Tandy Leather Factory Inc (TLF) 2005 Q1 法說會逐字稿

Good afternoon. Welcome to the The Leather Factory first quarter, 2005 earnings 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 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 The Leather Factory's Form 10-K for 2003 and their subsequent Forms 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 your host, Mr. Wray Thompson. Thank you. Mr. Thompson, you may begin your conference.

Thank you for joining us for our first-quarter, 2005 earnings conference call. I am Wray Thompson, CEO, and I am joined today by Shannon Greene, our CFO. Today, we will discuss our first-quarter results, as well as provide an update on our plans for the year. Overall, we are very pleased with the first-quarter results, as we set new quarterly sales and earnings records. Our first-quarter consolidated sales increased 4% in income from operations, and increased 8% over the first quarter of 2004. Our consolidated gross profit margins increased, and operating cash flow was positive again this quarter.

Our balance sheet continues to strengthen. As I mentioned on our last conference call in March, for the first time in the history of our company, and I think for the first time in my life, we have no bank debt. Accounts receivable increased this quarter as our sales to credit customers increased in the first quarter. Inventory is up as well, a reflection of our store growth.

Our wholesale Leathercraft division posted a sales decline of 6% this quarter, the majority of which is attributed to the National Account group. The Distribution Center sales were down 1% compared to last year's first quarter. We are not really concerned about that as they were working off a record setting first quarter in '04. We still believe the Distribution Centers are consistent in their sales growth at 2 to 4% annually.

Gross margins improved a full percentage point. Operating margin increased 14% for this quarter due to solid reductions in operating expenses.

Our retail Leathercraft division continues to build with solid revenue growth, with a majority of the growth coming from the new stores. But, we also experienced some growth in existing stores as well. The Tandy Leather retail store chain grew from 29 to 44 stores during the trailing 12 months ended March, 2005. Sales were up 35% in this quarter over last year. We have opened two new stores so far this year, and we are maintaining our commitment of funding this growth from internal cash flow.

Gross margins improved more than one percentage point. Operating margins declined a half point as a result of our opening of two new stores in March. As our sales ramp up, we should regain their operating leverage.

I will now turn the call over to Shannon Greene, our CFO, who will provide further details on our financial results, and then we will talk a little bit about our plans for the rest of the year.

Just to make sure everyone is on the same page, remember that the reference to the Wholesale Leathercraft division consists of the 30 distribution centers and our National Account group. The retail Leathercraft division consists of the Tandy Leather retail store chain, currently at 44 stores.

Our first-quarter consolidated sales increased 4%. Current-quarter sales were $12.7 million compared to last year's first-quarter sales of $12.2 million. Wholesale Leathercraft sales were 7.9 million this quarter compared to 8.4 million a year ago, a decrease of 6%.

Breaking it down further, the Distribution Centers posted a 1% sales decline, reporting sales of 6.6 million compared to 6.7 million in the first quarter, '04. We are fairly pleased with the sales results for the Distribution Centers, as we knew they were going up against a remarkable first quarter, 2004, from a sales standpoint. Our National Account group posted a 25 % sales decline, reporting sales of $1.2 million compared to $1.7 million last year.

As we discussed in our last call, National Accounts is no longer a primary focus point for us as we continue to grow our retail and wholesale centers. While we ought to prefer sales gains compared to declines, the decline in the National Account sales was not unexpected.

Our retail Leathercraft division reported sales of $4.3 million compared to last year of $3.2 million, an increase of 35%. Sales from the 15 new stores were $1.1 million this quarter. The 29 comparable stores posted sales of $3.2 million, an increase of 2% compared to last year.

Consolidated gross profit margin for the quarter was 56.3%, improving over last year's gross profit margin of 55.2%. Wholesale Leathercraft's gross profit margin improved from 54.2% to 55.3%. Retail Leathercraft's gross profit margin was 62.1% currently, versus 60.8% last year.

Consolidated operating expenses were 5.6 million, or 43.9% of sales, in the current quarter compared to 5.3 million, or 43.3% of sales, last year. Wholesale Leathercraft reported operating expenses totaling 40.5% of its sales versus 41.4% last year. Retail Leathercraft operated -- retail Leathercraft reported operating expenses totaling 53.1% of its sales currently, compared to 51.3% last year.

It appears that operating expenses are beginning to flatten out as a percentage of sales, which is a result of our efforts to contain costs including health care, which you may recall has been an issue for us in the past. We will continue to proactively manage these costs going forward.

Income from operations was $1.6 million for the quarter, up $122,000, or 8.5%, compared to the first quarter of '04. As Wray mentioned, we do believe our financial position is continuing to strengthen, as evidenced by our balance sheet. Total assets were $23 million. From December to March 31, cash decreased 93,000.

Accounts receivable increased to half a million dollars, due primarily to an increase in credit sales in the first quarter. And, inventory increased by 377,000 somewhat driven by the new store openings. Current liabilities increased 534,000, due primarily to an increase in income taxes payable. And, our only debt is a 36-month, 0 %-interest, capital lease for some computer software.

I would interject here that, while it is very apparent how proud we are of the fact that we have completely paid off our bank debt, we believe the accomplishment is even more remarkable if you know a little more of our history. To give you some perspective, consider this -- at the end of 1996, we owed the bank $8.5 million. Every year since then, that balance has decreased. In some years, the reduction was 50% or more. Other years, the reduction was as low as 1%.

During that same time, we opened nine Leather Factory distribution centers, spent $3 million cash to purchase Tandy Leather Company, opened 44 retail stores, including 10 via acquisition. I think, when you consider the growth and expansion we have maintained at the same time we are paying off debt, it makes the accomplishment even more exciting.

From my perspective as CFO, by eliminating our debt, we will have more strategic flexibility to expand in the U.S. or abroad, to make acquisitions, if they present themselves, or to acquire inventory that might have very advantageous pricing. Our current ratio is 4.44. EBITDA for the first quarter of 2005 was $1.7 million.

I have some specifics regarding the performance of the Tandy retail stores in the first quarter. As I said, total sales were $4.3 million. The gross profit percentage was 62.1% and the operating income was 9%.

For the stores that were opened in 2002, their sales were $1.7 million, gross profit percentage 62.4%. The operating income on those 14 stores is 12.3%.

For the stores opened in 2003, sales were $1.2 million, gross profit was 63.4%, and the operating income for those 12 stores was 11.6%.

For the stores opened in 2004, sales were $950,000. Gross profit was 63.4%, and the operating income on those 16 stores was 6.1%.

In this first quarter of 2005, average sales per store, per month, was $34,000. Interestingly, the stores opened in 2002 had average monthly sales of $42,000 per store. The 2003 stores had averaged $33,000 per store, and the 2004 stores averaged 26,000 per store. I believe that the statistics demonstrate our stores strengthening as they mature.

There are six stores with operating losses as of the end of March, totaling $22,000. The losses at the two stores opened in March of this year totalled $14,000. The other four were opened throughout 2004, and had a combined operating loss of $7,900 for the quarter. We fully expect them to be profitable in the second quarter.

The wholesale Leathercraft results are as follows -- Sales, again, were $7.9 million, gross profit percentage was 55.3%, and the operating income was 14.8%. 28 of the 30 wholesale centers posted year-to-date profits as of the end of March. In the case of the other two stores we believe it is a sales problem, not necessarily an expense problem.

We are considering some alternatives to boost the sales in these specific markets. I would reiterate Wray's comment regarding our positive opinion about our first quarter financial results and the performance of the wholesale and retail operations, collectively and individually.

We are on track with our Tandy store expansion in 2005. The retail stores will continue to mature and generate profits within the expected time frames, and the wholesale distribution centers are maintaining their positive performance while retail stores are opening all around them.

I will turn the call back over to Wray.

Thanks, Shannon. I feel like we are off to a good start for 2005. At this point, we don't have any reason to expect our plans for the year to change.

We will continue to open Tandy Leather retail stores, opening a minimum of eight. Coupled with the 16 we opened in '04, the additional eight stores will keep us on our pace of an average of 12 stores per year. We are not changing our sales and earnings guidance for 2005 at this point.

We iterate, we are estimating sales in the range of 48 to 51 million, and diluted earnings per share in the range of $0.28 to $0.32, assuming average diluted shares outstanding of approximately 11 million shares.

In summary, we will continue to do what we are doing. And, as a result, we believe our 2005 financial performance will be solid. Our goal is to produce positive results that increase the shareholder value. Operator, we are ready to take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Will Lyons of Westminster Securities. You may proceed.

Hi, Wray. Hi, Shannon.

Hey, Will.

Congratulations on another solid quarter.

Thank you.

I know you are happy about it. I had a couple of questions. You both mentioned the increase in gross margins in the quarter. What do you attribute that too, just a change in the product mix?

Will, I'll take the first shot at that. There are probably two things. First of all, our buying is better. Secondly, I think our managers are gradually learning the new stores that have opened to promote the higher gross profit items in the store.

And also, there are some things right now that are pretty hot out in the industry that we haven't normally carried. It is a little decorative spot that goes on belts or handbags, and these have an extremely high gross profit. And, it looks like it will run maybe several more months. Those spots are up in the top 100 items now. And we didn't sell that item last year.

Interesting. This is a question probably more for Shannon. You paid down payables by about 430,000, it looked like, in the quarter.

Right.

And, in addition, you paid down your final bank debt -- 505,000.

Okay.

More than likely, neither one of those would continue, which implies that your cash flow, all things being equal, for the rest of the year and beyond will be very, very strong.

I think that is a fair statement.

Okay. This is a question for Wray, and we have talked about it before. What are you going to do with all that cash?

Well, we haven't got it yet.

I know, you are not spending it yet, but you have got to be thinking about it.

We have discussed several things, Will. First, as is mentioned earlier in this interview, there is always the possibility of an acquisition, which would enable us to do it without maybe some bank debt. There is also the possibility of, maybe, going overseas. We have discussed that. We have talked about Australia, Europe. We have had some contacts, but there is nothing solid there yet.

But, I think one of the most important things is that we are offered bulk lots of merchandise and, normally, leather. If you have the cash to buy it with, you can buy it at a huge discount.

Oh.

So, it just puts us a better position.

Sure.

Somebody offers us a half million dollars' worth of upholstery leather that we can double our margins on, we will be able to pay cash and go on, and not be hurt.

Sure. And, that would be partly the explanation for your improved margins in the fourth -- in the first quarter?

Well, yes. That that has helped some. The buying always helps. If you are buying smart, it always helps your margins.

Okay. All right. Without hogging the call, if I could ask one more question. You mentioned your cost containment initiatives and specifically the insurance. Could you give us a little color to that -- what you have done, what you have prospects to do, to continue that?

We did some -- a couple of things. We -- like most companies, our employees have to pay a portion of the health care -- of our health-care costs. We increased that in -- on December 1, which made a difference in terms of the cost to the Company.

The other thing is -- we have renegotiated -- we are in the process of turning over a plan-year, and in the middle of that, did some negotiation with our agent and our stop-loss carrier, reworked our plan a little bit to optimize the benefits without increasing our costs. And so far in the first quarter, it looks pretty good. You know , change in deductibles, change in co-pays, those kinds of things. It is a little early to tell how successful it is going to be, because we obviously can't predict when people get sick and what the costs are related to that.

First quarter looked pretty good, and I think we are working hard to educate our employees on -- I wouldn't go so far as to say it is a serious wellness program, but be a little smarter in terms of how they use the program, and hopefully that will continue throughout the year.

Okay. Well, thanks very much and congratulations again.

Thanks, Will.

Thanks, Will

Your next question comes from the line of Dennis [Barton]. Please proceed.

Yes, thank you. I am a little bit unclear as to why the first quarter of the year, generally, has the highest earnings per share. And just for another note -- I thought I saw in the 10-K where your business doesn't have that much seasonality. And I think, maybe, you have addressed a little bit about why this quarter was more profitable, but can you kind of help me understand that?

I'll try to do it first, and then I will let Shannon secure it.

Thank you.

Normally in the first quarter, our dealers will restock. They have gone through the Christmas quarter. Normally most of them have run their inventories down pretty low.

Okay.

They will come back in in the first quarter and restock, which makes the first quarter better, somewhat.

Starting in the first quarter of nearly every year, we will get our saddle makers and professional leathercrafters. They have gone through their Christmas season. They run down on inventory, so they are coming back to rebuy it. And, your statement about our quarters being pretty consistent, that is true.

Okay. I think I understand then. I would consider that a little bit of a seasonality -- for the first quarter tending to be higher than any others. And, I guess that is consistent with what I am hearing your guidance to be. You are not saying we are going to repeat $0.10 every quarter this year.

We wish we were.

Yes. Same for me.

Dennis, I'd also throw out that the history of the Company, which has been The Leather Factory distribution unit -- that is very little retail, it is predominantly wholesale.

And if you look at history by quarter of The Leather Factory units -- when we say they are not seasonal, the -- if they were exactly dead even, the sales would be the same, 25% per quarter every quarter, year in, year out. It fluctuates. Maybe one quarter is 23% and another quarter is 27%. First quarter for wholesale seems to be really good.

Now, I think you are going to see that change some as the retail arm continues to get larger, because Tandy's fourth quarter should be the real heavy one because it is so much more traditional retail.

That ought to work out really good for us if we can have a bang-up fourth quarter from Tandy and a bang-up first quarter from The Leather Factory, then all we have to worry about the second and third quarter.

Well, all other things being equal, given that the stores seem to do better as they mature, it is kind of a nice track to be on.

We like it.

Yes.

We think it is a good one.

Thank you very much.

Yes, thank you, Dennis.

Your next question comes from the line of [Ted Broomfield] of Montgomery Street. Please proceed.

Thanks for taking my call, and congratulations on your good quarter. I was hoping you could give us a little more color on something you mentioned earlier -- of the hot items that are sold at the retail Tandy stores, both what is hot today and what you see as the trend going into the fourth quarter.

Well, really, it is a new item to us. It is a decorative spot, and I think the reason that ours have sold well -- the colors are all the same from one distributor to another. The colors pretty well match up, and there are about 16 colors of these decorative spots.

I am sorry. Could you just elaborate -- what is a decorative spot? I apologize for my ignorance.

Kind of looks like a sequin, but it is more like a metallic finish. And, the ones that we sell set very easily with just a pad underneath the piece of leather. And, you can hit it with a hammer and set it. The others require special tools that are very tedious to put together -- the ones our competitors sell. So, we have done very well with these.

Then, what does the consumer use -- where would the consumer apply them?

I think if you will pick up nearly any fashion magazine, you'll see them on belts, billfolds, handbags, the shoulder straps of lady's handbags.

Sure.

They are pretty predominant in the fashion world right now.

Got you. And, do you see any other items like this that can really drive gross margin coming up?

No. I don't see anything that good on tomorrow's horizon.

Okay. Thank you for your time.

Okay.

[OPERATOR INSTRUCTIONS] You have a follow-up question from Will Lyons. Please proceed.

Yes, following up on the last question. Do you guys think you are taking anything away from your National Account customers as you expand your own retail outlets -- any of that happening, as far as you can tell?

Will, there may be some, but we are so small and insignificant to those people, I don't think they even though we are -- they still don't even know we are out there.

But your clients do, your customers do.

Well, true.

And, they may be coming to your store instead of your National Accounts stores.

Will, if we get to 150, 200 stores, we will probably affect that some. Right now, we are looking at the volume that we are doing, I don't think it is going to bother Wal-Mart.

No, but it sure helps you guys out.

Will, I would interject here that leathercrafters, [inaudible]-goods hobbyists are not going to go to Wal-Mart or Michael's to get their supplies. The products that are selling out of those stores -- our products that are selling out of those stores, I would guess -- I would venture to guess that that it is kind of an impulse, spur-of-the-moment, buy as somebody is walking through those aisles.

I see.

I don't think the customers that go to a Michael's to buy leathercraft products -- those aren't the same people that are going -- that are die-hard leathercrafters that a Tandy store would sell to.

Okay.

It is good advertisement for us and occasionally, we will -- a customer will develop out of something they picked up at -- a vest kit they picked up at Michael's. But, I think even though the product is similar, as Wray said -- they carry such a small amount of our product and anybody who really wants to get into leathercrafting is going to come to a Tandy store. They are not going to go to Michael's, because there is just not enough product there.

Okay. That makes sense. A little bit of a follow-up. Have you seen anything tangible from your relationships with people like the Little League or the Boy Scouts?

Well,the Boy Scout program is still very good. In fact, I think a lot of our first-quarter business is coming from the Boy Scout stores -- some good orders that we didn't see last year.

Boy Scout stores? What is that?

Well, the Boy Scouts run their own retail stores.

Oh, I see, right, right. Yes.

They buy it from somewhere. So, right now we are getting some good orders from the Boy Scout retail scores.

So, you get it from their stores, rather than from Boy Scouts directly, typically.

Typically, that is correct.

Okay, Thank you.

Your next question comes from the line of David White of [Edmonds White Partners]. You made proceed.

Thank you. Hi, Shannon. Hi, Wray. Would you, Shannon, go over the numbers you provided earlier in the call regarding the average same-store sales per month for stores open one, two, and three years.

Sure. Did I say all of that too fast? Let's see. In the first-quarter of '05, average sales per store per month was 34,000. The stores that were opened in 2002 averaged monthly sales of 42,000 per month, per store. The stores opened in 2003 averaged $33,000 per store, per month. And, the stores opened in 2004 averaged $26,000 per store, per month.

Thank you very much.

Yes.

You have no further questions at this time.

Okay, thank you. I appreciate your time today. I would also like to remind everyone of our 2005 annual meeting of stockholders to be held on May 23rd at 10:00 a.m. local time, Texas time, here in Arlington, Texas.

Consider yourselves personally invited. We would love the opportunity to meet you in person. On behalf of Shannon and myself and the entire company, we appreciate your interest and welcome your questions any time. Thank you.

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