Tandy Leather Factory Inc (TLF) 2004 Q4 法說會逐字稿

Good afternoon. Welcome to the The Leather Factory 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. [Caller Instructions]. Questions will be taken in the order they are received. you are on speaker phone please pick up your handset before presenting your question. 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 speaker phone please pick up your handset before presenting your question. 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 making 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 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. 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. Mr. Thompson, you may begin your conference.

Thank you. Thank you for joining us for our 2004 earnings conference call. I'm Wray Thompson, CEO. Shannon Greene, our CFO, is here today as well. On this call, we will discuss our fourth quarter and year-end 2004 results as well as discuss our projections for 2005. 2004 ended with a strong finish and I'm pleased with our overall results. Shannon will provide us with more detailed financial information for the quarter and year shortly. However I would like to highlight a few items that I think are worth noting. 2004, sales grew more than 10 percent over 2003 sales. 2004 is our 6th consecutive year of sales gains. We also set a new quarterly sales record in the fourth quarter. Our consolidated gross profit margin improved for the 8th year in a row. In December we completed the acquisition of our only significant competitor in Canada. We opened 13 new Tandy Leather retail stores in 2004, which in combination with our 3 Canadian stores acquired in December, brings the total Tandy stores to 42. Our internal cash flow provided 100 percent of the capital necessary for these needed (ph) and acquired stores. In 2004 we generated a record 4.3 million in free cash flow, defined as EBITDA less capital expenditures. We executed a new credit agreement with Bank One JP Morgan Chase in November, refinancing our debt with Wells Fargo Bank. Finally we repaid 1.3 million of bank debt in '04, even after the acquisition and new store openings.

Starting this quarter, we are going to refer to a wholesale leathercraft division which consists of The Leather Factory wholesale centers and a retail leathercraft division which consists of the Tandy Leather retail stores. Shannon will explain in more detail why and what is changing. But I would like to point out this change in terminology does not affect prior period comparisons. Wholesale leathercraft division information presented for the fourth quarter and forward compares to The Leather Factory operating division that we discussed in prior quarters. Likewise information presented today for the leathercraft retail compares to the Tandy Leather operating division information provided previously. In our wholesale division, the 30 wholesale centers operating under the name The Leather Factory reported sales gains of 4.5 percent for the year which is better than the internal targets of 2 to 4 percent sales growth annually. The sales international account customer group was down a corresponding amount. And therefore our overall wholesale leathercraft division was down 0.2 percent. Shannon will further discuss our philosophy on our national accounts later. Gross margins improved approximately a half a percent over last year. Operating margins fell 1.4 percent due primarily to flat sales. Our leathercraft division -- retail leathercraft division -- ended the year with a 46.6 percent sales increase. 16 new or acquired stores were added in 2004. I want you all to remember what I just said. 16 new stores. We promised 10 to 12.

Tandy's gross margins decreased approximately 1 percentage point this year due primarily to the increase in leather sold at the retail stores which is normally a lower gross profit item. Operating margins improved 2.5 percentage points this year. Cushman reported a sales gain of 10.5 percent for 2004. Gross and operating margins remained steady. I will turn this over to Shannon now and let her give you some details on the financial results. Shannon?

Thank you Wray. I'll discuss fourth quarter results first and then provide the annual information. Remember the comparison here is fourth quarter 2004 to fourth quarter 2003. Also, again, the wholesale leathercraft division reference consists of the wholesale centers and the national account sales units where in reference to the retail leathercraft division refers to the Tandy Leather retail stores.

For the fourth quarter, consolidated sales increased 17.5 percent. Current quarter sales were $12.4 million this year compared to $10.6 million last year. Wholesale leathercraft sales were 7.7 million this quarter compared to 7.3 million a year ago, an increase of 5.3 percent. Retail leathercraft sales were 4.3 million compared to last year at 2.9 million, an increase of 49 percent. Cushman sales were 407,000 compared to 359,000 a year ago, an increase of 13.5 percent. Consolidated gross profit margins for the quarter was 54.7 percent, a slight improvement over last year's gross profit margin of 54.3 percent. The wholesale division's gross profit margin improved slightly to 52.9 percent versus 52.7 percent last year. Retail leathercraft gross profit margin fell from 62.7 percent to 61 percent even. We sold a lot of leather to the retail stores which explains the decrease in the gross margin this quarter. Consolidated operating expenses were 5.6 million, or 45.2 percent of sales in the fourth quarter of 2004, compared to 4.8 million or 45.6 percent of sales last year. Wholesale leathercraft reported operating expenses totaling 43.7 percent of its sales versus 41.3 percent last year, and the retail leathercraft reported operating expenses totaling 48.3 percent of sales currently compared to 56.8 percent last year. Cushman's operating expenses were 39.5 percent of its sales this year versus 43.6 percent last year. Income from operations was $1.2 million for the quarter, an increase of 272,000 or 29.8 percent compared to the fourth quarter of '03.

Now for the 2004 annual results. Consolidated sales were up 10.6 percent over 2003. Sales were 46.1 million compared to 41.7 million last year. Wholesale leathercraft sales were 30.6 million versus 30.7 million a year ago, a decrease of 0.02 percent. However, excluding national accounts, our wholesale leather craft sales were up 4.5 percent. National accounts, when we were solely a wholesaler, was an important piece of our business. However, since over the past several years we've shifted our growth strategy to focus on our wholesale centers and our retail operations, national accounts is becoming a less relevant part of our business with each passing quarter. Sales to national accounts comprised 12 percent of our total revenue in 2004. That percentage has decreased every year since 1993 as our total annual sales have grown but more specifically its contribution to our sales has decreased 40 percent since we began focusing on our retail growth strategy in 2000. As a result in the future, we are considering separating national accounts from the wholesale leathercraft division from a discussion standpoint.

Retail leathercraft sales were $13.5 million compared to last year of $9.2 million, an increase of 46.6 percent. Cushman sales were $2 million compared to $1.8 million a year ago, an increase of 10.5 percent. Consolidated gross profit margin for the year is 55.1 percent, up from last year's margin of 54.4 percent. Wholesale leathercraft gross profit margin increased to 53.8 percent this year, compared to 53.2 percent last year. Retail leathercraft gross profit margin was 61.8 percent currently, versus 63 percent last year. Consolidated operating expenses were $21.2 million, or 45.9 percent of sales in the current year, compared to 18.6 million, or 44.6 percent of sales last year. Wholesale leathercraft reported operating expenses totaling 44 percent of its sales versus 42 percent last year. The retail leathercraft reported operating expenses totaling 52.8 percent of its sales currently, compared to 56.4 percent last year. Cushman's operating expenses were 28.6 percent of its sales this year versus 28.9 percent last year. Income from operations was $4.2 million this year, a 4 percent increase over 2003 of 4.1 percent.

At December 31, 2004, total assets were $22.1 million. We held $2.6 million of cash at year- end, an increase of 48 percent from the end of 2003. Accounts receivable increased 203,000, and inventory increased by 1.6 million. Current liabilities increased by 682,000. Our bank debt was 505,000 at year-end, a reduction of $1.3 million since December 31, 2003. Our debt to equity ratio is .05. Our current ratio is 4.9. EBITDA for 2004 was $4.7 million. Free cash flow, which is EBITDA less capital expenditures, was $4.3 million. And our enterprise value, defined as market cap less cash net of debt, was 36 million at December 31.

Some specifics regarding the Tandy's retail stores performance. We will start with fourth quarter again and then provide the same information on an annual basis. Fourth quarter results are as follows -- sales were $4.3 million. Gross profit was 61 percent. Operating income was 12 percent. For the 14 stores opened in 2002, sales were $1.9 million, gross profit was 51.4 percent, operating income was 15.3 percent, and the average monthly sales per store was $45,300. For the stores opened in 2003, our sales were $1.2 million. Gross profit was 62.3 percent, operating income was 13.7 percent, and the average monthly sales per store was $34,600. For the stores opened in 2004, sales were $1.2 million, gross profit was 59.3 percent, the operating income was 4.9 percent. Again, remember this is the fourth quarter only.

The annual results for 2004 are as follows -- sales were $13.5 million. Gross profit percent was 61.8. Operating income was 9.4 percent. For the stores opened in 2002, sales were $6.6 million. Gross profit was 62 percent. The operating income was 12.7 percent. The average monthly sales per store for the year was $39,100. For the stores opened in 2003, sales were $4.6 million, gross profit was 62 percent, operating income was 11.4 percent, the average monthly sales per store was $32,100. For the stores opened in 2004, sales were $2.3 million. Gross profit was 60.7 percent. The operating income was 0.3 percent.

There were 8 Tandy stores reporting operating losses as of the end of 2004. 2 of the 8 were the new stores acquired in Canada as of December 1. 4 of the remaining unprofitable stores were profitable for the fourth quarter. Those fourth quarter profits were just not enough to get them profitable for the entire year. The remaining 2 unprofitable stores were only open 5 months in 2004 and we expect those to be profitable in 2005.

To summarize, I think we had a very good year. I'm pleased with the sales growth in the retail leathercraft and wholesale leathercraft divisions excluding national accounts. The gross profit margin improved this year despite the potential concerns surrounding metal and fuel prices. And we had a positive net cash position on the balance sheet and our operating income continues to increase. Our retail leathercraft division continues to achieve strong successes. Our retail strategy is the crux of our growth in the future and we believe we have developed a strong group of store managers that are focused on delivering bottom line results. While a few of our stores were (ph) unprofitable at the end of 2004, we witnessed significant progress in each of the stores during the fourth quarter and are expecting this trend to continue. We plan to continue our growth plan of an average of 12 new stores per year. In 2004, we opened 13 new stores and acquired 3 stores in Canada in December. We will see the full year benefit of these acquired stores in 2005 and we plan to open 6 to 8 new stores in 2005. This will result in an average of 12 stores per year in the 2004 to 2005 time frame. We anticipate that we will continue this average retail growth rate in the future.

The wholesale leather craft division is performing well too. Growth in the revenue of the wholesale center exceeded our expectations and we believe that they can continue to deliver consistent and predictable growth in the future.

While we are continuing to work on lowering our operating expenses, we believe that we have done a good job containing the majority of our costs. Our health benefit programs for employees are a persistent issue. Their costs rose $350,000 in 2004 or approximately $0.03 a share. We will continue to analyze these benefit programs, specifically related to our medical health plans, looking for ways to cut costs without sacrificing too much in the way of benefits. In addition we, like every other public company, are beginning to grapple with SOX 404 compliance which costs us approximately $175,000 or 1.5 cents per share this year. With the limited staff that we have, it is possible that we will have to utilize outside help as we continue through this process but we will do what we can to minimize future expenses as much as possible. I will now turn the call back over to Wray.

Thanks, Shannon. If any of you can remember all of that, raise your hand. I have 3 more items of business to discuss and then we will take whatever questions you might have. First, guidance for 2005. As the press release indicated this morning, we are estimating that our total revenue for 2005 will be in the 48 to $50 million range and fully diluted earnings per share will be in the $0.28 to $0.32 range. We plan to open 6 to 8 Tandy Leather retail stores which, in combination with 2004, is an average of approximately 12 stores per year. We believe that by opening 6 to 8 new retail stores in '05, we can focus on assuring that they will reach profitability quicker while also working on the numerous stores that we either acquired or opened in the latter half of '04. Second, we acknowledge that our national accounts have been decreasing over the past years and we anticipate they will continue to decline in the terms of revenue in '05 and beyond. As Shannon stated earlier, national accounts were an important component of our business prior to our full commitment to the retail marketplace. However, with the continued growth in strategic focus on the Tandy Leather retail stores and our wholesale centers, we are seeing that the impact of the national accounts on our overall performance, whether positive or negative, will continue to fade. Certainly we welcome positive trends in national accounts but it is not a strategic focus. Third, I'm very proud and I will say "very proud" twice, to report that we paid off our remaining balance on our revolving line of credit with Bank One today. So for the first time in the company's history we have no bank debt. That's 24 long years. In conclusion we firmly believe in the potential of Tandy Leather and our company overall and we are committed to doing what it takes to increase value for our stockholders. Operator, we are ready to take questions.

[Caller Instructions]. And sir your first question comes from Will Lyons of Westminster Securities.

Hi, Wray. Hi, Shannon.

Hello.

Hi Will.

Hi. Nice quarter.

Thank you.

Thank you.

A couple of questions. 6 to 8 stores next year. Does that include acquisitions?

Well, if there happen to be any, Will, that would be a plus.

So this would be sort of Greenfield is your planning?

Yes.

Can you give us a little color to what the problems were with the stores you mentioned in last quarter's conference call and what you did to fix them?

Well, we probably over-emphasized problems because they didn't turn profitable within 60 days. Really there was not a problem. I think Shannon covered that in her part of it. We've got a few stores that are new that are not profitable. But we don't like that.

Sure.

We want them to be profitable quickly so we can open more stores. And I don't know if we get the -- what I call the laggards up and running, we could expand our goals a little bit. But really, if you go back, when we started the Tandy store expansion, we said we would open 10 to 12 per year, right?

Right.

We've been in this 3 years. Do you know how many we have now?

32?

42.

42.

So in 3 years, if we had maxed out on our 10 to 12 bet, we would have been at 36. And we are at 42. So even though we are saying 6 to 8 this year, we are still ahead of the game. We are going to stick to our promise that we are going to open them. We are going to open them and make them profitable and then we will open some more.

When typically you haven't opened any in the fourth quarter, 2004 was a bit different. What was the change there?

We were just dragging around, Will.

That's fair enough.

No, it has to happen on site location and manager availability. That's really all that controls it.

On your national accounts, I know you want to deemphasize that and I don't want to over- emphasize it, but Shannon, you mentioned the idea of splitting that out. I have to say as an editorial comment and somebody looking at the firm from the outside, that would be helpful.

Okay. Well, I think we've -- I'm not going to guarantee you we are going to do it. However, I think we've already decided that the beginning of fourth quarter was the time to make the change between The Leather Factory and Tandy versus wholesale and retail. And I think that makes really good sense because we now have The Leather Factory legal entity stores in Canada that are operating as Tandy Leather so I think that will as we make the change in the terminology that will make sense going forward. National accounts is skewing the success of the wholesale centers right now. So it might be helpful to those of you who spend an awful lot of time looking at numbers and make it do analysis to make it a little more apples-to-apples instead of having the waters muddy so to speak. I'm not going to guarantee you I am going to do it but I'm strongly considering it.

One last question, sort of a housekeeping question. What's your best, I don't know if estimate is the right word, but what did you spend on Sarbox for the quarter and for the year? Additional costs?

We spent a total of, hard costs like money out the door?

Yes.

175,000 for the year, 125 in the quarter.

And are those recurring?

No.

Just getting up to speed to where you need to be.

I will cut you off right there. God help us if that's recurring, no.

Okay.

We used some outside consultants to get us going. They spent about 5, 6 months with us. It's a pretty intense, you've got to be hearing from all the companies, it's a very intensive process. We don't have an internal audit staff. We are a small company and frankly I would not like to spend the money to hire anybody if I can help it. They kind of helped us with the initial design and documentation of the whole process. Hopefully we can internally take it from there and do our ongoing testing and be in good shape. Got the news today that we are actually pushed another year in terms of when we have to be compliant. That just means we have a little bit more time to make sure we have everything going like it needs to go. You know audit fees are going to go up. You guys have got to know that too. Our audit fees will go up because they have to do this additional assessment but we haven't seen any of that yet.

Thanks very much and again congratulations on a solid quarter.

Thank you Will.

Will, before you get away, I would like to go back and address the number of stores that we opened, Tandy stores. We are going to try very hard to stick to our original schedule. We are a little bit ahead right now of the 10 to 12 per year. And let me assure you that once we get the ones that are not profitable up and running, we will probably be a little more aggressive.

Sure. Let me add on something there, though. You mentioned that one of the limiting factors is finding the right manager and that absolutely makes sense. As you have more stores out there and more -- presumably developing more management talent, will that be a little easier?

Will, I think it will be because right now I understand we have a good backlog of trainees in the system. And these people will be younger people with a good background in leathercraft and selling leather. And that's not something that you just find coming in off the street. So I'm kind of enthused about having a group of 8 to 10 young trainees coming up that will give us some new blood.

All right. Thanks very much, Wray.

Okay.

Again, if you wish to ask a question, please press star, followed by one, on your touch tone telephone. Your next question comes from Jim Cheechee of Contractor.

Hello, Mr. Thompson.

Hi, Jim.

Hi, I appreciate your quarter. I appreciate your 28 years. I'm with you all the way. I think I discussed about 500,000 last time I talked with you. And I'm working on it. But let me, I got a couple of things. I worked in prison work for 24 years.

Okay.

And we got some of your material in for our inmates to work on. You know to give them something to do, keep their mind active and productive things?

Right.

And it was a real success. And I came up with an idea some months ago, and that was an idea of coasters, using coasters. I don't know if you got, I sent a letter and put a couple of samples in.

Yes, I got them.

I just wondered if that would be something -- I understand there's a couple of, well, there's quite a few companies that are doing something like that. But it's basically they have a punch -- just get about a quarter inch bunch of leather together and they've got a punch, it's stainless-steel and they have a quarter inch reset, or inset. And they punch these little coasters out and then at the same time they can either print their company's name or take them out and then have them printed. So I just thought I would throw that out to you to take a look at it. I don't want, I don't need you to say anything about it now. But I just thought that that would be something, I understand, that can be profitable because some of the, some of these companies especially these financial companies want to give something out to their clients and they are free to the clients but you can send a case to the company and they like to do that, advertising and their telephone numbers and so on. So just thought I would throw that out. And just keep up the good work. I can see a lot of potential in your company and I appreciate you all. Thank you.

Thank you, Jim. Jim, as you probably already know, since you understand who we are and what we are about, those old coasters the company has sold them for – let's say they started in about 1946, those have been in the catalog.

Okay.

Since 1946.

All right.

Maybe we haven't featured them or put a push on in the way that you suggested. But I would tell you that we have just recently sent out a mailing to all the prisons asking them to keep copies of our catalog in their libraries. Because it's very difficult to get catalogs into the inmates unless they request them.

I see.

Can't just send them in blind. So if we can get copies in the library it will be a little easier and maybe -- and we do, we do special mailings to the inmates.

Address them to the chaplains. Chaplains can get anything.

Gotcha. We do special mailings to the inmates and on the next one I will try to remember, you know how it is when you get to be 70 years old, I may not remember, but I will go back and tell advertising to feature the coasters or the rounders and show them what can be done with them.

Thank you.

Thank you Jim.

For any further questions, please press star followed by one. And sir you have a question from Will Lyons from Westminster Securities.

Wray, you were quoted in the press release this morning, one of your comments was regarding gross margin improvement in spite of concerns surrounding rising metal and fuel prices. What did you guys do to keep that from affecting your margins?

Well, actually we had orders in ahead of the increases. But also we tried to set our prices in every flyer, every catalog, to where our margins stay at a place we'd like to have them. We have that right to set the prices. If the price goes up and it's something we can't avoid, we have to pass it along.

For you or for Shannon, should we, for those of us who try to understand from the outside, should we look at gross margins in '05 being in line with '04?

Will, in answer to that, I just read an article last week in the Wall Street about the continued problems we are going to have with transportation costs. Not necessarily just fuel costs but finding a trailer or a container. So in answer to your question, I don't have an answer. I think we are going to have to watch it very close. We are going to have to be very careful. There is probably going to be some increases in freight costs.

Okay. Thank you.

Okay.

Again, ladies and gentlemen, for any further questions, key star followed by one. Sir, you have no more questions at this time.

Okay. Thank you very much. Appreciate you sitting in.

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