Tandy Leather Factory Inc (TLF) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2005 Tandy Leather Factory earnings conference call.

My name is Michelle and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] As a reminder, today's conference call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Shannon Greene, Chief Financial Officer. Please proceed, ma'am.

Thank you.

Thank you for joining us on our second quarter 2005 earnings conference call. I'm Shannon Greene, Chief Financial Officer of Tandy Leather Factory. I'm sure you were all expecting to be greeted by Mr. Thompson today, however he is on an airplane as we speak. So I will do my best to represent him well in his absence.

Toward the end of our call I will be joined by Ron Morgan the Company President to assist in answering whatever questions you may have.

I want to call your attention to the fact that these conversations will contain forward-looking statements to the extent Tandy 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. There are risks [inaudible] Leather Factory that could prevent these events from occurring in a manner foreseen. Please see Tandy Leather Factory's Form 10-K for 2004 and our subsequent 10 -- Forms10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's EDGAR system and from our Investor Relations office. Also statements made today by me and Mr. Morgan as management of Tandy Leather Factory are made as of this moment and Tandy Leather Factory and its management disclaim any duty to update those statements.

With all of that said, I will jump into the discussion of our second quarter results and provide an update on our plans for the remainder of year.

I am happy to report that we had another good quarter, achieving strong second quarter results. Compared to the second quarter of 2004, consolidated sales increased 11% and income from operations increased 55%. Our consolidated gross profit margins increased again this quarter and we generated positive operating cash flow for the eighth quarter in a row. Year-to-date our consolidated sales are up 7.5 % compared to this time last year and income from operations is up 25%. Consolidated gross profit margins are up for the year as well and in the trailing 12 months ending June 2005, our number of retail stores increased by 14.

Before I get into the financial details I should remind everyone of the structure of our operations and the terminology associated with it. When we talk about the wholesale leathercraft division, we are talking about the 30 wholesale distribution centers operating under the trade name, The Leather Factory and our national account sales group.

"National accounts" generally refers to larger retail craft chains. The retail leathercraft division consists of the Tandy Leather retail store chain, currently at 46 stores.

Our second quarter consolidated sales increased 11.2%. Current quarter sales were $12.2 million compared to last year's second quarter sales of $10.9 million. Wholesale leathercraft sales were $7.7 million this quarter compared to $7.4 million a year ago, an increase of 3.3%. Breaking it down further, the wholesale distribution centers posted a 6.5% sales increase, reporting sales of $6.4 million compared to $6 million in the second quarter 2004. We were very pleased with the sales results from the distribution centers, as they as far exceeded our internal expectations for sales growth of 2 to 4%.

As we anticipated, our national account sales group posted a 10% sales decline for the quarter. Reporting sales of $1.3 million, compared to $1.4 million last year. We've mentioned before that national accounts is not a primary focus point for us and it continues to become a smaller part of our business, as we further the expansion of the retail store chain and strengthen the wholesale centers. National accounts are approximately 10% of our total sales this year versus 13% at this time last year.

On a positive note however, I can tell you that the national account group did achieve a sales gain for the month of June. That one month gain was not enough to offset April and May's losses, but it is encouraging that we are making some progress with this group. While I can't predict the sales of the entire third quarter I do believe we had a sales gain in July for this group, as well.

Our retail leathercraft division reported sales of $4.1 million, compared to last year's sales of $3 million, an increase of 38%. Sales from the 14 new stores were $891,000 this quarter, 32 comparable stores posted sales of $3.2 million, an increase of 8% compared to last year.

Consolidated gross profit margin for the quarter was 56.6%, improving over last year's gross profit margin of 54.6%. Wholesale leathercraft gross profit margin improved from 53.6%, to 54.8%. Retail leathercraft gross profit margin was virtually unchanged at 62.4% for second quarter 2005, versus 62.2% for second quarter 2004.

Consolidated operating expenses were $5.6 million, or 45.8 % of sales in the current quarter, compared to $5.1 million, or 46.8% of sales last year. The reason for the improvement in operating efficiency is two-fold. The increased sales and our continued efforts to contain costs and reduce expenses.

Wholesale leathercraft reported operating expenses totaling 43.6% of its sales versus 44.9% last year, and retail leathercraft reported operating expenses totaling 52.2% of its sales currently compared to 55.8% last year. Income from operations was $1.3 million for the quarter, up $468,000 or 55% compared to the second quarter of 2004. All operating segments reporting operating margins over 10%.

Now for the six month results. Consolidated sales are up 7.5% over the same period last year. 2005 sales are $24.9 million, compared to 2004 sales of $23.1 million. Wholesale leathercraft sales are $15.6 million this year versus 15.8% -- $15.8 million a year ago, an increase of -- a decrease of 1.8%. Retail leathercraft sales are $8.4 million compared to last year of $6.1 million, an increase of 36%.

Consolidated gross profit margin for the year is 56.5%, up from last year's margin of 54.9%. Wholesale leathercraft's gross profit margin increased to 55.1% this year, compared to 53.9% last year. And retail leathercraft's gross profit margin is 62.2% currently versus 61.5% last year.

Consolidated operating expenses were $11.1 million, or 44.9 % of sales in the current year, compared to $10.4 million, or 45% of sales last year. Wholesale leathercraft reported operating expenses totaling 42% of its sales versus 43.1% last year. And retail leathercraft reported operating expenses totaling 52.7% of its sales currently compared to 53.5% last year. Income from operations is $2.9 million this year, an increase compared to year-to-date 2004 of almost 26%.

Specifics regarding the Tandy stores' performance -- for the second quarter the stores that were opened in 2002, of which there were 14, their sales for the quarter were $1.6 million; gross profit margin was 62.3%; operating income was 12.8%. For the stores open in 2003 of which there were 12, sales for the second quarter were $1.1 million; gross profit margin was 64.1%; and operating income was 12.4%. For those stores that were open in 2004, of which there were 16, sales were $1.2 million; gross profit margin was 60.7%; and the operating income was 6.9%.

For the second quarter of 2005, average monthly sales per store was $33,000. The stores open in 2002 had average monthly sales of $38,000 per store, the 2003 stores averaged $31,000 per store. And the 2004 stores averaged $25,000 per store. As I've stated before I think that these statistics demonstrate the stores' ability to strengthen as they mature.

We are achieving success in the execution of our retail strategy, that being solid retail locations coupled with the strong management teams that is supported by branded advertising results in continued sales growth. For the first six months of 2005 we have six stores with operating losses as of the end of June, totaling $35,000. Three of these six stores are new, opened in March, May and June and their combined loss totaled $28,000. The other three stores were opened in the middle of 2004 and have had a combined operating loss of $7,000.

At the risk of sounding too obvious, I think the problem with these stores is simply a sales problem. They are not generating enough revenue to support their operating expenses. Our operations team is working diligently with these managers at the stores to get their revenue base up and it won't take much to get them in the black. One of the stores actually had a profit for this quarter but not enough to get him caught up for the year.

Wholesale leathercraft results for the second quarter are as follows -- sales again, were $7.7 million; gross profit percentage was 54.8%; and operating income was 11.2%. 28 of the 30 wholesale centers posted year-to-date profits as of the end of June. We recently made manager changes in the other two stores in an attempt to get those stores profitable. Their year-to-date operating loss totaled $35,000.

To summarize, we are very pleased with our second quarter results. Historically, our second and third quarters tend to be our weaker quarters, financially speaking. So to produce the kind of results we did this quarter is extremely positive. I think it goes without saying that we would like for this trend to continue into the third quarter of 2005. And I was fairly pleased with our sales for July, but I also know that just because July was decent doesn't mean that August and September will be.

I can tell you that I expect our inventory to continue to build through the third quarter in anticipation for a solid fourth quarter. And as a result, I am not looking for big increases in our cash through the third quarter. But I am told that we will turn that inventory back into cash throughout the fourth quarter and get our inventory back in line as of the end of the year.

For the most part I think we've done well for the first half of 2005, achieving what I consider substantial improvement in our operating off efficiencies. We believe the execution of our retail growth strategy has been successful and we don't have any plans to change those plans in that regard.

We've opened four stores so far and we plan to open at least four more before the end of the year and our wholesale distribution centers add stability and predictability to our mix. We are not changing our revenue guidance for 2005 at this point. It's still in the 50 -- $48 to $51 million range. We are however increasing our 2005 earnings guidance to $0.30 to $0.34 per fully diluted share, assuming an average diluted shares outstanding of approximately 11 million.

In summary our Corporate goal is to manage the company in such a way that creates sustainable shareholder value appreciation. We will continue to execute our growth strategy and as a result we believe that 2005 will be another year of solid financial performance.

With all of that said, Operator, we are now ready for questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Will Lyons of Westminster Securities. Please proceed.

Hi, congratulations on another good quarter.

Thanks, Will.

You mentioned, Shannon, the national accounts becoming less important, but still at 10%. You also said June and July looked like they had experienced an increase. What led to the increase or can you really pinpoint that?

Frankly, we've got some new -- some fresh meat on our team so to speak. A new guy running that operation or that division -- group for us and I think, without sounding overly simplistic, I think that some fresh relationships and new approach seems to be helping. The feedback from the national accounts -- I think maybe it was time for a change there on both sides.

And so some buyers have changed. Our guy on our end has changed and without doing too much more, it seems to have kind of renewed some commitments from those customers to work on the relationship.

You also mentioned the wholesale division did even better than you would have expected. Is that also pinpointable or just a general nice trend?

This is Ron Morgan.

Hi, Ron.

That's generally because of the new products we've introduced over the first half of this year. It's when we picked up the increased in our sales at the wholesale, as well as the increased gross margin at that wholesale. The products we've introduced have -- are fairly in demand right now and carry a larger than normal gross profits.

Can you give me an example of a couple of those new products?

I think Wray mentioned them the last -- on the last call and that's those crystal rivets. They are kind of a rhinestone-looking ornament that goes on belts and bags and such.

And in the rodeo circuit and the western industry those are very hot. They are going on from bridles on horses to belts for ladies, etc. As well as, we've added some -- a new line of motorcycle hardware that complements the motorcycle market. It's primarily buckles and conchos, that type. The people that are doing repair or making motorcycle hard saddlebags and whatever, are buying this hardware and it's -- it carries a little larger margins than normal and it's selling real well right now.

Ron, when I was at the shareholders meeting a couple of months back, you guys had some numbers there regarding your Internet site, pretty strong traffic growth.

Can you give us an update on that? It was really quiet interesting at the time.

Our Internet business continues -- it really amazes us a little bit, because as we opened more stores we would think that the Internet orders and traffic would drop off. And it's not the case. And it is growing at the rate of about 30% over last year each month so far. We had a fairly weak month last month in Internet sales. It was really the weakest one we've had of the year, and we did about $150,000 in Internet sales -- through Internet sales. Generally they've been running about $200,000 a month.

In a lot of cases, the Internet business -- the people are seeing the offers or the presentation on the Internet and we're using it as a vehicle to stimulate them to come into the stores and it's working both ways. It is causing -- driving traffic into our bricks and mortar but it's also causing people that are live -- wherever. It's really the overseas business. It's picking up because of it.

We are probably a third of that is done outside the United States and Canada. And that's all over the world. I think I noticed 51 different countries, something like that, the last time I looked.

Very interesting. Thanks, Ron.

[OPERATOR INSTRUCTIONS]

Our next question comes from the line of Ivan Wick (ph) of Raymond James. Please proceed.

Thank you.

On the retail store segment of your business are there any plans to accelerate that growth? That seems to be the best part of your business at present.

It is avenue for growth for us. It is definitely the avenue for growth for us. I don't think you're going to see us grow any faster than roughly a dozen stores a year. Mainly because -- not because it wouldn't be a good idea to get out there. I think the more we get out there the more revenue we produce. I mean locations that we are not currently drawing from.

However, the success to those stores are the personnel. And store managers are crucial to the operation and we can only open stores as fast as we've got qualified, experienced managers ready to take stores. And while we have a small backlog in the system all the time, training new people, you can't -- they can't learn any faster than the time goes by.

So, coming up with a dozen new guys a year, drawing from an industry where there is not a whole lot of -- there are not a whole lot of guys out there that have run leathercraft stores unless we've already have them. So, you're kind of having to take retail guys and train them in our products and our industry from scratch. You just can't train them much faster than a dozen a year.

Okay. Well, thank you.

You bet.

[OPERATOR INSTRUCTIONS]

Our next question is a follow-up question from the line of Will Lyons of Westminster Securities. Please proceed.

To follow up on that same train of thought, roughly speaking how long do you think it takes to train a new -- a person ready to manage their own store?

We try for six months -- really it takes about three years, but they can get two and a half of those years on the front line. We need a good six months with a person. Now we've put out managers, trained them and, 90 days and they've done good. But generally if we really want -- but that's an exception.

Generally it takes a good six months for a person to understand the philosophies. And these guys, they've got to be entrepreneurs of sorts. They have to go out there and teach leathercraft, show it to you, and in most cases we hire people that don't under -- have never done any leathercraft, and yet we advertise in our mailing pieces that [inaudible] to call and we'll come give you a free demonstration. Well it's a little difficult if they've never done it to -- or know anything about it to do that or to the Boy Scouts or whatever. So, six months to a year is perfect.

Okay. Thanks.

If I could have that little follow-up to that. If I remember correctly Tandy originally, well before you bought it, had about 340 stores throughout North America. Is that about right?

Correct.

And the numbers I remember talking with you guys about or hearing on conference calls like this, was that you think you've got about 150 that you could, let me use the word easily, though nothing is easy, that you could feel confident could you move into over whatever period you decide to do it, is that still about true or have you changed your outlook on that?

Will, what we are saying is 100 to 120. So that -- that has not changed, not right now.

Okay. All right. Thanks.

Our next question comes from the line of Charles Littlejohn of Masonic Lodge of California. Please proceed.

Shannon and Ron, this is Charles Littlejohn. I want to congratulate you once again on a very, very fine quarter.

Thank you.

You really turned some numbers for us all. I have a question.

Basically, I know this business essentially because I've been an analyst for many years in the yarn industry. And they have stores, many of these companies have stores throughout the nation. And what criteria do you use in setting up a new store? And are there certain areas of concentration you are looking for?

We are basically using the history of Tandy Leather Company that has -- was in operation for some 70, 80 years. And where they had had their best success in the cities that they had and we've gotten -- and we track all of our current customers that we've had since The Leather Factory has been in existence for the last 25 years. And we open them in the markets where we have the largest concentration of business currently. We don't try to put a location -- put one in a location or a city that does not lend itself to leathercraft.

But strangely enough, across the United States that's very mixed. And the location in those cities is just off of prime. We are not looking for high dollar real estate. We are looking for 15 to 1800 square foot on a very recognizable street. That's our qualifications. We are not looking for a new shopping center, new strip centers. We don't want to pay that kind of price.

Our objective to open every one of them, is for them to be as profitable as possible, so -- as quick as possible so the less money we spend in real estate and/or furniture and fixtures, the longer it takes for them to be profitable.

Ron, as a second question, basically.

Last year you opened 14 new stores and this year you've opened four with another four to go. You are also flushed with cash; you have no debt whatsoever. Is that correct?

That's correct.

That's correct.

Okay.

Is there any reason why you are opening fewer stores in 2005 than 2004?

Charles, we originally for 2005 came out and said we were going to open six and I think that's the minimum in order to keep us on pace for an average of a dozen a year. In our fourth year of expansion, so we need 48 by the end of this year.

Part of what we are doing with 2005, is allowing our store operations team time to make sure that the stores that we've got and that we are opening we're not moving off of them so fast that they don't get a good start.

And we talk every conference call about the number of stores that are profitable versus those that aren't. And I think I just said it for June, for this year we've got six Tandy stores out of the 46, or whatever we have, that are not profitable right now? That's a pretty good ratio. But that's not good enough for us.

You gave me the answer was looking for Shannon.

Yes. No, it's not.

Why we are only looking at 100 to 120 is because there were 350 at some point with Tandy but they were not all profitable and call us greedy but I don't like unprofitable stores.

So, we wanted the time for our store operations team here at corporate to spend time with those stores to make sure they get started well, that they build their base, that they can contribute to profits quickly.

Sounds like you are doing everything right.

We'd like to --

I guess the concludes my questions. Thank you.

Yes. Thank you.

We like to think so even though I know there are people that wish we would expand a little faster than we are.

We could expand a lot faster, but I don't think we would be able to show the profits, while we did it that would keep most of the listeners to this very happy.

Right. I would agree.

Our next question is a follow-up question from the line of Will Lyons. Please proceed.

Shannon, you mentioned part of the contribution to such strong bottom line results in this quarter was from pretty tight operating expense, taking a reign in there.

Can you give some examples of some of your major initiatives, where exactly you think you are doing your best job in that?

We've cut payroll, particularly at corporate. As Ron says, we are trying to get a little -- bleed the onion a little bit more. We've renegotiated some contracts, some agreements. I have done -- on the legal side the -- getting fees down, we've renegotiated with our -- some of our freight carriers.

We leased new -- some of our older leases, when we went back we've taken a little smaller space or a different type of space. We've reduced our lease in our old Leather Factory units considerable in some cases. And it's really not any one big thing. It's -- we try to have a culture of not spending money.

And we try to breathe it every day and do it every day. And it's nickel here and a penny there just like any good place to -- when you try to cut expenses, you -- it's easy to look at the big dollars but those are the ones it's hard to cut, the payroll or the rent or whatever. But those nickels and dimes and pennies that end up adding up to big dollars at the end of the year and that's the ones we are trying to cut.

Well, they've clearly added up for you, thanks very much.

Thanks, Will.

And I am currently showing there are no questions in the queue at this time. I would like to turn the presentation back over to yourself, Ms. Greene, for closing remarks.

Thank you. On behalf of Ron Morgan, myself and the entire management team of Tandy Leather Factory, we appreciate your time today and your continued interest in our Company. We encourage and welcome your calls any time. Thank you and have a great afternoon.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation and you may now disconnect. Good day.