Tandy Leather Factory Inc (TLF) 2005 Q3 法說會逐字稿

Welcome to the Tandy Leather Factory third-quarter earnings release conference call. At this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Ms. Shannon Greene.

Thank you for joining us on our third-quarter 2005 earnings conference call. My name is Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Mr. Thompson is out of the week handling some family matters so I will be chairing our call today. Toward the end of our call I will be joined by Ron Morgan, our President, for the question-and-answer period.

Before I get started 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 that the inherent uncertainties of looking into the future, that there are risks to Tandy Leather Factory that could prevent these events from occurring in the manner forcing. Please see Tandy Leather Factory's Form 10-K for 2004 and their subsequent Forms 10-Q for the 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 Tandy Leather Factory are made as of this moment and Tandy Leather Factory and its management disclaim any duty to update those statements.

We are very pleased with our third-quarter results, especially given that it was typically our weakest quarter and that one of our wholesale centers was temporarily impacted by the hurricanes. Compared to the third quarter of 2004 consolidated sales increased 11%, income from operations increased 16%, and our consolidated gross profit margins increased again this quarter.

Year-to-date our consolidated sales are up 9% compared to this time last year, income from operations as up 23%, and consolidated gross profit margins are up for the year as well. Year-to-date the wholesale leathercraft division sales are down by only 0.5% over the first nine months of 2004, the retail leathercraft sales are up 37% driven by new store openings and same store growth. We have opened 12 retail stores over the trailing 12 months, in line with our retail rollout strategy.

As I indicated in our second-quarter conference call, we expected cash flow to the tight this quarter and it was. We used cash this quarter to purchase $8 million of inventory during the quarter in preparation for what we hope will be a robust fourth quarter. Despite the large amount of inventory acquired, however, our cash decreased by only $1 million during the period.

Before I get into the financial details I thought it would be particularly helpful to recap the history of our Company particularly the Tandy Leather story as it usually helps people understand what we're doing, why we're doing it and why we believe so strongly that we're going to be successful.

The Leather Factory was founded in 1980; we've grown from the original six locations to 27 U.S. and three Canadian based wholesale distribution centers for a total of 30. We acquired Tandy Leather Company at the end of 2000. At that time Tandy was operating strictly as a centralized mail order house in Ft. Worth. In January 2002 we began opening Tandy Leather retail stores with the intention of re-establishing Tandy Leather Company as the prominent leathercraft specialty retail store chain in North America. As of today we have 50 Tandy stores, 46 located throughout the U.S. and four in Canada and are approximately halfway through our planned expansion.

The Tandy Leather story prior to our acquisition is even more intriguing. Tandy Leather was founded in 1919 by Mr. Dave Tandy and a business partner to sell leather shoe parts to shoe repair shops. His son Charles got involved in the business after World War II and essentially directed the development and expansion of the business from that time forward. Tandy's goal was to teach leathercraft to the general public at a time when the secrets of the craft were passed on from father to son and jealously guarded.

By 1954 the team of Dave and Charles Tandy had opened 67 Tandy Leather stores throughout the United States. In 1960 with Charles Tandy at the helm the name of the Company was changed to Tandy Corporation and its stock began trading on the New York Stock Exchange. Due to the cash generated by the leathercraft business, Tandy Corporation was able to diversify into unrelated industries that should be familiar to all of us today, the likes of which included RadioShack, Pier 1 Imports, ColorTile and Bombay Co. just to name a few.

Tandy Leather continued to expand so that by the mid-1980s there were 350 leathercraft stores in the United States. Due to the success of Tandy Leather, Charles Tandy mirrored the layout of those stores in his original RadioShack stores. Tandy Leather's reputation was second to none as it was a true pioneer in the leathercraft industry and Mr. Tandy guarded that reputation diligently until his death in 1978.

Wray Thompson, our CEO, was hired by Charles Tandy in 1958. He worked his way up through the ranks until he became President of Tandy leather in the mid '70s. He left the Company after Mr. Tandy's death and founded The Leather Factory with Ron Morgan, another Tandy Leather executive and our current President. Both Mr. Thompson and Mr. Morgan were very involved in the expansion of the Tandy Leather retail store chain in the '60s and '70s.

In the essence of time I'm skipping the details about what happened to Tandy Leather from the time that Mr. Thompson and Mr. Morgan left and founded The Leather Factory in 1980 to the time that we acquired Tandy Leather Company at the end of 2000. Feel free to ask about it at the end of this call today or call me later and I'll be glad to fill you in on the details.

The point I'm trying to make is this, Tandy Leather historically generated large amounts of cash as evidenced by the acquisitions made by Charles Tandy and Tandy Corporation. We believe that while we don't plan to acquire any RadioShack's or Pier 1's, Tandy Leather will and is generating solid cash flow again.

Second point, Wray Thompson and Ron Morgan, the founders of The Leather Factory, were key players in the rollout of the Tandy Leather retail stores under the guidance of Charles Tandy. We're doing that same rollout again now with very experienced leadership.

Enough about that, let's move into the current numbers. As a reminder, reference to the wholesale leathercraft segment or division means the 30 wholesale centers and our national account group. Reference to the retail leathercraft segment means the chain of Tandy Leather stores.

Our third-quarter consolidated sales increased 11%. Current quarter sales were 11.8 million compared to last year's third-quarter sales of 10.6 million. Wholesale leathercraft sales were 7.3 million this quarter compared to 7 million a year ago, an increase of 3%. Breaking it down further, the wholesale distribution centers posted a 2.8% sales increase, right in line with our internal expectations for sales growth of 2 to 4% reporting sales of $6 million compared to $5.9 million in the third quarter of '04. Keep in mind that our current quarter revenue was impacted by a one-month step-down at our New Orleans wholesale center.

Our national account sales group posted a 2% increase for the quarter reporting sales of $1.2 million compared to $1.1 million last year. While the sales increase is minimal, it is important to note that September marks the fourth consecutive month of sales gains for national accounts. We are encouraged with the progress we've made with this customer group and believe that we're headed in the right direction.

Our retail leathercraft division reported sales of $4.2 million compared to last year's sales of $3 million, an increase of 37%. We opened two new stores in the third quarter. Sales from the 12 new stores opened over the last 12 months were $803,000 this quarter; the 36 comparable stores posted same-store sales of $3.4 million, an increase of 11% compared to last year. Consolidated gross profit margin for the quarter was 57.4%, improving over last year's gross profit margin of 56.1% and the second quarter of 2005 gross margin of 56.6%.

Wholesale leathercraft's gross profit margin improved from 54.6% to 56.5%. Retail leathercraft's gross profit margins fell from 63.3% for the third quarter of '04 to 61.3% for third quarter '05. Consolidated operating expenses were $5.8 million or 49.8% of sales in the current quarter compared to $5.2 million or 48.7% of sales last year. Wholesale leathercrafts reported operating expenses totaling 47.5% of its sales versus 46.1% of its sales last year. And retail leathercraft reported operating expenses totaling 55.5% of its sales currently compared to 57.8% last year.

Income from operations was $898,000 for the quarter, up 14% compared to the third quarter of '04. All operating segments reported positive operating margins for the quarter.

Now for the nine-month results, consolidated sales were up 9% over the same period last year. 2005 sales are $36.7 million compared to 2004 sales of $33.7 million. Wholesale leathercraft sales are $22.8 million this year versus $22.9 million last year, a decrease of 0.5%. Retail leathercraft sales are $12.6 million this year compared to last year of $9.2 million, an increase of 37%. Consolidated gross profit margin for the year is 56.8%, up from last year's margin of 55.3%; wholesale leathercraft's gross profit margin increased to 55.5% this year compared to 54.1% last year. Retail leathercraft's gross profit margin is 61.9% currently versus 62.1% last year.

Consolidated operating expenses were $17 million or 46.5% of sales in the current year compared to $15.6 million or 46.1% of sales last year. Wholesale leathercraft reported operating expenses totaling 43.8% of its sales versus 44% last year. And retail leathercraft reported operating expenses totally 53.6% of its sales currently compared to 54.9% last year. Income from operations is $3.8 million this year, an increase compared to year to date 2004 of almost 23%.

Some specifics on the Tandy store's performance. The stores opened in 2002 of which there are 14, their third-quarter sales were $1.6 million, gross profit margin was 60.9%, operating income was 10%. For the stores opened in 2003, of which there were 12, third-quarter sales are $1.1 million, gross profit margin was 62%, operating income was 7%. For the stores opened in 2004, which there were 16, third-quarter revenue was $1.3 million, 61.7% gross profit margin and operating income of 5%.

Year-to-date specifics, the stores opened in 2002, had sales of $4.9 million, gross profit margin of 61.9%, operating income of 12%. Stores opened in 2003 sales year-to-date are $3.4 million, gross profit margin is 63.2%, and operating income of 10%. Stores opened in 2004 year-to-date sales are 3.8 million, gross profit margin of 61.1%, operating income of 5%. For the third quarter of 2005 average monthly sales per store was $32,000, the stores opened in 2002 had average monthly sales of $38,000 per store, the 2003 stores averaged $30,000 per store per month and the 2004 stores averaged $27,000 per store per month. The statistics here continue to demonstrate the continued success of our disciplined retail rollout strategy.

We had eight stores with year-to-date operating losses as of the end of September, five stores were opened in 2005 and have a combined operating loss of $81,000. The other three were opened in 2004 and had a combined operating loss of $32,000. Strong sales in the fourth quarter will fix these stores for this year; however, we have addressed the underlying issues at these stores and believe we'll see results fairly quickly.

Wholesale leathercraft results for the third quarter are as follows -- third-quarter sales were $7.3 million, gross profit margin 56.5%, operating income 9%. Year-to-date sales are $22.8 million, gross profit margin of 55.5%, operating income of 12%. 27 of the 30 wholesale centers posted year to date profits as of the end of September, one of which was our New Orleans store. The year-to-date operating losses for these stores totaled $40,000.

To summarize, we are pleased with our third-quarter results. As we've discussed previously, our second and third quarters tend to be our weaker quarters. Our second-quarter results were solid and I believe we can say the same for third quarter. We're in a good position to do well in the fourth quarter and so far it looks promising as we posted a 17% sales gain for the month of October compared to October of 2004.

We've certainly got plenty of inventory to support strong sales for the quarter. I expect our cash to build through the fourth quarter and our inventory to return to a more reasonable level by the end of the year. I think for 2005 overall we're pleased with our performance. We lost a month of sales from our Leather Factory New Orleans store due to Hurricane Katrina and we've got a few Tandy Leather stores that are not producing like they should. However, I also think these negatives, if you will, can be overcome so that we are positioned well going into 2006.

There will always be ways to improve our operating efficiency and we will continue to work on that. We believe we're executing well, sticking to the game plan we originally presented to our stockholders. The Tandy stores are performing as expected and provide solid opportunity for growth and expansion while The Leather Factory distribution centers continue to provide stability.

Our 2005 guidance remains intact -- revenue in the $48 to $51 million range and earnings of 30 to 34% -- $0.30 to $0.34 per fully diluted share assuming average diluted shares outstanding of approximately 11 million shares. Looking forward to 2006, we will continue executing our retail growth strategy opening 12 new Tandy Leather stores in 2006. We estimate total sales will be in the range of $50 to $54 million. Diluted earnings per share as expected to be $0.35 to $0.38 a share assuming average diluted shares outstanding of approximately 11 million shares and an effective tax rate of between 35 and 37%.

In summary, we are successfully executing the growth plan that we set forth at the beginning of 2002. Our strategy is very clear and we believe we have been diligent in doing exactly what we said we would do. We have virtually no competition and we own the most recognized brand-name in the industry. Couple that with a committed management team and dedicated employees who strongly believe in the Company, we believe the vehicle is in place to continue the creation of sustainable value for our shareholders. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS). Will Lyon.

Westminster Securities. Congratulations on a good quarter, guys. I think most retailers would kill for an 11% year-on-year same-store sales growth. A couple of questions. Will you open any stores in the fourth quarter this year?

That we haven't already announced?

Yes.

No.

No more?

No more.

12 the target for next full year?

Correct.

Okay. Did I understand you to say that the gross margins on the retail sector dropped just a little this year and, if so, why?

They did. We have several Tandy Leather managers that are getting rather ingenious in creating sales gains by developing new customers. I can think of two or three off the top of my head that have developed some wholesale customers new to us that are located in close proximity to those Tandy stores. And the Tandy stores are carrying enough leather in their stores now that they are somewhat appealing to some wholesale customers and -- but it's affected their margin just a little bit. A couple of stores have had some great sales numbers, but they're selling at a wholesale level as opposed to strictly retail. New customers are new business for us so we're certainly not complaining, but it does pull the margin down just slightly.

How are your store managers -- what are their incentives? Are they primarily profit based, revenue based?

The store managers?

Individual store manager.

Well, they get paid a percentage of the operating profit of their store. They also get a very minimal monthly bonus I guess on sales gains from the same month a year ago.

So that would be on revenues only?

Yes.

Interesting. On the national account side, is there anything specifically you've done different? I know you've been working hard on it. Are there any new products, new people in place? What's happened there?

There's not any new products -- this is Ron Morgan. Primarily it's that we've got a new man running that department, Jerry Arona (ph). It's new fresh energy and he's just working very hard trying to maintain business and doing a great job -- he's trying to grow it, but he is maintaining it at this time, so we're happy.

Sure. At your shareholder's meeting I remember seeing some numbers on the growth in your traffic on your website as far as sales and hits and that sort of thing. How has that gone in the third quarter?

It's still growing very well. In the third quarter I think we ran a 27% gain in -- that's our year-to-date gain -- in our website business. Remember, our website, though, is designed to drive customers to our existing stores. Yet it's still running -- the amounts of orders we're getting, it's up 27% over last year. It's doing very well and we're very pleased at the amount of dollars we're selling over our website even though it is really a vehicle to send people to our company stores.

It's really more of a marketing tool.

Yes.

The 27% number, is that the number of orders or the volume of -- the dollar volume of orders?

The dollar volume.

Great. Thank you very much, guys.

Charles Littlejohn (ph).

I'm with the Masonic Lodge of California. And I should say that our group is the largest private shareholder now in Tandy Leather, we own 6% of the float. And I have some questions for both Ron and Shannon. First of all, I'd like to congratulate them on a very, very good quarter. And if you back calculate using fractions of cents, actually their earnings are up 61.4% over the last year in Q3. This year they earned 6.31 cents per share fully diluted and last year it was 3.91 cents per share fully diluted. So that's a very, very good increase.

My question basically relates to expansion of the Company, opening new stores. And Shannon, you alluded to a few moments ago that you're 50% through your expansion plan. I assume that that meant that you wanted to open 100 stores, that was your goal, is that correct?

Yes, of the original plan we came out and said we are going to open 100 new stores. Depending on what time of the day it is sometimes you'll hear us say 100 to 120 maybe. We're not exactly sure where the saturation point is.

That was my next question actually. Because Tandy Leather has 350 stores in the U.S. and 60 in Canada and, as I remember, approximately 110 were not even profitable.

If you take 110 off that number does that mean we could open 200 or so? The bottom line is we only want profitable ones.

I understand that.

(multiple speakers) out there that were profitable I guess we'd probably open them. But I guess we're being conservative in figuring there's probably 100 or 120 markets that we could be in and be very successful and that wouldn't be a bad little retail store chain.

That was our plan also that we came up with in 2002. And once we achieve those goals we'll relook at the whole situation in the markets and that plan may change to 150 stores.

I see.

To know we can open 100 to 120 profitable.

The next question I have basically relates to your earning potential over the next five-year period. Based on the metric of same-store sales growth of about 11%, which has been pretty well average in the last couple years, and opening let's say the 12 new stores a year, and you may change that with time. You may open 15 or something as time goes by. But in five years -- and five years is what I'm looking at here because we're in a position for a long-term hold on this stock. Is $1 per share earnings reasonable and attainable in five years time?

Is it reasonable and attainable? I think we could -- that's one I haven't thought about. I don't know if Shannon has thought about it yet. I believe we could -- we're going to show about what -- a 20% over last year this year in our earnings, Shannon, is that correct? I think you could assume that we should be able to grow our earnings 20% per year over a four- or five-year period. I think that's a reasonable number. Any more than that would be probably pushing it. So if that compounds out to $1 then I would say that's a fair statement. If it doesn't then that's the best I can come up with at this time.

I appreciate your answer on that. What do you plan on doing if any at this point in time for an encore once you saturate out? You saw Tandy expanding in different areas. Do you have visions of doing that kind of thing or making more acquisitions? I know it's a difficult question right now because there are so many imponderables out there, but we're trying to make a forecast here for a few years down the road. What do you think will happen there?

I think Shannon and me and most of our team here in Ft. Worth are so occupied on trying to make more money, better locations, better product that we are so involved with keeping the -- getting the machine running more efficiently on a daily basis that we have not dreamed into the three-, four-, five-year. I would think that as time goes on we will start dreaming in that five-year down the road what we're going to do for the future expansion. Right now we have plenty to do so that we can keep -- we're kind of hung up on making a profit and operating more efficiently and producing more sales and we're doing everything we can and at this time it really has not allowed us the time to dream. Shannon, is that a fair statement?

Yes, I think that's fair. Charles, we've talked before about once we think we've hit market saturation in the U.S. or in North America I guess we'll look at international expansion. I'm not going to sit here and say we'll never diversify into anything else. But I'd be really slow to indicate that that would even be a possibility, at least even on the back burner at this point.

We know what we're doing. We know the business that we're in. We think there's a lot of potential domestically and internationally with leathercraft. It's one of those industries that you get what you put into it; the more we develop customers the more successful we're going to be. Where you hit the wall on that I'm not real sure, but we haven't been real successful diversifying into other types of industries and businesses in the past even though they've been very small and virtually nobody has really noticed.

But I don't see us becoming another Tandy Corporation that had however many different unrelated businesses that they had. Maybe I'm shortsighted, but we don't know that business. We know what we're going. We want to ride this until we hit the wall and then I don't know what the encore is after that.

That's a reasonable answer, it really is. That's all the questions I have. Thank you very much and congratulations once again for a very, very successful quarter.

(OPERATOR INSTRUCTIONS). Ivan Zwick.

Raymond James Financial. My question is we're going to start having some excess cash. I know the plan is to continue to grow the Company out of earnings, but we're still going to start growing some excess cash. And I was wondering what your plans were to do with that cash.

As I said during the presentation, we used quite a bit of cash this quarter. I knew we wouldn't be accumulating a whole lot. I do think that's going to begin to rebuild in the fourth quarter. And there are several options. We don't have a formulated plan yes. Is a stock buyback an option? Yes. We don't have anything formal, but it has been discussed kind of formally with the Board of Directors a couple of times. There are pros and cons to that that I'm sure all of you are aware of.

With cash in the bank it kind of gives us an opportunity to be a little more aggressive in our inventory purchases. We occasionally come across some pretty incredible deals on leathers and if you've got the cash and can pay for it you can get a heck of a deal. And we're talking pretty large dollars and leather is a big part of our business. It's 35 to 40% of our total revenue and it's our lowest margin item. So if we could get some really good deals on leather because we can pay for it a little faster than some other vendors, that's a possibility because that will improve margins, that will improve bottom-line earnings and everybody likes that.

Acquisitions -- besides the acquiring of some small independent dealers as we have done in the past, I'm not aware of any strategic acquisition opportunity out there right now. Something may prove to -- may show up, but right now we don't really have anything that, again, anybody would notice. They've be very small acquisitions that would create another retail store for us.

I think our Board of Directors of all (indiscernible) and I think we've got three or four financial people on our Board that all have indicated that when the cash starts piling up they want to use the soundest best judgment possible on what to do with it. So we're going to get a lot of input from our directors.

That's fine. I wouldn't want you to do anything with that cash to slow your growth. That's the primary thing I think you're going to use it for and that will return the best results to the shareholders in the long run anyway.

We absolutely agree. And until we've grown this as far as we think we can grow it I don't think you're going to have a whole lot of other things happening. We think the potential is in the Tandy Leather rollout and we want to do that well. We want to be efficient and make as much money at it as we can. And we'll use our cash to do that until it's determined that we could use the cash better someplace else.

Thanks a lot.

Will Lyon.

Westminster Securities. Going back to something you mentioned, Shannon, as far as inventory investment, your inventory was up well more than your sales grew. was that all about buying some special deals or what happened there?

That was some of the things that Shannon mentioned about buying some lots of leather. But also, remember, we're going into our fourth quarter, it's our strongest of the year. And even at a 46% cost of goods we're going to fly through some $6.5 million worth of inventory in this quarter. And then thinking starting next year we're going to be hitting pretty hard and fast to start with in opening these 12 new stores. And that will take about 40,000 to 50,000 in the backup inventory, we'll need $1 million there. So of that inventory we're going to need about $7.5 million of it in the next three to four months.

I see. Thank you.

It's piled up. It's not quite as bad because if we reach our numbers of $14 million and then in the fourth quarter 46% cost of goods that that will be about 6.4 million. So we just came in prepared this time.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Charles Littlejohn.

You said a few moments ago that the month of October of 2005 the sales gain was 17% over October of 2004. Now does this mean that you're going to raise your guidance for the fourth quarter of 2005? You're presently -- your guidance now I think is $0.07 to $0.11 per fully diluted share, will that change any?

We're not raising it right now and I'll tell you why. We had -- a 17% gain for October is great and we're thrilled with that and we are hoping for a fantastic fourth quarter. We are running against November and December last year of 20 and 23% sales gains over the year before. We had a great fourth quarter last year, particularly November and December. We're going to need a good November and December to make the numbers that we want to make and be better than we were for forth quarter of '04. So we're not raising guidance right now.

It's possible thought, right? It's possible you will raise guidance if things go well in November, let's put it that way?

I was going to say, yes, if we get into and do -- for Thanksgiving and things look as good as we're hoping they are, then absolutely, we'll come out with increased guidance if that's what -- try to get as close to where we think we're going to being as we can.

That's what I wanted to hear, Shannon. Thank you very much.

(OPERATOR INSTRUCTIONS). I'm showing no further questions at this time.

Thanks. On bahalf of Ron Morgan, myself, and the entire management team, we appreciate your time today and your continued interest in our Company. Thank you and have a good afternoon.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time. We thank you for your participation.