Tandy Leather Factory Inc (TLF) 2005 Q4 法說會逐字稿

Good morning and welcome to the Tandy Leather Factory 2005 earnings 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 Tandy Leather Factory management speaks today of any future events, makes other forward-looking statements; you are reminded of inherent uncertainties of looking into that future that there are risks to Tandy Leather Factory that could prevent events from occurring in the manner foreseen.

Please see Tandy Leather Factory's Form 10-K for 2004, its subsequent Forms 10-Q for a discussion of some of these risks. Copies of these documents are variable through the SEC's EDGAR system or the Company's Investor Relationships office. Also, statements made today by management of Tandy Leather Factory are made of this moment and Tandy Leather Factory's management disclaim any duty to update of those statements. I would now like to turn the floor over to your host Mr. Wray Thompson. Mr. Thompson, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for our 2005 earnings conference call. I am Wray Thompson CEO and we also have Shannon Greene, our CFO, available. On this call we will discuss our fourth quarter and year end 2005 results, as well as discuss projections for 2006. Simply stated, I'm very pleased with our performance in '05. Shannon will give you more detailed information in a few minutes but I will quickly highlight a few items that are worth noting.

2005 sales grew by 10% over 2004. 2005 is our seventh year consecutive sales gain and we set a new quarterly sales record in the fourth quarter. Our consolidate gross profit margin improved for the ninth year in a row. Our consolidated operating profit grew three times faster than our sales for both the fourth quarter of '05 and the year. We opened eight new Tandy Leather retail stores in '05, bringing the store total to 50. Our internal cash flow provided 100% of the capital needed to open these stores. We paid off the last our bank debt in March of '05.

In our wholesale leathercraft division, the 30 wholesale centers operating under the name of the Leather Factory reported sales gain of 3.5% for the year, which is right in line with our internal targets of 2% to 4% annually. Sales in our national account customer group there was down 8.7%, resulting in a net sales gain for the division of 1.4%. Compared to '04, gross margin improvement by 4% this year and operating margin improved by 30%. Our retail leathercraft division ended year with a 33% sales increase over '04. Eight new stores were added in '05.

Gross margin held steady at 61.8%, while operating margin fell 4%. There is always room for improvement and I believe we performed well in '05. We have a sold game plain and I believe we're gaining positive momentum as we execute that plan. I will share you with our plans for '06 after Shannon goes over the financial details for '05. Shannon, will you take over?

Thanks and I will run through fourth quarter results first and then through the annual information. So I don't have to keep referencing, remember the comparison is fourth quarter '05 to fourth '04. Quarterly results are as follows; Consolidate sales increased 13%. Sales were $14.1 million this year, compared to $12.4 million in the prior year. Wholesale leathercraft sales were $8.2 million this quarter, compared to $7.7 million a year ago, an increase of 6.7%.

With the wholesale leathercraft division, the wholesale centers reported quarterly $7.1 million in 2005, compared to $6.7 million in 2004, an increase of 6.3%. The national account group reported quarterly sales of $1.1 million, compared to $1 million in the prior year, an increase of 9.5%. Retail leathercraft sales were $5.4 million for the quarter, compared to the prior year of $4.3 million, an increase of 26%.

I am not going to take the time to discuss the financial results of our other operating segment, as it is immaterial to our overall operations. However, if you feel that that information is helpful, please let me know at the end of today's call, I can certainly include it. I've just made the assumption that it's not information you find useful or relevant.

Consolidated gross margin margin for the quarter was 56.5%, a nice improvement over prior year's gross profit margin of 54.7%. Wholesale leathercraft gross profit margin improved to 54.5% currently versus 52.9% last year. While retail leathercraft gross profit margin improvement was minimal from 61% last year to 61.6% this year.

Consolidated operating expenses were $6.1 million or 43.8% of sales, compared to $5.6 million or 45.2% of sales last year. Wholesale leathercraft reported operating expenses totaling 41.9% of its sales versus 43.7% last year. Retail leathercraft reported operating experiences totaling 48.3% of its sales, the same as was reported last year. Income from operations for the quarter was $1.8 million, an increase $614,000 or 52.5% compared to the fourth quarter of '04.

Now, for the 2005 annual results. Consolidated sales were up 9.9% over 2005. Sales were $50.7 million, compared to $46.1 million last year. Wholesale leathercraft sales were 31 million versus 30.6 million a year ago, an increase of 1.4%. Within the division, the wholesale centers reported sales of $26.2 million, an increase of 3.5% over 2004 sales of $25.3 million. The national account group reported sales of $4.9 million, compared to $5.3 million in 2004, a decrease of 8.7%. Sales to national accounts comprised 9.5% of our total revenue in 2005. A continuing and expected trend downward as we continue to execute our retail expansion plan. Retail leathercraft sales were $18 million this year, compared to last year of $13.5 million, an increase of 33%.

As Wray indicated earlier, we opened eight new retail stores in 2005. The new stores, which are these eight plus the ten opened in August 2004 and later, contributed sales of $4.3 million in 2005. The 32 comparable stores contributed sales of $13.7 million in '05, which translates into a same-store sales gain of 8% over 2004. Consolidated gross profit for the year was 56.7%, up from last year's margin of 55.1%. Wholesale leathercraft gross profit margin increased to 55.3% this year, compared to 53.8% last year. And retail leathercraft gross profit margin held steady at 61.8%. Consolidated operating expenses were $23.2 million, or 45.7% of sales in the current year, compared to $21.2 million or 45.9% of sales last year.

Wholesale leathercraft reported operating experiences totaling 43.2% of its sales versus 44% last year. And retail leathercraft reported operating expense of 52% of its sales currently, compared to 52.8% last year. Income from operations is $5.6 million this year, a 31% increase over 2004 of 4.2 million. Total assets grew 15% in 2005 compared to the end of 2004, as we ended the year with total assets of $25.7 million. We held $3.2 million in cash at the end of the year, an increase of 25% from the end of '04. Accounts receivable increased to $150,000. And inventory increased by $2.9 million.

Current liabilities increased by $312,000. Total liabilities decreased by $435,000. And we had no bank debt. Accrued expenses up $1 million. $650,000 of it was for inventory on its way to us at year end, and $300,000 was the increase in manager bonuses earned in 2005 based on the profits of the stores. The inventory in transit at year end has been received in its entirety and the last of the 2005 bonuses due to managers were paid this week. Our current ratio was 5.3 EBITDA for 2005 was $6.1 million. Free cash flow, defined as EBITDA less CapEx was $5.8 million.

Some specifics on Tandy retail stores performance. We'll start with fourth quarter and then provide the same information for the year. Fourth quarter results are; Sales were -- again were $5.4 million. Gross profit was 61.6%. Operating income was 13.3%. For the sore stores opened in 2002, of which there were 14; Sales were $2 million. Gross profit was 61.9%. Operating income was 16.6%. And average monthly sales per store was $48,000. For the stores opened in 2003, of which there were 12; Sales were $1.3 million. Gross profit percentage was 61.9%. Operating income was 15.5%. And average monthly sales per store was $36,000.

For the stores opened in 2004; Sales were $2.1 million. Gross profit was 61.5%. Operating income was 12.7%. Average monthly sales per store was $33,000. And there were 12 stores opened in '04. Annual results for 2005 are as follows; Sales are $18 million. Gross profit was 16.8%. Operating income 9.8%. For the stores opened in 2002, sales were $6.9 million. Gross profit was 61.9%. Operating income was 13.1%. Average monthly sales per store was 41,000. For the stores opened in '03; Sales were $4.6 million. Gross profit was 62.8%. Operating income 11.8%. Average monthly sales per store 32,000. And for the stores opened in '04; Sales were $5.4 million. Gross profit was 61.2%. Operating income was 7.5%. And average monthly sales per store was 28,000.

There are eight Tandy stores reporting operating losses, totaling $145,000 as of the end of '05. Two stores were opened in '04 and remaining six were the last stores opened in 2005. Of the stores opened in 2004, one was profitable in the fourth quarter and we have made a manager's change in the other one. So, I expect we'll see improvement there. Of the of the six stores opened in 2005, one was profitable in the fourth quarter. As to the other five, one of the problems with opening stores in the latter half of the year, is that the stores don't have enough time to overcome the cost to get them set up. We fully expect these stores to generate profits in 2006.

To summarize, 2005 was a good year for us. Our retail leathercraft division continues to drive our sales growth and we're executing our expansion plan exactly as we originally presented it at the beginning of 2001. The wholesale leathercraft division is successful in its own right. Although, it tends to be overshadowed by the momentum generated in the retail leathercraft operations. Our gross profit margin improved again this year. And our operating income grew faster than our sales. We plan to open 12 new Tandy stores in 2006. As of today, we have announced the opening of six new Tandy Leather stores, so far this year. Including one conversion from a Leather Factory wholesale center. We already have the other six locations selected and we'll make announcements regarding those once we have secured leases and can better estimate opening dates.

One of the keys to our continued operational success is our people. Our store managers are pivotal to our ability to produce positive financial results, They are the front line responsible for promoting the craft through education and customer service. In our business, that is crucial in order to be successful. I believe we have a great group of managers, probably the best we have ever had. We are constantly looking for trainees to enroll in our manager training program, as we plan for our future store openings. Overall, I think we did a good job at containing operating expenses in 2005. Cost containment is a priority for us as we're growing. And our goal in 2006 will be that sales continue to grow faster than operating expenses.

I think our balance sheet is in good shape, although I would have preferred to have less inventory at year end. According to my calculations, we should have had $1 million less inventory than we actually ended up with. If we were having this conversation in mid-January, I would have said that we messed up. That we overbought for the fourth quarter. However, based on our January and February 2006 sales, it turned out that we were probably okay.

Accounts payable, at year end, was the lowest it's been since '97/'98. I suppose we could have ended the year with more cash if we hadn't been so aggressive in paying our trade payables. But on the other hand we gain price negotiating power when we're willing to pay vendors a little more quickly. And that could potentially strengthen our gross profit margins. I like the position we are in going into 2006 and have no reason to think that it won't be another banner year for our Company. With that, I will turn the call back over to Wray.

Thank You, Shannon. That's a lot of numbers in a short period of time. As our press release indicated yesterday we're not changing our revenue guidance for '06 but we are raising our earnings guidance. We expect '06 revenues to be in the $53 to $56 million range. And fully diluted earnings per share to be in the $0.40 to $0.44 range, based on average diluted shares outstanding of 11 million. We certainly appreciate your time today and we'll be happy to answer whatever questions you may have at that time. Operator, we're ready to take questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is come from Charles Littlejohn, sir please state your affiliation, then pose your question.

Yes, I'm Charles Littlejohn with the Masonic Lodge of California. Congratulations Wray and Shannon, once again on a banner year. I'm very pleased with the results here. I just have a few questions for you. Number one, as you continue to grow and build up more cash, are you at some point anticipating a share buyback?

Chuck, I think that I would have to tell you what I hear from here. I probably get as many calls from institutions wanting to know when we're going get more shares out in the float, as I do from maybe individual investors wanting to know if we're going buy back some shares. I think the best answer to what you have asked, would be to tell you that I will bring it up at the Board meeting and then we'll report to you.

Okay. Fair enough. I have a second question here. You are talking about you paid bonuses just last week to your managers for 2005. My question is basically this; This is kind of unusual. Are these folks employees or are these independent contractors or they work on a commission? How does that work with your managers?

Charles, the way the managers work on these bonuses we're talking about, they get a base pay of approximately $30,000 a year and 25% of the net profit their store. So, the way we feel about it; is it encourages them to sell to build up the bonuses. Because really the major part of their earnings will be in their bonus. And we also know that if they are spending $1 and they know that $0.25 of it is theirs, they are likely not to spend it. So, we feel like it's good encouragement to make them run a tight ship, run a high gross.

Our next question is coming from Patrick [May]. Please state your affiliation, then pose your question.

Well, my name is Patrick May. I'm in San Antonio, Texas and I'm a private investor. Wray, I want to tell you guys thanks for all the money you've made me in the last few years on my stock. I got in pretty cheap here, so I'm a real happy camper. My other question is, I know that at one of your meetings here a few years ago and I know that you have some young kids there in your organization that appear to have quite a bit of fire power. Are you guys looking at anything else here on down the road. That you've been so successful here in the leather business, are you all looking at anything else down the road that you could get into and exploit that doesn't have a whole lot do with what what you are doing now?

Patrick, I appreciate your call and your questions. There is one thing I would like to ask you, since I know where you are from. If I answer this question to your liking do I get to play La Cantera?

Yes, I think that could be arranged.

All right, Patrick to try to answer that, I would have to say that we're kind of like an ink blotter. We're open if anything happened to pop-up, I'm certain that the people here in the Company and the Board of Directors would want to look at it. Unfortunately, there hasn't been anything presented itself. As you know, we don't have any competitors. So, there is not much out there to buy in the way of competition in the leather business. Now, if we thought we were to smart enough to run a different type of company, there might be something out there.

Patrick, I will fill in a little bit there. We have done acquisitions that were somewhat related to the leather business in the past, thinking that it would be a good fit. We have done a very poor job being successful with those acquisitions, to be totally frank. The only explanation that I can give besides we know what we are doing in this business but we're not capable of doing anything other business; is that the the businesses -- the acquisitions that we have done previously were generally owners management teams that were exiting the business. So, basically they sold it to us and left us with learning what to do with those businesses. And we, frankly, we have done a very poor job.

So, we tend to be a little bit careful about considering things outside of the leather business because our track record is so poor. However, if it was a situation where we were buying a Company and the management team there was staying in place, we might be real successful at that. That is the one type of acquisition we haven't done. All we have ever done was acquire those companies that somebody wanted out of, retiring or what have you; and there is no other way to say it, we have just done a very poor job with those. And don't feel like that makes a whole lot of sense in terms of using investment dollars, if we can't perform successfully with those businesses. So, it's kind of a Catch-22 in terms of expanding into semi-related or totally unrelated businesses.

Well, do you all feel like you have a ways to go in the leather business?

Absolutely.

Plenty room out there yet?

Yes, Patrick, I'm sure you know the history of the old Tandy Company. They had over 300 stores when I left them in 1979 or '80. And the majority of them were profitable. Now, granted we had some areas where we crowded them in on top of each other and there were some that were unprofitable. We said we were going to try to open 100 stores. I think we may find that if we are smart enough with our merchandise mix and better packaging and better displays, that we might be able to go further than 100 stores. If we opened a store in a community of 300,000 and can make it profitable, how many could you open in the L.A. Basin if you worked off that 300,000 population number?

Yes, okay.

The other thing, Patrick is that we haven't even tapped the international market really yet. We have a few dealers ASP's internationally. But there are several countries that would be very logical for us to have a presence in, that we're not there yet. We are focusing on the domestic market. So even when the domestic market we feel like that we have maxed out, we have got another, I don't know how many years of looking at expansion overseas, which would continue to add. So while, again, while we're not opposed to acquisitions and if an opportunity came up that made sense, we would be all over it. We certainly think we have got plenty to keep us busy with what we're doing currently and domestically and then what we think we can do internationally as we get closer to the end of domestic expansion.

I have heard you all mention the international market before. Do you all have any kind of timetable on that at all?

Well, I think the closer we get to running out of expansion in the U.S., we'll have to start -- we're looking now, Patrick.

Okay. I don't want to push too hard here but I'm just -- it's my job to ask questions.

When I was with Tandy, I went to Tokyo and set up the Tandy distributor over there in Japan, that was very successful. I also went to Australia and set up the Australian distributor and that was profitable. So, I feel like it's -- probably there's two or three likely countries. And when I say "countries" I will just say Europe for one, Australia, Japan that we can go look at a little closer. And we're already putting out feelers.

Okay. Well, good. It sounds like you are all doing great. I don't need to tell you to keep doing it, you're just doing wonderful. So, thanks.

Thank you, Patrick. Thank you. Our next question is coming from Will Lyons. Sir, please state your affiliation then pose your question.

Westminster Securities. Hi guys. Congratulations on a great year. You must be having fun. Wray, you just mentioned that one of your challenges in terms of expansion is better packaging. Could you walk me through what you mean by that?

Well, I think what you are seeing, we've been kind of surprised at the increase in retail business in the Leather Factory stores as compared to Tandy Leather stores. I think a lot of that has do with brighter, cleaner packaging. Displays are more more attractively. And so when people walk in the stores they are more inclined to make an impulse buy. It just needs to be packaged neat and clean. As you know, when you sell to the big box stores, the chain stores, they sell their space by the square foot. So, you have to have very compact attractive packaging. And I think we have done that to a large degree and I think it helped the sales in the older Leather Factory stores.

Interesting. On the separate tact and I missed the first couple minutes of call, so excuse me if this is repetitive. You clearly, at least your numbers seem to show you've sort turned the corner on national accounts, what do you attribute that to?

Well again, well those national -- whoever is running that national account division has all of my sympathy. I have sat in some of those meetings with the buyers at the box big stores. And you send them a -- you give a 20% price increase on a product that they are buying and you send them a notice that it's going up x percent and they say well, they don't accept that. They are very tough, as you know, to sell to.

Sure.

And I think that anybody that can fight that battle everyday has got to be one tough little cookie.

Well the good news is that is a smaller and smaller part of your business.

Well, as we open more Tandy retail stores, it probably will diminish the sales to the national account group.

I have noticed and maybe it's my imagination and tell me if I'm wrong. But it looks like you are now able to when you open new stores, pick people out of existing stores. And you've got a cadre of people that you've now trained that you can put into these new stores.

That is correct. I think -- I was told just before the meeting that I checked on it, that we have 14 so-called manager-trainees in the system right now. And as we move the senior ones out into new stores, we'll try to pick up another one and keep new trainees coming all the time.

What do you think are your one or two or three biggest constraints to more rapid or continued rapid growth in the Tandy leather sector?

Well, I don't think there is any. Really, if there's any limitations, we put it on ourselves. We just felt like to do a controlled growth, we figured out if we go one store a month and make most of them profitable before they got into the six month burn, that we would be lucky.

And you have achieved that haven't you?

Well, pretty well. Shannon, what do you think?

I agree. And the other thing of course, is the whole trainee program. You can't open faster than people can take the stores because that's -- as I said earlier, our store managers, our people are pivotal to the success of the individual store and then obviously then the success of the total operation. So, we got 14 trainees in the system right now. We still occasionally get calls from old -- I should say, I'm sorry, former --

Be careful.

former Tandy Leather Factory store managers. We got a lot of those when we first started doing this. They had a pool of 350, obviously, out there at some point. We occasionally get phone calls there. But if we don't have solid managers in the stores, then we are going to end up shooting ourselves in the foot. So, you can't open any faster than you've got the people with the experience to get out there and run them because if you don't, it will kill you. So, I think the biggest straint to accelerating any kind of expansion is; How many people do you have in the system that could take stores? If we opened 25 tomorrow, we're not going to make it. It's not going to happen because we don't have the people to run them.

And the people that you target for that, what does it take to train them, 12 to 18 months?

They normally don't get to stay that long Will. Six months to twelve months, so probably nine, average. And if they stay nine months, you are lucky. It kind of depends too on the person. Some people -- we've got -- the guy that took our Jacksonville store was a trainee and I don't think we was here very long, four or five months maybe. And he's doing a great job. That's kind of an unusual situation. He was just extraordinary. We have people that trained for 12, 18, months, two years before -- it just takes them a little longer. And it depends on what store they train in and how quickly they got exposure to anything and everything.

Okay, well thanks guys and congratulations again.

[OPERATOR INSTRUCTIONS] Our next question is coming from Ivan [Zlick]. Please state your affiliation, then pose your question.

Ivan Zlick, Raymond James Financial. This really isn't a question, it's a comment on what you have been speaking in the conference call. I am very much in favor of the controlled growth and staying within the framework where you really have your expertise, as far as your growth. I think when you get into areas where you don't have the expertise, you are just asking for problems. And I think that so far, you have stayed really within the area that I have been involved in the stock. And I think that is why you have had the success that you had. So, that's just my comment.

Thank you very much.

Thank you our next question is coming from Charles Littlejohn.

I've got one final question here. The margins on each of your divisions wholesale, national and retail, could you give me your latest figures on that?

Let me find them. The Leather Factory, 55.3%, which is up from last year. Tandy is 61.8, which is flat. The national accounts group, 43.4, it was up from 41.

Okay. Could you repeat the wholesale division again on those figures?

55.3%.

65.3?

No, 55.3.

And what was it the prior year?

It was 53.8.

It was less than that.

It was 53.8% last year, Charles.

53.8. What about retail, could you repeat that for me again?

61.8 and that is flat. That is exactly what it was last year.

Thanks, very much.

Okay. Thanks, Charles.

[OPERATOR INSTRUCTIONS] I'm showing no further questions in the queue at this time. Did you have any closing questions?

No. Thank you everyone for sitting in on the conference call. We appreciate it.

Thank you.

Thank you, ladies and gentlemen. This does concludes today's teleconference. You may disconnect your phone line at this time and enjoy the rest of your day.