Tandy Leather Factory Inc (TLF) 2004 Q2 法說會逐字稿

Good afternoon. Welcome to The Leather Factory's second quarter conference call. All calls have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad, and your questions will be taken in the order they are received. If you would like to withdraw your question, you may do so by pressing star, then the number 2. As a reminder, if you are on a speakerphone, please pick up your handset before presenting your question.

Before 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 these events from occuring in the manner foreseen.

Please see The Leather Factory's Form 10-K for 2003, and their subsequent form 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's 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 our host, Mr. Wray Thompson.

Thank you, Mr. Thompson, you may begin your conference.

Thank you for joining The Leather Factory's second quarter 2004 earnings conference call. I'm Wray Thompson, CEO, I have Shannon Greene, our CFO with me. In this call, we'll discussion our second quarter results, and also discuss some of our plans and outlook for the remainder of the year.

As indicated in the press release this morning, I think the second quarter was actually one of positives and negatives. On a consolidated basis, our sales were up again over this quarter. Our gross profit margins were solid. We had report earnings of over $.5 million. Operating cash flow was positive again this quarter. We're pleased with the improvement in the balance sheet, particularly inventory.

The inventory management has been very strong, we've got a strong balance sheet, and I believe we've been successful in maintaining reasonable inventory levels, even though we've opened 10 new stores. In addition, we've lowered our debt by 700,000 this year while opening the 10 new stores. The Leather Factory wholesale centers reported 4.8% sales decline this quarter.

Due to a decline in sales in our national account customer group. And I feel like that needs a little classification if you don't mind. We have one group here that only works with the national chain stores. Most of the them are chain stores that would have 50 to 100, up to 2,000 chain stores. Some of them pure pure crafts, some of them general merchandise.

But the national account group had a sales loss for the second quarter. The whole of The Leather Factory wholesale centers reported a 4.5% increase in sales. Shannon will give you more detail on this issue later in the call, and I feel sure that when it comes to questions and answers, somebody will have a question. Gross margins held steady at 53.6 for the quarter.

Overall our operating margins were consistent with previous quarters. Many of our operating expenses decreased this quarter compared to a year ago, and we're pleased with the progress we're seeing in this area. The Tandy Leather retail operation reported solid sales - sales gains this quarter including a 9.2% increase in same-store sales. The retail store chain grew from 22 to 32 stores during the 12 months ended June 2004. As a result, Tandy sales increased 41% in this quarter over last year.

As of today, we've opened 10 new stores so far this year, and have done so with internal cash flow. Tandy's gross margins were down a half a percent for the quarter, but we're still running over 62% gross, which I think is good. That was a goal we had set originally. Our operating margin is down this quarter, but the majority of the operating expense increases are related to the start-up costs of 10 new retail stores.

Normally, I don't like to open stores in the first quarter, second quarter of a fiscal year because if you open these stores in early September, you've got a good run in September, October, November, December, that you can break out real quick, but when we're opening - trying to open 12 or 15 stores, it more difficult to cram them in to that last quarter, so we're just taking them as they come. When we find a good lease and a man to run it, we're going ahead and taking them.

Our operating margin is down this quarter, but the majority of the operating expense increases are related to the start-up costs of the 10 new retail stores. Because we opened so many new stores in the first half of the year, coupled with the fact that it takes 60 to 180 days for a new retail store to break even,Tandy's operating margin is typically lower in the the first half of the year.

That is primary because in November and December, they pick - the retail stores pick up Christmas sales, and the margins are higher, and the last quarter for Tandy is percentage-wise a higher percent of sales than the other three quarters. Robert's Cushman of New York, sales gains continued in this quarter, with a modest increase. Cushman is not a significant contributor to our financial success, however, generally has some contribution to our earnings.

I'll turn the call over to Shannon right now, our CFO, and she'll go over the numbers, and when Shannon gets through, I'll have a few closing remarks, and then we'll go through the question and answer. Thank you.

Thank you Ray. The earnings release went out this morning, for those of you that haven't seen it, I'll quickly recap the information. We'll discussion second quarter results first and then provide the year-to-date information.

Remember in this first comparison the time frame is second quarter '04 to second quarter '03. Consolidated sales increased almost 5%. Current quarter sales were almost $11 million, compared to the 2003 comparable quarter sales of 10.5 million. Other factories warehouse centers sales were 7.4 million this quarter, compared to 7.8 million a year ago, a decrease of 4.8%.

Tandy sales were $3.0 million compared to last year of 2.1 million, an increase of 41%. Cushman sales were 563,000 compared to 545,000 a year ago, an increase of 3%. Consolidated gross profit margins for the quarter was 54.6%, the same as last year. The Leather Factory's gross profit margin held steady at 53.6% for this quarter, and last year's second quarter. Tandy's gross profit margin was 62.2% currently versus 52.7% last year.

We've been successful in maintaining gross margins by retaining numerous vender relationships and by frequently producing catalog updates which allows us pass on price increases to customers as they occur. Consolidated operating expenses were $5.1 million or 46.8% of sales in the quarter compared to 4.5 million or 43.7% of sales last year.

The Leather Factory reported operating expenses totaling 44.9% of its sales, versus 41.7% last year, which reflects the impact of the lower national account sales covering a portion of our fixed overhead expenses. Tandy reported operating expenses totaling 55.8% of its sales currently, compared to 54.8% last year. Cushman's operating expenses were 24.2% of its sales this year versus 28.1% last year. [Inaudible] operations was 854,000 for the quarter down 300,000, or 26% compared to the second quarter of '03. Now for the six-month results.

Consolidated sales were up 10% over the same period last year, 2004 sales were 23.1 million compared to 2003 sales of 21.2 million. The Leather Factory sales were 15.7 million this year versus 16 million a year ago, a decrease of less than 1%. Tandy sales were 6.1 million compared to last year of 4 million, an increase of 54%. Cushman sales were 1.1 million, compared to $1 million a year ago, an increase of 9%. Consolidated gross profit margin for the year is 54.9%, up from last year's margin of 54.1%.

Other factories' gross profit margin increased to 53.9% this year, compared to 53% even last year. Tandy's gross profit margin is 61.5% versus 63 percent last year. Consolidated operating expenses were $10.4 million, or 45% of sales in the current year, compared to 9.1 million, or 44.3% of sales last year. The Leather Factory reported operating expenses totaling 43.1% of it sales versus 41.5% last year.

Tandy reported operating expenses totaling 53.5% of its sales currently, compared to 55.1% last year. Cushman's operating expenses were 25.2% of its sales this year versus 25.5% last year. Income from operations is $2.3 million this year, a modest increase compared to year-to-date 2003. At June 30th, 2004, total assets were 20.4 million, from year end 2003 to June 30th, cash decreased $547,000.

Accounts receivable increased 867,000 and inventory increased by 1.1 million. Current liabilities increased 444,000. Our debt balance for the Wells Fargo Bank was 1.1 million at the end of June, a reduction of $693,000 since December. Our debt to equity ratio is under .07, our current ratio is 5.7, EBITDA for the first six months of 2004 was $2.5 million, free cash flow which is EBITDA less CapEx was $2.4 million, and our enterprise value defined as market [inaudible] less cash plus debt was $43 million at June 30th.

Some specifics regarding the Tandy stores in the second quarter, sales were $3 million, gross profit was 62.2%, operating income was 10%. For the stores that were - the Tandy stores that were opened in 2002, which there were 14, sales were 1.5 million, gross profit was 62.6%, operating income was 2. - 12.9%. For the stores open in 2003, of which there were 12, sales were $1.1 million, gross profit was 61.7%, operating income was 11.2%. In the second quarter of 2004, average sales per store per month was almost $34,000.

The range of average sales per store per month during the second quarter ranged from 56,000 to 20,000. There are 4 Tandy stores with operating losses as of the end of June, they are the last store opened in the first quarter, and the three stores opened in the second quarter. The other two stores opened in the first quarter of this year are reporting year-to-date profit as of June 30th. Other factory wholesale center results are sales of $7.4 million, gross profit percentage 53.6%. Operating income 8.7%. The range of average sales per center per month excluding our Fort Worth superstore was 103,000 to 34,000.

29 of the 30 wholesale centers posted year-to-date profits as of the end of June, the one unprofitable center is the one we moved during the first quarter. That's essentially the number story. Higher sales than last year. Gross profit margins held steady, and we made $.5 million this quarter. We continue to open Tandy Leather retail stores, we're generating positive cash flow and we're continuing to pay down debt. So the burning question is, obviously, beyond that, what happened in the second quarter? We'll do Tandy first. Tandy's story's not surprising. Revenues continue to grow as stores we added last year become stronger. However, as Ray highlighted earlier, because we opened 10 new stores in the first half of this year, the costs associated with the store, including wages, rent, utilities, et cetera, are reflected immediately in our earnings figures, while revenues tend build over a period of months.

We anticipate that we'll see the benefit of these new stores in the second half of the year as we typically do. Overall Tandy Leather is performing extremely well, and we do believe that we'll continue to do so. The Leather Factory's story is a little different. There were obviously some real positives this quarter. Unfortunately, they are masked somewhat by the decline in our national account revenue.

The wholesale centers by themselves exceeded our expectations, growing at 5.6% so far this year, versus our expectation of 2 to 4%. So they're almost double what we - were projecting as expected revenue. However, the sales to our national account customer group are down substantially, which has dragged down sales for the entire group. If you followed our story over the last several quarters, we've talked about the product reset process that occurs to some of our national accounts, and we've emphasized before, this is a very normal and expected part of doing business with these customers. However, we believe that there are things going on internationally with some of those customers, for example, changes in buyers in our product group, or the implementation of some new automated inventory and purchasing systems, as examples, that have significantly impacted the timing and the amount of their purchases to date relative to our expectations.

While we can't control the internal changes within these customers, we can be better positioned to handle these changes. So in order to better manager these national accounts, we're currently redesigning our sales strategy in order to work more closely with these larger customers, and to better service the smaller regional chain accounts in order to better diversify the national accounts revenue. While these changes will take time to implement, we are working diligently to complete the changes.

As far as the operating margins are concerned, there are some real positives going on that are not obvious when you're looking at the numbers. We've been talking for several quarters about controlling operating expenses, particularly at the central support departments here in Fort Worth. As of June, we've made some solid progress in that area as a majority of those expenses from those support units are down from a year ago. However, there are a selected few that are up, including employee health benefits and our reserve for the allowance - reserve for uncollectible customer accounts.

Health costs for our Company are up almost 100% from what they were a year ago. The increase in store personnel, and the coincidental timing of certain claims have increased our healthcare expenses dramatically. Given that we don't plan to limit our employee's benefit, a key to hiring and retaining good personnel, we are focused on identifying ways to better manage increases in these costs.

Bad debt expense also increased significantly as our reserve for questionable accounts has increased from 1.5% of our outstanding A/R at June 30, '03, to almost 4% at June 2004. Some of that's timing. We - our policy is to reserve all accounts over 120 days, regardless of the circumstances, and I know that there's a large portion of those reserve accounts that have already been collected in this third quarter, so we'll pick up some additional income - or earnings in the third quarter due to those payments.

We'll continue to focus on expense management, eliminate those that we can without sacrificing operational success, and look for ways to strengthen our margin. Overall, I still believe in where we're headed, and that we will continue to produce solid results. I'll turn the call back over to Wray. He may have some some additional comments to what I said.

Thanks, Shannon. Well, I've got about a full page here I can read, but I think I'll skip it if you don't mind. I would like to discuss, and I will discuss it in detail, after I get through with this paragraph or two. The national accounts are really not our main focus for growth. We love them, and we want to keep them. They've been good to us.

But we've always known that the Tandy Leather retail stores will give you a better gross profit, a better feel for how the business is running, because you can monitor it, you don't have the buybacks, you don't have to buy shelf space, so don't misunderstand me. I'm not running down our national accounts, and I hope that we improve our performance at the national accounts.

I feel like that they'll always want leather craft products, and as the largest supplier, we probably would be the obviously supplier to them. We're disappointed in the performance of the national accounts, and I think that with the plans we have in effect, we'll make some changes as to how we approach them, and how we're going to try to sell them in the coming months.

We're cutting costs here, you know, we're supposed to do that, and we felt like we did pretty good. Shannon and I both are going to work more on our relationships with the institutional investors. We have with us now a new corporate controller, which will give Shannon some help day to day, and allow her to focus a little more on Investor Relations and capital market activities. I think that rather than reading the rest of that page, I'll just turn this over to the question and answer. I'm sure there's some hot questions out there by now.

Ladies and gentlemen, at this time, we will conduct a question and answer session. If you wish to make a question or a comment on today's presentation, please key star followed by 1 on your touch-tone telephone. If your question has been answered, and you wish to withdraw your registration, please key star followed by 2. Once again ladies and gentlemen, it is star 1 to ask a question. And your first question comes from the line of [Michael Fairen] of Westminster Securities. Please go ahead, sir.

Hi guys, actually this is Will Lyons.

Hi Will.

Hey Will.

Hey. First of all, would you repeat for us, just to get us all where we're on the same page--what is your guidance? You said it was - it's not changing, but what is it, exactly?

Referring to what, Will?

Oh, guidance for revenues and earnings for the year?

I'll let Shannon take that.

We're still saying revenue's going be 46 to 47 million, and diluted earnings per share is going to be 32 to 34 cents.

And Ray, it sounded like from your comments that - well, let me back up a little bit. If I understand right, you typically don't expect to open any new retail stores in the fourth. It's just too busy a quarter for you to try to do that, is that right?

That's true, it's easier to open them in September, October, and then go ahead and get ready for Christmas.

So the - part of the slow down we've seen here, not slow down, really, it more of your costs, are the first 3, 4 months of a new store being opened, so if you're going to stick to the projected 10 to 12, maybe 15 a year, we should still expect most of those would be in the first half, and we should also expect that they wouldn't be profitable until the 3rd and 4th quarter?

Well, that's kind of the way we look at it. When you open in - if you make the mistake, and I call it a mistake. If you make the mistakes of opening in June, July, and August --

Uh-huh.

You're opening in dog days. So we - if they just hold their own, we're real happy. But in order to get 12 or 15 of them opened, well, we have to go ahead and open them as we can.

Oh, sure.

One or two a month is about all we can handle, so we - we tried to spread it out, space them, so they don't bog our warehouse down.

Sure.

And, really, the ideal time is late August, early September, but - we obviously can't open 15 stores in early September.

Well, the logistics just don't work out for you.

We can't ship them.

Well, the other thing too, is, obviously if we could open in, say the first of November, and have a [hellatious] holiday season with that store that opened in November, you know, that would be great, because then higher revenues match the start up for the, you know, the start up of the stores. Unfortunately, if you wait that long to open, people aren't even going to know you're there for the holiday season.

So, you know, if we get much past October 1st, they'll still be in good shape, they'll be able to do fine, but you - we don't think we'll see the fourth holiday revenue that we like to see if we don't get open earlier enough for everybody to know where we are, and have time to get in the yellow pages and get the advertising out.

Sure.

So it's kind of a catch 22. If we open early in the year, so that we're not disabled by the holiday, we have these periods-- like this first and second quarter where all of those expenses to get started and the ramp up of revenue make our operating margins look bad, if we wait too long, we're going to have to wait a whole other year before we get the holiday shopping bump, and we don't want to do that.

Yeah. Well, no, it's understandable, you're going to - it makes sense, it's just that, you know, as somebody who follows the Company, this was a little bit of a surprise to me, now that I understand the reasoning for it, frankly I'll just take it into account from now on, because it's part of the way you're going to operate your openings.

Right.

Well, Will, for probably 42, 43 years of my life, I was taught to open them in late August, early September.

Uh-huh.

But we were only talking about opening two or three stores.

Sure.

That's when I was still with the Tandy group. Now that we're trying - a little bitty company trying to open 12 to 15 stores, we're having to space them.

Oh, sure. Of course. Do you think that will change over time? I mean, you're going to be up to 50 stores, I suspect, by the end of next year. Does your store opening scheduled in 2006 look different than your 2004 opening schedule, or will this always be the approach you'll need to take?

I think we're going to go the same route.

Yeah, okay. Thanks very much.

Yeah. Thank you Will.

Once again, ladies and gentlemen, it is star 1 to ask a question. Your next question is a follow-up from [Michael Fairen] of Westminster Securities. Please go ahead, sir.

Thank you. It's Will again. The accounts receivable reserves, you - am I right in thinking - you believe they're higher than they need to be now, and they'll - you'll actually reduce that charge to earnings in the current quarter, the third quarter if?

Yes.

You'll get some of that back?

Yes. Will, the policy is - I mean, the internal policy is that we reserve any and all accounts that are 120 days old, standard policy. And I happen to know that there are several rather large accounts that were in that 120-day column at the end of June that I reserved, and sometime in the last week, our credit managers managed to those accounts collected.

So it wasn't - I mean, I guess I could go back and do it a little differently at June, knowing what I know at the first of August, but that's standardly not the way we do it. So if you look at our reserve, it's up - I think it's 107,000 or something--I can't remember--at the end of June, which is higher than it's been for several quarters. Yeah, we'll pick up.

I mean, you're not talking huge dollars. I think last quarter - or last December it was 45,000, it's now 107, or something like that, so, I mean, you're not talking - wouldn't have been enough to swing a couple of hundred thousand dollars. But we, once again, being conservative, we tend to err on that side.

Sure.

So I did it because I wasn't sure, and, you know, we managed to know a little more now than we did at the end of June, so, yeah, we'll pick on little bit of that, but obviously as you know from the accounting side, that goes into your bad debt expense.

Sure.

It will reverse itself, or at least part of it will reverse itself come third quarter.

Well of the increase in your SG&A, which includes the healthcare costs and that sort of thing--is any of that what you consider to be one-time, or is that a permanent new plateau of costs now that you have just - a higher headcount and so many more stores opening, and such as that?

There are some unique cases that won't occur again, although that doesn't keep somebody else from being diagnosed with something horrible.

And you're talking there just on the healthcare side?

Yeah.

So you had one or two people who got ill to an extent, and a cost that you didn't expect?

Right, and obviously you can't manage any of that, and people - well, everybody knows that.

Oh, sure. Yeah.

Let's see. In terms of anything else besides that - I don't think there's really anything unusual - you know what's making the margins look like they do is because, you know, we - we're so far down on the national account sales, and, you know, the same staff that's working those accounts is there whether they're selling, you know, X dollars or Y dollars, so I'm not going to say that all of the - I mean, if you take the gross profit that would have been earned on national account sales, we've broken even with a year ago, you know, our bottom line would look a lot different, because all of the costs associated with managing that department are all there whether they sell $1 or whether they sell $10 million. Sure. Could you give us a little more flavor, a little more color, a little more depth on the changes you're making in your national accounts sales area?

Yeah, I think I can. We had - we have had a young man that was -- has been with us several years, came up through the store chain, that was going to work the smaller store accounts, and some unfortunate things happened, and we lost him. So now we're looking at - we've got probably two choices, and we're looking at both of them.

We can go back to national sales reps, or we can groom an insider, to call on them. The bigger accounts, and there's only 10 or 12 of them, we're going to focus more on constant contact and showing new products, and trying to gain more space without having to spend a fortune to get the space. In those chain stores, as y'all probably know, we have to buy space if you want to take somebody out. If somebody's got a hook next to you, a peg board hook next to yours, and you want that hook, you have to buy the merchandise. So we have to be careful about buying space that we can't utilize properly.

Sure.

But we are going to focus a little bit more on the big ones.

Okay. Thanks.

Once again, ladies and gentlemen, it is star 1 to ask a question. And there are no further questions in queue.

Thank everybody for joining us. I'm glad you could be there. And I sincerely hope that at the next meeting I don't have any bad news to give you. Thank you.

Ladies and gentlemen, this brings your conference call to a close. Please feel free to disconnect at this time.