Tandy Leather Factory Inc (TLF) 2006 Q1 法說會逐字稿

Good afternoon. Welcome to Tandy Leather Factory's first quarter 2006 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 Tandy Leather Factory management speaks today of any future events, makes other forward-looking statements. You are reminded of 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 foreseen.

Please see Tandy Leather Factory's Form 10-K for 2005 for a discussion of some of these risks. Copies of these documents are available through the SEC's EDGAR system 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.

I would now like to turn the floor over to our host, Mr. Wray Thompson. Mr. Thompson, you may begin your conference.

Thank you. Good morning, everyone. Thanks for joining us for our first quarter 2006 earnings call. I'm Wray Thompson, CEO of The Tandy Leather Factory and I have Shannon Greene, our Chief Financial Officer, who is joining me on the call today.

We're very pleased with our first quarter results. Our goal for '06 was to grow our earnings faster than our sales and we accomplished that in the first quarter. Compared to the first quarter of 2005, consolidated sales increased 13% and income from operations increased 30%, while our consolidated gross profit margins held steady at 56.3. We'll talk a little bit more about gross profit margins later on in this call.

Our balance sheet continues to look good, getting stronger. Compared to '05 -- year-end '05, we added 1.5 million in cash to the balance sheet and were able to reduce inventories by 600,000 despite opening eight new retail stores so far this year. Our Wholesale Leathercraft division posted a sales gain of 6% this quarter, the majority of which is distributed to the distribution centers.

The National Account group did achieve a sales gain for the quarter, although minimal. We continue to be pleasantly surprised with the performance of the distribution centers as they consistently meet or beat our internal targets of 2 to 4% sales growth annually. Gross profit remains steady and operating margin increased to 18% for this quarter due to the continued efforts of cost containment throughout the division.

Our Retail Leathercraft division continues to generate solid revenue growth from the old stores as well as the new ones. The Tandy Leather Retail store chain grew from 44 to 56 stores during the trailing 12 months ended March '06. Sales are up 29% in this quarter over last year. We've opened eight new stores so far this year and we are still maintaining our commitment of funding this growth from internal cash flow.

Gross margins declined almost 2%. Operating margin held steady at 9%. Generally speaking, we are pleased with the operating margin as we have incurred a set of expenses associated with six stores opened before the end of March.

We'll now get Shannon to go over the financials with you and then I'll come back in later. Shannon?

Thank you, Wray. Good morning, everyone. Our first quarter consolidated sales increased 13%. Current quarter sales were $14.4 million compared to last year's first quarter sales of $12.7 million. Wholesale Leathercraft sales were $8.4 million this quarter compared to $7.9 million a year ago, an increase of 6%.

Breaking it down further, the distribution centers posted a 7% sales gain, reporting sales of $7.1 million compared to $6.6 million in Q1 '05. Our National Account group posted a 1% sales gain, reporting sales of $1.3 million this quarter compared to $1.2 million last year. As we have mentioned in previous calls, National Accounts is not a primary focus point for us as we continue to grow our retail and wholesale centers. However, we are cautiously optimistic that we've got this group turned around and are headed in the right direction.

Our Retail Leathercraft division reported sales of $5.5 million this quarter compared to last year of $4.3 million, an increase of 29%. Sales from the 13 new stores were $717,000 this quarter. We converted our distribution center in Charlotte, North Carolina, to a retail store in January, which added $98,000 in sales and the 42 comparable stores posted sales of $4.7 million, an increase of 11% compared to last year's first quarter.

Consolidated gross profit margin for the quarter was 56.3%, the same as Q1 '05. Wholesale Leathercraft gross profit margin improved minimally from 55.3% to 55.4%. Retail Leathercraft gross profit margin was 60.3% currently versus 62.1% last year, due to an increase in sales to business customers from the Tandy stores.

We have had several Tandy store managers who have discovered some local businesses in their area and have been successful turning those businesses into solid customers, which has contributed nicely to sales. However, the trade-off is that they're selling at wholesale prices rather than retail prices, so the overall margin for this division has decreased as a result.

Consolidated operating expenses were $6.1 million this quarter or 42.1% of sales compared to $5.6 million or 43.9% of sales last year. Wholesale Leathercraft reported operating expenses totaling 37.2% of its sales versus 40.5% last year. Retail Leathercraft reported operating expenses totaling 51.4% of its sales currently, compared to 53.1% last year.

We achieved expense decreases in bank fees, some advertising and postage costs, and in our bad debt charges. As we've said before, we will continue to monitor and manage our operating expenses closely, as we're expanding our overall business. Income from operations was $2 million for the quarter, up $472,000 or 30% compared to first quarter '05.

As Ray mentioned, we do believe our financial position is continuing to strengthen as evidenced by our balance sheet. Total assets were $28 million. From December to March 31st, cash increased $1.5 million. Accounts receivable increased $800,000 to an increasing credit sales in the first quarter compared to the fourth quarter of '05 and a slight slowdown in days to collect accounts.

The inventory decreased by $625,000, despite the stocking of the eight new stores opened so far in '06. Current liabilities increased $912,000, due primarily to an increase in trade accounts payable. We were unusually aggressive in paying our trade payables in the fourth quarter of '05, which resulted in our accounts payable balance at 12/31/05 being extremely low. The level of accounts payable at March 31st is more in line with our purchasing volume and payment terms.

Our only debt is a 36-month 0% interest capital lease for some computer software. We have 19 payments of $11,000 left on the lease. We still have no bank debt, and we've increased our cash position by almost double over the last 12 months. During that same period, we also opened 12 new stores, have opened two more in April and will be announcing another store opening shortly.

We are asked from time to time about the appropriateness of no debt given that the interest rates are what they are. In addition, the assumption is that we could grow faster if we had more cash to fund the opening of stores. However, the reality is that we're growing at the pace we're on, not because we don't have an adequate supply of cash, but because we don't have an adequate supply of trained personnel.

Also, as stated from the beginning of this expansion process, we believe in managed growth in order to ensure a positive impact on earnings. Our current ratio is 4.78. EBITDA for the first quarter of '06 was $2.1 million.

Some specifics regarding the performance of the Tandy Retail stores in the first quarter. Again, sales are $5.5 million, gross profit is 60.3%, operating income is 9%. For the stores opened in 2002, sales are $1.8 million, gross profit margin is 60.9%, operating income is 12.8%. For the stores opened in 2003, sales are $1.2 million, gross profit margin is 61.1%, operating income is 10 3%. For the stores opened in 2004, sales were $1.8 million, gross profit percentage 59.5%, operating income was 11.3%. For the stores opened in 2005, sales were 539,000, gross profit is 59.1% at an operating loss of 0.4%.

In this first quarter of '06, average sales per store per month was $33,000. The stores opened in 2002 had average monthly sales of $43,000 per store. The 2003 stores had average sales of $33,000 a store, and the 2004 stores averaged $37,000 per store and the 2005 stores averaged $22,000 per store per month.

There are nine stores with operating losses as of the end of March totaling $90,000, five of which were opened this year, three were opened in 2005, and one was opened in 2004. The losses at the five stores opened this year totaled $62,000. The operating losses from the three stores opened in 2005 totaled $25,000 and the one store opened in 2004 generated an operating loss of $3,000.

We've made a manager change in the fourth quarter of '05 in the store opened in 2004 and one of the stores opened in 2005 which should correct the problems there with a little more time. The other two stores opened in 2005 are being reviewed by store operations to determine where the problem is and what needs to be done to correct it. I can tell you that in both cases sales are not up to expectations yet.

Wholesale Leathercraft results are as follows. Sales, again, are $8.4 million, gross profit percentage 55.3%, operating income is 18.1%. All of the 29 distribution centers posted year-to-date profits as of the end of March and operating margins range from 4% to 19%. 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're on track with our Tandy store expansion in 2006, maybe even a little ahead of schedule. Generally speaking, the retail stores continue to mature and generate profits within the expected time frame and the distribution centers are performing above our internal expectations while the retail stores are opening all around them. I think that confirms our belief that as industry awareness increases, it benefits both the wholesale and retail operations. I'll turn the call back over to Wray.

Thanks Shannon. Well, it looks like we're off to a good start in '06. We continue to execute our growth strategy and don't have any reason to expect our plans to change -- our plans for the year to change. Our plan is to open at least 12 retail stores in 2006 and as of today we've opened eight. We're not changing our sales and earnings guidance for 2006 at this point. To reiterate, we're estimating sales in the range of 53 million to 56 million and diluted earnings per share in the range of $0.40 to $0.44, assuming average diluted shares outstanding of approximately 11 million shares.

In summary, we'll continue doing what we're doing; managing growth and containing costs in order to increase operating leverage and ultimately increase shareholder value. Operator at this time, we'll take questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. [OPERATOR INSTRUCTIONS] Our first question is coming from Will Lyons. Sir, please state your affiliation then pose your question.

Westminster Securities. Good morning, Wray. Good morning, Shannon.

Hi, Will.

Hi Will.

Another great quarter.

Thank you.

Thanks.

You guys having fun yet.

Absolutely.

Wray, you have got $2.5 million more now than you had a one year ago. What are you going to do with all this cash that's flowing in?

Well, as Wray has often said, first of all, we've never been in this position before. So we've got some work to do to figure out exactly what we want to do.

Sure.

I think, as Wray -- Will, as we've said before, we -- at some point dividends may be an option. We occasionally at this point get the opportunity to make some good inventory purchases if we've got the cash to pay for them, which can positively affect our gross margins.

Is that seasonal, those opportunities?

No.

Not necessarily.

Okay. Okay.

They continue to come up. It just depends on what the market's doing out there, particularly with leather.

I see.

Better than anything else.

Will, what really happens on the opportunity to buy leather, a tanner may obtain a specific lot of leather for a certain customer and maybe the customer decides that he can't pay for it or it's the wrong color or it's the wrong thickness. So the tanner is stuck with and when they are caught in that position they normally will call us and offer it to us at a discount.

You've opened eight stores so far, Shannon, if I understand correctly, a ninth one will be announced soon.

Yes.

Is 12 to 15 a good estimate for all of '06?

I think so.

Okay.

Definitely beat 12. If we can do a little bit better than that, we will. It will -- again as we've stressed before, it depends on the managers that are available. We're definitely set for 12. If things go well, we can find the right leases, and we've got the right people in places, we could possibly do a few more.

Would you still stick to your historical sort of plan, if you will, of not opening anything in the fourth quarter?

I think that's kind of the goal. If we can get them established before the 1st of October, it helps make the fourth quarter -- they do better in the fourth quarter if they're already there. So yes, we'll probably, if we've got the lease space and the managers in place, we will try to get everything done by the end of the third quarter.

A few of your new stores to-date have been actually you buying out what I'll call your competitors in particular markets. Would we expect the same ratio of what I'll call real new store openings verses purchasing stores? Would the ratio be pretty much the same gong forward for the next year or two?

We haven't done an acquisition since July of '04 of those small stores. There are none in the works right now. I'm not aware of any. So, I mean, if I had to give you an answer right now, I'm going to tell you that they're all going to be opened brand new. We're not going to acquire any.

Okay.

If something comes up and there's a good opportunity, we'd certainly jump on it but I'm aware of nothing in the works that would give me any indication of something like that's going to happen in the next year or so.

Okay, thanks. Congratulations again.

Thank you.

Thanks Will.

You bet.

[OPERATOR INSTRUCTIONS] Our next question is coming from Robert Straus. Sir, please state your affiliation, then pose your question.

Robert Straus from Merriman Curhan & Ford. Hi Wray, hi Shannon. And how you're guys doing today?

Hello Robert.

Just a few follow-up questions. First of all, the wholesale business is clearly performing better than expected. The expectations were calling for 2% to 4% revenue growth. Wray, can you walk us a little bit through that and give us your feel for what's going on there?

Robert, I think that I can. As we have expanded the Tandy Leather retail chain across the country and into Canada, we've done more mailings. We've done better mailings and I think we've made better offers. And in a lot of cases, we've stirred up old Tandy customers that are wandering into our old leather factory units, kind of generating a new customer base. All I can say is I think the advertising and the Internet, our website has just done a tremendous job of steering people into the stores.

And you spoke a little bit, Shannon, about the retail side of the business particularly, the gross margin level, which has come down a little year-over-year. What can you tell us about your expectations going forward? Clearly, it sounds like some business customers are coming into those stores and maybe knocking margins a little bit. Is that a trend that you expect to continue or is it a fluid situation where you just have to watch it as you go?

Well, I think in the retail stores we're looking for margins -- overall margin of 60%. We're still above that for this quarter. Basically, what's happening and frankly, it surprised me a little bit although it doesn't seem to really surprise some of these other guys -- Wray will probably tell you that. We have some incredible managers in the Tandy system that are aggressive enough that they're going to find out -- figure out a way to sell one more piece of product to somebody.

And while historically, Tandy has always focused on the end user retail customer, which is great and that will continue to be the focus, we've got a couple of creative managers out there that have discovered businesses in their local areas that they can service and develop new customers. And these are new customers. They are not stealing customers from leather factories from the wholesale distribution center. These are customers that we were not selling that they have figured out a way to sell to.

As a result though, as I indicated in the prepared remarks, it does pull their overall margins down a little bit, because they are selling in these -- some of these isolated stores, they're selling at wholesale prices to these other businesses as opposed to pure retail.

We're certainly not discouraging that, and I don't think it's going to get where -- to the point that their retail to wholesale mix is blended like Leather Factory's is, but we're certainly not going to tell them that they can't sell the customer if they're right there in town. And that's exactly what's happening, there's about four or five stores. The managers are just aggressive as heck and they have gone out and been willing to try something a little different than traditional retail sales and it's working for them.

And my understanding is this is sort of an entrepreneurial type of business. So can you remind us how you compensate your store managers?

Sure. They are paid - base pay of it's about $30,000 a year, and then they earn a bonus of 25% of the operating profit of their store. So they have a great deal of incentive to be profitable. We have had the managers that were great volume sellers, but their margins were pretty bad. And that doesn't, I mean that helps a little a bit with their compensation, but it doesn't help as much as when you can really get the margins in there.

So these guys are not losing their retail business by any means, they're just adding some more wholesale sales dollars to their mix, and it's added sales, and it's pulled the margins down a little bit, but it's not costing them anymore in operating expenses to sell to these guys, because they're local, so they have virtually no delivery costs or anything like that.

So, yes, the incentive is there definitely to continue to do well, to continue to grow their profit -- their bottom-line profit. And these couple of stores that are selling these wholesale businesses, they're certainly not losing anything in their annual compensation every year.

When we look at the cash flow of the business, clearly it's strong -- you guys put up another good quarter. In using that cash flow, can you talk a little bit about the store managers that you have in training, your philosophy from that standpoint to drive that store growth?

Robert, we have six to eight people, could be men or women, either one, we're pretty well evenly divided on that. We just put these people in a store where we feel like we've got a solid manager that knows the fundamentals of running a good sound business.

And normally, we leave them in a training store six to nine months before we put them out in a store on their own. And that, invariably, you're going to have one or two out of the 12 that don't do as well as you'd like. But overall I feel like they get a good sound training, and are probably pretty well equipped to turn a profit and make a bonus.

It sounds good to me, guys. Nice performance and good luck.

Thank you.

Thank you. Robert.

Thank you. Our next question is a follow-up from Will Lyons.

Wray, you mentioned the Internet. Last year at your shareholders meeting there were some pretty interesting numbers that Ron had up on the Internet traffic and growth. Do you have any of that in front of you for either the current quarter or even just '05 as a whole?

Will, I don't have it. I have talked to Ron Morgan and Dana that really runs the Internet program. And the last -- at the end of last month, I was told that their Internet sales were up 29%. The inquiries keep coming in, our conversion rate is pretty good. So I'll feel real good about the website.

That's March sales of '06 compared to March sales of '05 were up 29%?

Yes. On the - off the website.

And that's in dollars or in product unit sales, do you have any idea what -- dollars?

Yes. Dollars.

Dollars. Well that's pretty darn good.

Yes, that is good.

Shannon, I'm sorry if you said this earlier, I missed it, I wonder if I could get about three numbers from you. Cost of revenues for the three segments in dollars?

Yes, hang on. All right, let's see Wholesale Leathercraft for the quarter, our gross profit margin was 55.4%. That converts to $4.6 million gross profit.

Okay.

Retail Leathercraft, the gross margin was 60.3%, that's $3.3 million.

Okay.

Our other segment is 26.7%. It converts to $129,000.

Okay.

And Consolidated is 56.3%, $8.1 million gross profit.

Okay, great. Thanks a lot.

You bet

Thanks Will

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

Yes, thank you. I appreciate your time today. I would also like to remind everyone about our 2006 annual stockholders meeting to be held on May 24th, 11'o clock a.m. local time. The meeting will be held in the Stolman Museum which is actually inside our Fort Worth store, the old Fort store on Loop 820. Everyone consider yourself personally invited. If you haven't seen the Leathercraft Museum, it would be worth a trip.

On behalf of Shannon and myself, and the entire company, thank you for your participation in today's call. We appreciate your interest in our company. Have a nice day. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and enjoy the rest of your day.