Tandy Leather Factory Inc (TLF) 2007 Q1 法說會逐字稿

Good afternoon. Welcome to the Tandy Leather Factory first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) Before I turn the call over to Ms. Greene I want to call your attention to the fact that these conversations will contain forward-looking statements of any future events or make other forward looking statements. You are reminded of the inherent certainties of looking into the future that there are risks pertaining to the factories that could present (INAUDIBLE) working. Please see Tandy Leather Factory's form 10-K for 2006 for a discussion of some of these risks. Copies of these documents are available through the SEC system or from the Company's Investor Relations office. Also statements made today by members of management of Tandy Leather Factory are made as of this moment and Tandy Leather Factory disclaim any duty to the update of those statements. I would now like to turn the call over to your hostess Shannon Greene. Ms. Greene you may begin your conference.

Good afternoon everyone. Thank you for joining us for our first quarter 2007 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Ron Morgan our Chief Executive Officer will be joining me today during the Q&A period of our call. The general consensus around here is that we are glad that the first quarter is over. It was a tough quarter for sales as we've indicated in our monthly sales releases.

As a result of those top sales our earnings were not where we want them to be either. Our goal is to grow our earnings faster than our sales and for the first time in 10 quarters, we didn't achieve that goal. Compared to the first quarter of 2006 consolidated sales increased 1%. And income from operations decreased 4%. If there is a silver lining in result fact is that our consolidated gross profit margin increased from 56% to 59% for the quarter. Compared to year end 2006, our cash decreased $738,000 while our investment and inventory was up by $825,000. As of the end of the first quarter we opened three new retail stores and announced the opening of an additional two. We still intend to open a total of 12 new stores in 2007. Our wholesale Leather Craft Division posted a sales decline of 3% this quarter attributed to the sales loss of the distribution centers of 6.8%.

The National Account Group reported a 2% sales gain for the quarter. Mid continent Leather sales and acquisition we completed on January 31st added sales of $185,000. The distribution centers struggled all quarter from a sales perspective and we will talk more about that in a minute. As expected gross profit improved significantly this quarter seeing just shy of 59%. Operating margin declined by 11% due to weak sales. Our retail Leather Craft Division continues to generate revenue gains from the old stores as well as the new ones. The Tandy Leather Retail store chain grew from 56 to 65 stores during the trailing 12 months ended March 2007. Sales are up 13% in this quarter over last year.

As of today we have opened five new stores so far this year and we're still maintaining our commitment of funding this growth from internal cash flow. Gross margins increased slightly to 60.5% and operating margin improved by almost 12%. I'll run through the numbers quickly and try to provide some color to them. Our first quarter consolidated sales increased 1%. Current quarter sales were $14.5 million compared to last year first quarter sales of $14.4 million. Wholesale Leather Craft sales were $7.9 million dollars this quarter compared to $8.2 a year ago a decrease of 3%. Breaking it down further the distribution centers posted a 7% sales decline reporting sales of $6.6 million compared to $7.1 million in Q1 of '06. Mid Continent Leather sales, the new store acquired at the end of January contributed sales of $185,000. Our National account group posted a 2% sales gain recording sales of $1.13 million compared to $1.08 million last year.

As I indicated at the beginning of the call, sales, particularly at the Leather Factory stores were soft. At the risk of sounding too general, sales of many of our leather categories were off this quarter. Some categories were down due to market pricing others were off due to a change in customer preference and demand. We did introduce a new upholstery program this year, which has generated positive results for us. However, we will continue to analyze the market conditions, pricing, and qualities of the leathers we sell to maintain our competitiveness and increase our market share.

Our retail Leather Craft Division reported sales of $6.2 million compared to last year of $5.5 million an increase of 13% . Sales from the 12 new stores were $724,000 this quarter. The 53 comparable stores posted sales of $5.5 million, an increase of 1% over last year. Consolidated gross profit margin for the quarter was 59.3% compared to 56.3% in Q1 '06. Whole sale Leather crafts gross profit margin strongly improved from 55.4% to 58.9%. Retail leather craft gross profit margin improved slightly from 60.3% to 60.5% this year. Consolidated operating expenses were $6.6 million or 45.8% of sales in the current quarter compared to $6.1 million or 42.1% of sales last year. Wholesale Leather crafts reported operating expenses totaling 42% of its sales versus 37.2% last year.

Retail leather craft reported operating expenses totaling 51.6% of its sales currently, compared to 51.4% last year. Expense increases occurred in employee compensation due to increase in the employee head count from a year ago. Expenses associated with new stores, such as rent and utilities, employee benefit program and advertising expenses. Reductions in expenses occurred in employee savings programs, travel and meals,supplies, and some insurance programs. The softer sales in the quarter eliminate the need for tighter expense control and that has been and will continue to be a priority for us.

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 $1.9 million for the quarter down $87,000 or 4% compared to the first quarter of 2006. Looking at our balance sheet, total assets have increased to $33 million. From December '06 to March 31st cash decreased $738,000, accounts receivable increased $295,000 and inventory increased by 1.2 million.

Current liabilities increased $170,000 due to an increase in trade accounts payable of $775,000 and income taxes payable of $368,000 offset somewhat by a decrease in accrued expenses of $939,000. Our only debt is a 36 month zero interest capital lease for computer software. We have seven payments of $11,000 left on the lease. We still have no bank debt and and we have increased our cash position by 25% during the last 12 months, from $4.8 million at March of '06 to $6 million at the end of March of '07.

During that same period we also opened nine new retail stores, opened two more in April and will be announcing another store opening shortly. Our current ratio is 5.23 EBITDA for the first quarter of '07 was $2.1 million. Specifics regarding the performance of the Tandy retail stores in the first quarter. Sales of $6.2 million. Gross profit of 60.5% , operating income of 8.8%. In looking at the store performance based on the year opened, gross profit margin ranged from 62% to 58.2% and operating income range form 12.6% to 1.4%. Looking at individual stores average monthly sales ranged from $100,000 per month to $13,000 per month. And operating margins range from 21.2% to losses of 26.7%.

In this first quarter of 2007, average sales per store per month was $32,000. Based on the year the stores were open average monthly sales range from $43,000 to $23,000. There are nine stores with operating losses as of the end of March totaling $52,000. One of which was opened in March of this year, four were opened in 2006. Three were opened in 2005. And one was opened in 2004.

I would like to point out the two stores we opened in January of this year are profitable already which tells me our additional advertising efforts regarding store openings is working. As is usually the case, most of the stores with operating loses are not generating adequate sales and are being evaluated by store operations. Wholesale Leather Craft results are sales of $7.9 million. Gross profit percentage of 58.9%, operating income of 16.9%. All of the 29 distribution centers posted year to date profits as of the end of March and operating margins range from 4% to 18%. Mid Continent Leather sales our new distribution center acquired at the end of January just posting average sales of $92,000 and profitable although just barely.

I expect it will take most of the year to get its inventory cleaned up. We believe we can increase its gross profit margin by 8% to 10% points based on our ability to purchase product more aggressively because of our size. We are also working on streamlining its operations to produce more profit. To summarize, I would emphasize that while we were disappointed in our first quarter performance we are not changing our strategy. We have been in this business a long time and have seen periods like the first quarter before. We will continue to open retail stores at a pace of 12 stores per year. And we remain committed to growing our business one customer at a time. By staffing our stores with knowledgeable and experienced personnel who can provide quality service to our existing customers and develop new ones through classes and demonstrations. In summary, we will continue doing what we are doing, managing growth and containing cost in order to increase operating leverage and ultimately increase share holder value. That is the conclusion of my prepared remarks, Operator we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Clayton Ripley. Your line is live.

This is Clayton Ripley from Byers Capital Management. I heard you say that you are on track for opening your 12 stores in 2007. Have you seen any change in estimates regarding startup costs for those new stores. I know you had some estimates but the setup and computer equipment. Is it still online with the start up cost?

Yes, it is no changes there at all the only thing we've done differently for '07 is we are doing a little bit -- taking a slightly different approach with the advertising of the openings. We were a little sluggish in '06 and done a better job in '07. As I indicated the two stores we opened on January of '07 are already profitable by the end of March. I think we've made huge strides there. As far as set up, wha tit cost to get the store open the inventory going in the computer equipment all of that it is still exactly the same 50,000 in inventory, about $15,000 in computer equipment and the stores were capitalized and depreciated over the life of the lease and then we spent about $10,000 to $15,000 on what I consider store setup head board hooks, tables, tool racks,.

That's why you have such a large amount of cash on the balance sheet is for those startup costs. If you're only spending those kind of dollars, you could open a lot of stores.

Well obviously $6 million on the balance sheet is you can open a whole lot of stores. The cash on the balance sheet - we haven't come up with anything else to spend it on that makes sense for shareholders and makes sense for the companies. Our growth strategy and the pace of opening stores has nothing to do with the amount of cash it takes. It all has to do with trained personnel and quality managers that know how to sell products and how to take care of customers.

Okay. Thank you.

You bet.

(OPERATOR INSTRUCTIONS) Joe Blankenship, your line is live.

Couple questions. Your increase in inventory. How much of that came from the acquisition of Mid-continent. And number two strong gross margin performance on the wholesale division. Do you have an estimate of what the mix goes out of there as pure retail versus wholesale.

The inventory that we picked up for Mid Continent is about $300,000 the gross profit margin on the wholesale leather craft side at the distribution centers we've been talking about that all quarter. Very much expecting gross margins to be exceptional for the quarter and pushing 59% consolidated is probably the best I've ever seen. With weaker leather sales which is our lowest gross margin item, your sales are going to be not as strong and it's obvious they are not as strong as we would like. In exchange for that however you sell more of the higher margin, low dollar items which pushes your margins up. Ron, what's the retail mix -- retail to wholesale?

I think it's about 60%.

Yeah, normally particularly in the wholesale stores we do about 75% in what we consider wholesale business and 25% in retail. In those particular stores right now, we're running more of 30%, 35% what we would consider retail business and the balance being wholesale. So much of that has to do with how much leather we're selling to our businesses and saddle makers and that kind of thing. It's very much a tradeoff. Weaker sales but better margins. Frankly, I'd rather have better sales and we'll get there.

All right. Thank you.

Our next question is from Robert Straus. Your line is live.

Just a couple of quick questions.First Shannon, on the operating expense line, if you can maybe share with us a little bit more as it relates to the marketing and advertising. It seems like you probably increased that a little bit in the first quarter. Maybe that's because of the soft sales. If you can give us more color, it would be appreciated.

Our advertising we have put more efforts and spending more dollars on advertising. Some of that was already planned and then of course, some of that is when we started off with January and got into February and sales weren't like we wanted put a little bit more effort and emphasize on some advertising efforts. If I remember correctly, first quarter operating expenses are up a little over a half million dollars in the first quarter of '06. About half of that is in advertising. The rest would be in the cost of the dozen stores that exist now that didn't exist in the first quarter of '06. Ron can give you more specifics, where the grand openings of the new stores.

This is Ron Morgan. The grand openings in the new stores probably were 10% of the additional expense because we've beefed up the programs and looks likes the working. When sales are tough we've experimented with a couple other programs. We started one with the upholstery shops in the United States and it looks real good and we voted a special mail order to those folks and we spent which wasn't budge ted for. We'll spend 3.1 million. We are spending a little more with a little more aggressive programs trying to get our sales back on track. Does that answer your question?

Sure does. I'll leave it there. Thank you.

Thanks, Robert.

Once again, if there are further questions, it is 1-4 on your touch tone phone. Next question is from Matt miller. Your line is live.

Question for you. On the discussion with weaker leather sales. I wonder if you could help us understand the dynamic. Was it lower leather sales accompanied by lower -- what I'll call other miscellaneous products.

It was more prominent in the leather. The leather, hides, skins, etc. And generally, while leather is the fun part of this business, it's also the weakest margin. We traditionally sell about 34%, 35% in leather and roughly 30% gross profit margin. And everything else is in the 60s. But when the leather sales drop off and they drop to about 31 or so, 30, 31% for that quarter and we sell more goods -- individual items -- than we normally do in a quarter lost the higher dollar and lower gross profit it affected our sales. Average item is $10 for a side of leather is $100. So every time -- even though we've made up a lot of those sales, the sales that we lost on the leather -- and leather -- we have some competition in selling letter and we always have to stay aggressive. We don't have competition selling our overall range of products. We do have competition in selling leather, skins, and hides. And that's a little fattish at times in the western and southwestern look so we have to get a little more aggressive in our leather sales. I wonder if you could help us you can the long term dynamic there.

Is the leather more sensitive? It's just because is it high every price point that sales were weak? Seems difficult to reconcile the fact that leather was weaker and miscellaneous was not as weak.

We sell in the long term if you don't sell leather, you don't sell all the accessories to go along with it. And that's the importance of selling the leather is that you will for a while but you'll eventually not sell all the parts and pieces, the glues, the cements, the rivets and snaps and goods that goes with the leather. When the prices do jump on increase on leather there is resistance from customers. We did have price increases on leather. There was some resistance.

What happens if a typical manufacturer they may carry a big stock of leather. The prices go up. They hold buying and won't buy, hoping the prices will come back down. After three months and four months and they have weathered -- their inventory is depleted and the the price hasn't come back then they go ahead and buy it anyway. And it's very typical.

One other question. Not really related. Comment on whether the results this particular quarter gives any pause towards the ultimate goal in retail locations.

Not really.

No. Matt, they don't. We're not changing anything. And I guess I would stress that while the quarter has been disappointing, you know, I can't tell you -- and this is happened before. One of the things we're dealing with we started announcing monthly revenue numbers in October of '05 and when we were looking at the ups and downs of various months in the last say 10 years, you would be amazed at years that we ended up with a 10 or 15% sales gain for the year. But there was a quarter that sales weren't only flat but they were negative. This kind of thing happens.

Part of what you're looking at is we haven't seen this in quite a long time. We didn't have any really depressing months in 2006. You know, it's one of the things that happens. We have some competitors on the leather side that didn't raise their prices when everybody else kid. We weren't willing to lose money on the leather, so we raised our prices and lost some market share to them temporarily. That happens all the time -- it happens frequently.

However you want to think about it. This is not an unusual situation. We're just all spoiled to -- having had 10 or 12 or 15 months of pretty impressive numbers and this kind of thing is going to happen. Is that going to change our business strategy? And the answer is absolutely not. We're going to continue to open stores -- 12 stores a year. The Tandy stores are looking pretty good. Leather factory stores are still not where we want them to be. Recovery to achieve but this is not one of those things we sit around and say did we guess wrong? Are we headed down the wrong path? Bottom line we need to cut more expenses the growth in this company and industry is the Tandy leather retail stores and we're not changing our strategy or plans about that at all.

Appreciate it. Thank you for your candor. Thank you.

Thanks, Matt.

Our next question from Ruth Anne Russell.

Good afternoon. question from Ruth Anne Russell. Good afternoon. It's Ruth Anne Russell Just a quick clarification. With regard to the operating expenses, expenses associated with new retail stores rent utility, employee benefits were the primary contributors. I wanted to better understand there. Are we talking a rise in employee benefit costs such as health care costs that's separate?

That employee benefits is exactly that. It's right now it's primarily plow health benefits. It doesn't really have anything to do with the new stores. It's an overall increase in the medical programs that we've got.

That's just something that almost everybody is experiencing.

You're absolutely right.

Then going back to the question of the lower margins on the leather. I think during the last call there was talk about deliberately increasing the in order to drive more foot traffic. Is this something that wasn't done or could your better explain what that story is from there to here?

I think the program -- the leather factory warehouse units has always had piles of the leather. We did that program in the retail stores and in the retail stores I think that's part of the reason that they've had such good numbers this quarter. We were -- we'd have liked them to have done better but we weren't dis-pointed with the retail sales and I think that program is working and I think it will get even better as time goes on. We've got a quarter of it under our belt in putting more leather in those retail stores and their mix -- they went from about 28% of their sales in leather over the last year up to about 31%, 32% of their sales in leather which we're quite pleased and that's also causing some of their volume to be what it is.

Okay.

Did that answer your question?

It does, I think. And the last thing I wanted to ask is also I. Day sales of inventory have gone up just a bit. Can you explain what that reflects. If you plan for a sales loss with inventory. You will have a sales loss. If you plan for a sales gain you have a better chance of having a sales gain.

Our inventory went up over the quarter primarily because we didn't sell notch product. And we planned to sell enough product. Now we have the job of bringing our inventory in line to match our sales. We anticipated sales would be stronger than they are and about 60% of our goods are bought overseas. So the time line and the planning is 120 days out on planning for inventory purchases. So that's the reason they went up more than anything. We didn't sell enough.

Sock. So the cost of understocking is higher than the cost of over stocking.

To us it is.

That makes sense. Thank you very much.

Thanks, Ruth Anne.

There appear to be no further questions in queue.

We appreciate your time today. I'd also like to remind everyone about the annual meeting of stockholders on May 22 here in Fort Worth. Our main store here in Fort Worth and please consider yourselves personally invited. We would love the opportunity to visit with you in person. On behalf of myself and Ron Morgan and the entire company.

This does conclude today's conference. Thank you and have a wonderful day.