's correct.

Yeah, and earnings net income to come in around 32 cents a share?

32 to 34.

32 to 34. Okay. It's a great report, Wray, and we're really proud of what you and your team have been doing.

Well, they keep me awake most of the time.

[ LAUGHTER ] Okay. Thanks again.

Thank you, Max.

And your next question comes from Richard Louise from West Manchester Security. Please proceed.

Good afternoon, guys.

Hey, Richard.

Congratulations on a great quarter.

Thanks.

Will is still tied up on two other conference calls so he has given me a couple of questions to ask, if I may.

Regarding the stores and the sites that you have opened in the past, have you cherry-picked traditional locations, and have you noticed any trends in -- as you now opened 30 stores in your operating costs, or opening costs, or things of that nature?

Let me give you my - let me give you my thoughts and then I'll let Ronnie jump in there. Of course, we're trying to cherry-pick but that is not necessarily true, because a lot of these stores that we're opening depends on personnel to run it.

In other words, we might have a city we'd rather go to, but we've got a man that wants to live in another town.

Right.

But, we veered off in some cases--and not necessarily gone to the best of what we considered geographical area--but if we've got a man that is familiar with leather and has run a store before for Tandy, we'll probably go where we got an experienced manager.

Okay.

Ronnie may want to add to that.

No, that is exactly the way we've done it.

Terrific. Second question. Based on your recent proxy, it appears that the insiders own about 6.2 million shares of the 10.6 outstanding, and of the 4.4 if that math is right--shares that are in the public flow--what is currently the number of shares or percentage that's in the hands of institutional investors?

Richard, this is Shannon, as close as I can tell, my estimation is we're at about 6 or 7% of the total outstanding shares in - as far as investor - or institutions are concern.

Okay.

That number obviously sounds really low, but I did go back and look at - where we were roughly a year ago and it was less than 1%. So we are -- as much as we're aware that we need to continue to attract institutional investors we are working on that. Meeting with new folks all the time, so we have--even though I guess maybe the improvement is small--it's - we have improved in that area in the last 12 months or so.

Terrific. And my last question, please.

Publicly, looking at opening 12-15 new Tandy stores each year for the foreseeable future and regarding the attractive sites and the management that you may have to plug into those stores, have you identified, excuse me--how many store sites have you identified to open?

We will let Ron Morgan answer that one.

Okay.

We've identified up to 120 markets or areas in the United States. We've got 4 or 5 in Canada we're also looking at.

But -- and these units geographically would make sense in the size and the market and the demographics makes sense also is for the most leather craft dollars were.

I think Wray mentioned to me the other day that when I was talking about opening these stores so close together he says, yes, he remembers when there was a store opened in Amarillo, Texas, and the man in Albuquerque, New Mexico was so worried that the store was too close to him which is probably 600 miles away. Well, that was - that was 30 years ago.

I don't think we're going to have that problem today. But we will be able to open 70 or 80 of these stores without the other stores even know they exist, but it is like you open in the L.A. Basin--we've got one store in L.A. When Wray left Tandy Leather company in '79, I believe, there was 20-plus stores there. So we know we could open 3 or 4, 5 stores in the L.A. Basin without giving us any - even the other stores knowing that they were there.

Does that help you, Richard?

I think it does, yes sir, thank you.

And once again, ladies and gentlemen, star one to ask a question. There are no more questions at this time.

I'd like to thank all of you for participating in our call today. And on behalf of Ron Morgan, Shannon Greene, and myself, we appreciate your interest in our company, and welcome your questions at any time. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.