Tandy Leather Factory Inc (TLF) 2004 Q3 法說會逐字稿

Good afternoon. Welcome to the Leather Factory Third Quarter Conference Call. (OPERATOR INSTRUCTIONS). 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 events, 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 occurring 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 the 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 these statements. I would now like to turn the call over to our host, Mr. Wray Thompson. You may begin sir.

Thank you. I am Wrap Thompson, CEO of The Leather Factory. Thanks for joining us for our Third Quarter 2004 Earnings Conference Call. Shannon Greene, our CFO, is here with us today also.

On this call, we will discuss our third quarter results, as well as discuss some of our plans and outlook for the remainder of the year. As stated in our press release from this morning, the third quarter was a continuation of the second quarter. On a consolidated basis, sales were up again this quarter. Our gross profit margins were solid. We reported earnings of over $400,000.

Operating cash flow was positive again this quarter. Our balance sheet continues to show improvement. Inventory is a key asset for us, as it is for all businesses. And I think we’re maintaining responsible, reasonable inventory levels, while expanding our store base. Also, we’ve repaid almost $800,000 of our debt this year, while opening 12 new Tandy stores.

The Leather Factor wholesale centers reported a 4% sales decline this quarter, due to the continued decline in sales to our national account customer group. Excluding the national accounts, the wholesale centers reported a 1% increase in sales. Gross margins improved slightly to 54.6 for the quarter from a year ago, and improved a full percent over last quarter. Operating margins fell slightly, due primarily to the sales decline.

The Tandy Leather retail operation reported solid sales gains this quarter, including a 2.4% increase in sale store sales. The retail store chain grew from 26 to 36 stores during the 12 months ended September, 2004. As a result, Tandy sales increased 31% in this quarter over last year. As of today, we’ve opened 12 new stores this year, and have done so with internal cash flow. Tandy’s gross margins held steady this quarter compared to the third quarter of 2003, at 63.2%, and improved a full percent from last quarter. Our operating margin is up slightly this quarter, as the sales at the new stores are beginning to catch up with the start-up costs incurred earlier in the year. Roberts, Cushman of New York, sales gain continued this quarter, with an 11% increase. Even though Cushman is not a significant contributor to our financial operational success, it generally contributes to our consolidated earnings, although the contribution is minimal.

Now that I have hit the highlights, I will let Shannon take over for the financial numbers.

I hope you’ve all had a chance to review the earnings release that went out this morning. I know it was a little bit late. I will quickly recap the financial information for those of you who haven’t seen it yet. We’ll discuss third quarter results first, and then provide year-to-date information.

Remember the comparison here is third quarter ‘04 to third quarter ‘03. Also, I am going to reference the wholesale division, which is represented by The Leather Factory whole centers and the national account sales unit. The retail division reference will be the Tandy Leather retail stores.

Consolidated sales increased 4.6% this quarter. Current quarter sales were $10.5m, compared to the 2003 comparable quarter sales of $10.1m. The wholesale division sales were $7.1m this quarter, compared to $7.4m a year ago, a decrease of 4%. The retail division sales were $3m, compared to last year of $2.3m, an increase of 31%.

Cushman sales were $459,000, compared to $413,000 a year ago, an increase of 11%. Consolidated gross profit margins for the quarter was 56.1%, an improvement over last year’s gross profit margin of 55.2%. The wholesale division’s gross profit margin improved slightly to 54.6% for the quarter, versus 54.2% last year.

The retail division’s gross profit margin held steady at 63.2% this quarter compared to last year. We continue to diligently monitor product costs carefully, and are pleased with the success we achieved this quarter maintaining or improving gross profit margins in all three operating divisions.

Consolidated operating expenses were $5.1m or 48.8% of sales in the current quarter, compared to $4.7m or 46.2% of sales last year. The wholesale division reported operating expenses totaling 46.4% of its sales versus 43.6% last year. The decline in national account sales is the primary reason for the decrease in operating margins. The retail division reported operating expenses totaling 57.8% of its sales currently, compared to 58.2% last year. And systems operating expenses were 26.1% of its sales this year, versus 24.8% last year.

Income from operations was $775,000 for the quarter, down $140,000 or 15% compared to the third quarter of ‘03. On a nine months basis, consolidated sales were up 8% over the same period last year. 2004 sales are $33.7m, compared to 2003 sales of $31.1m. The wholesale division sales are $22.9m this year, versus $23.3m a year ago, a decrease of 1.9%.

The retail division sales are $9.1m compared to last year of $6.3m, an increase of 46%. Cushman sales were $1.6m, compared to $1.4m a year ago, an increase of almost 10%. Consolidated gross profit margin for the year is 55.3%, up from last year’s margin of 54.5%. The wholesale division’s gross profit margin increased to 54.1% this year, compared to 53.4% last year. And the retail division’s gross profit margin is 62.1% currently, versus 63.1% last year.

Consolidated operating expenses were $15.5m, or 46% of sales in the current year, compared to $13.7m or 44.2% of sales last year. The wholesale division reported operating expenses totaling 44.1% of its sales versus 42.1% last year. The retail division reported operating expenses totaling 54.9% of its sales currently, compared to 56.2% last year. And systems operating expenses were 25.8% of its sales this year, versus 25.3% last year.

Income from operations is $3.1m this year, a slightly decrease from year to date 2003 of $3.2m. At September 30, 2004, total assets were $20.6m. From year end 2003 to September 30, cash decreased by $400,000. Accounts receivable increased $414,000. And inventory increased by $1.8m.

Current liabilities increased by $265,000. And our debt balance with Wells Fargo Bank was $1m at September 30, a reduction of $786,000 since December ‘03. Our debt to equity ratio was 0.06. Our current ratio is 6.2. EBITDA for the first nine months of ‘04 was $3.4m. Free cash flow, which is EBITDA (less) (ph) capital expenditures was $3.2m. And our enterprise value, defined as market cap, less cash, plus debt, was $39m at September 30.

Some specifics regarding the Tandy Stores in the third quarter, again they did total sales of $3m. Gross profit margin was 63.3% . Operating income was 5-1/2%. For the stores, the Tandy Stores that were opened in 2002, of which there were 14, their sales for the quarter were $1.4m. Gross profit percentage was 63.1%. And their operating income was 11.4%. Of the 12 stores that were opened in 2003, their sales were $1m. Their gross profit percentage was 63.1%. And their operating income is 9.6%.

In the third quarter, average sales per store per month was $30,000. The range of average sales per month per store during the quarter ranged from $53,000 to $20,000. There are 8 Tandy stores with operating losses as of the end of September. They are our newest stores opened this year from February to August.

Simply stated, we’re still recording sales gains. Our gross profit margins improved. And we made $425,000 this quarter. We’re still on target with our Tandy Leather retail store openings, while paying down debt and generating positive cash flow. Tandy’s story seems to be a good one, although the summer has been tough. Business always seems to be tougher during the summer, maybe because people are taking vacations or spending time outdoors rather than indoors working on leather crafts.

Frankly, I am very pleased with Tandy’s revenue growth, especially in the older stores, considering that we’ve added another dozen stores to the mix this year. The older stores are definitely impacted by the new stores in terms of sales. However, the impact doesn’t seem to last very long, as they’re continuing to find ways to produce sales gains on a consistent basis. I’m a little disappointed that we’ve got 8 stores that are not profitable yet. Although I know, with the exception of 1 store, they’re all less than six months old.

The combined operating loss from those 8 stores is $94,000 so far this year. Realistically, they should be profitable no later than the second quarter of ‘05, maybe earlier. I don’t think they’ll break even before the end of the year.

Leather Factory’s story hasn’t changed much from last quarter. The wholesale centers are doing well. Similar to the older Tandy stores, one would expect The Leather Factory centers to be negatively impacted by the competition of the expanding Tandy Store chains. But again, they manage to find a way to compete and succeed. Sales for our national account customer group are still down, which has resulted in a sales decline for the entire Leather Factory wholesale group for the second quarter in a row. While we believe we’re making some progress in adjusting our strategies in this area, I don’t believe we’ll see any positive impact until 2005.

On the positive side, however, the significance of this customer group on our total revenue should continue to drop as we focus on the growth potential of Tandy Leather. Operating margins are still not where we’d like them to be. And again, just like the second quarter, the sales loss in the wholesale division easily explains why operating margins as a percentage of sales are higher than we would like.

We continue to battle rising healthcare costs. And I don’t expect that we’ll see any significant progress in this area any time soon. We are increasing the employee’s contribution as of December 1. But the bottom line is that every company seems to be struggling with the cost of healthcare and how it impacts their bottom line.

We’re spending more on advertising than we did a year ago. And I expect that trend to continue as we add more stores and expand into new markets. There is a direct correlation between our advertising efforts and our sales. If we expect sales to continue to grow, we have to expect our advertising expenses to trend upward as well.

Sarbanes-Oxley compliance is another expense we’re dealing with now. We spent approximately $50,000 in the third quarter on stocks consultants. Given that we do not have an internal audit department, we didn’t see any way to complete the initial SOX 404 work without some outside help.

Wray has got a few more comments, general concepts, before the call is over.

Thank you Shannon. Overall, with the exception of our national accounts, we’re on target with our internal expectations for the year. The Tandy Leather retail division continues to grow, and is our major focus of growth for the future. The Leather Factory wholesale centers are generally predictable sales producers. We are continuing to work on our national accounts strategy, by presenting new product ideas to stimulate sales.

As we’ve said before, it can be a slow process. And at this point, we don’t expect to see any significant improvement this year. As the press release indicated this morning, we are lowing our 2004 guidance, due to the decline in sales to our national accounts. We are now estimating that our total revenue will be in the $44m to $46m range, and fully diluted earnings per share will be in the $0.24 to $0.26 range.

For 2005, we plan to open 6 Tandy Leather retail stores, rather than 12. As a result, we are estimating our total revenue to be in the $47m to $48m range; a 5% to 8% increase top line. And diluted earnings per share is expected to be in the $0.28 to $0.30 range, a 15-18% increase over 2004.

While we are not lowering our expectations for the Tandy Leather Division, we have stated that we want to open stores that are profitable quickly. We are not concerned about our 8 unprofitable stores. But we want to make sure that we put in the effort that’s necessary to ensure quick profitability. From a management perspective, we feel that we haven’t been able to spend as much time as we need in making sure that these stores get off to a good start. We believe by being conservative now, we ensure better store performance in the long-term.

In the conclusion, we firmly believe in the potential of Tandy Leather and our Company overall, and are committed to doing what it takes to be successful for our stockholders. Operator, we can take questions.

(OPERATOR INSTRUCTIONS.) Will Lyons with Westminster Securities.

I have a couple of questions. One, could you just give us some flavor, some meat on the bones of the ongoing problem in the national accounts, and what you are doing to fix that? Or, as you say, it’s becoming less important in terms of overall revenues. But certainly it’s something you’d like to see a little bit turn around. So what’s happening there?

Well, let’s see if I can answer that three-part question. First of all, about three years ago the national accounts were approximately 30% of our sales. This year, maybe they will be 10%. I mean it’s not good to lose sales. But with the thought in mind of opening our own retail stores, and trying to capture that business ourselves at a higher gross, it couldn’t be all bad.

Sure.

Another thing that is important, and I am sure all of you in the business world are aware of this, it sometimes can be difficult to do business with some of these major chains. For instance, this year, early in the year, we had our SKUs, our items in the stores in one of the major accounts cut by a third. This morning we’ve got another call. And now they tell us they’re going to cut 12 more items, and add back 5. There is no recourse. Whatever they tell you is what they’re going to do. All we can hope is that the 7 we lost were dogs, and the 5 we’re going to put in are good ones. That’s the only way I can look at it.

Sure.

Will, we are looking at adding a new, or presenting some new products. It’s very early into that process. Initial feedback has been good. But it hasn’t turned into purchase orders yet. So if you know anything about the big craft chains, it’s very much, I don’t want to say a fad. But some things are hotter than other things. What we’ve traditionally sold in this traditional leather craft items – and we can continue to do that.

However, they are filling their stores with other things. And we either will see the number of SKUs that we continue to sell them and amount of space we have decline, or we will kind of put something else that we can entice them with, to give us shelf space, and to continue to purchase products.

So we’re working on that. That’s not our core business. And there’s a lot of effort that’s got to go into adding some new things, product ideas to them, because that’s not the traditional stuff that we do. But we’re going to give it a shot. We’re certainly not walking away from the business. But right now they’re certainly not making it easy. Does that help?

Yes it does. Thanks very much. The follow on question, if I might, on a different tact, you were looking at 6 new stores in 2005, which would, obviously doing simple math, be half what you’ve opened this year, and less than you opened last year as well. Is that a function of wanting to slow down and make the openings, give management more time to deal with the openings and that sort of thing? That’s quite a -- well, not quite. But it is a down-step, if you will. What’s the thinking behind that?

You’re pretty much thinking right. We are, when we started the Tandy Leather chain development, chain expansion, we initially came out and said oh, we’ll open 10 to 12 a year. And we still believe in 100 to 120 stores. That’s not changing any. We’re at 38 right now -- 39 if you count the Calgary store that we opened last month.

So in three years, we’re still ahead of our 10-12. We feel like the number 12 is a nice round figure and it makes sense. But, as you indicated, I am a little not concerned. But I don’t like the fact that we’ve got $100,000 of losses at the 8 stores that we’ve got, the last ones that we opened right now. We certainly don’t need another 12 in ‘05 that are dragging just a little bit.

So we just want a little bit of time, to make sure from a management perspective, that those guys that are out there in those new stores are getting the attention that they need in order to be truly successful, instead of just being kind of average.

And if these 8 stores that we’ve referred to this quarter, if they really kick in for fourth quarter and look really good, we may go back to 12. But I just want to make real sure that we don’t end up with 12 or 15 or 18 stores that are losing money, because we know how we all feel about when we don’t make as much money this quarter as we did a year ago, or we’re making less money this quarter than we did last quarter.

That’s hard. And if we started out as very average or mediocre, we’re going to have a hard time ever getting to where they’re the stars. And we want to make sure that they’re solid producers, and that they’ve got the attention that they need, particularly from our store operations team, to get out there and be truly successful, so that we can keep the momentum going.

Okay. All right. Thanks very much.

(OPERATOR INSTRUCTIONS). Sir, we have no further questions at this time.

Okay. Thank you guys. Thanks for taking the time to listen to our conference call. And I hope to speak to you the next quarter. Thanks everyone for participating today. Goodbye.