Tandy Leather Factory Inc (TLF) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Tandy Leather Factory sponsored Fourth Quarter 2007 Earnings Conference Call. At this time all participants have been placed on a listen only mode. We will open our floor for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host Shannon Greene. Ma'am, the floor is yours.

Thank you. Thank you for joining us for our 2007 earnings conference call. I'm Shannon Greene, Chief Financial Officer and I'm joined today by Ron Morgan, our CEO. I appreciate your ability to be on this call given the short notice you received about it this week. We will be discussing our fourth quarter and year end 2007 results as well as our expectations for 2008. I have to call your attention to the fact that these conversations will contain forward-looking statements to the extent we speak today of any future event or make any other forward-looking statements. You are reminded of the inherent uncertainties of looking into the future, but that there are risks to Tandy Leather Factory that could prevent these events from occurring in the manner foreseen. Please see our form 10-K for 2006 and its subsequent forms 10-Q for some discussion of some of these risks. Copies of these documents are available through the SEC's Edgar system or from our Investor Relations office. Statements made today by myself and Mr. Morgan are made as of this moment and we and the management team disclaim any duty to update those statements.

While the year will not be considered a good one because we did not meet our goal of higher profits than the year before, there are several positives that are worth highlighting. Our 2007 sales were higher than our 2006 sales albeit minimally. 2007 is our ninth consecutive year of sales gains and our 11th consecutive year of operating profit. Our consolidated gross profit margin also improved for the 11th year in a row. We opened 10 new Tandy Leather retail stores in 2007 bringing the store total to 72. Our internal cash flow provided a 100% of the capital needed to open these stores.

We ended the year with more cash in the bank than at the end of '06 and our cash increased by 80% in the fourth quarter. Our inventory was only $300,000 higher than at the end of '06, a 2% increase. Considering the 10 new stores accounted for new inventory of $560,000, we actually did decrease our inventory investment on a same store basis by $250,000.

Our Retail Leathercraft division ended the year with a 9% sales increase over 2006. As I mentioned, 10 new stores were added during the year. Our Wholesale Leathercraft division ended the year with a 4% sales decline. Consolidated gross profit margin held steady, operating profit was down 36%, but we did make up some ground in the fourth quarter as operating profit was down 45% at the end of September. Quick run-through of the numbers for the fourth quarter and the year.

Quarterly results are as follows. Consolidated sales decreased 1.4%; sales were $14.6 million this year compared to $14.8 million in the prior year. Wholesale Leathercraft sales were $7.5 million this quarter compared to $7.8 million a year ago, a decrease of 4%. Within the wholesale Leathercraft division, the wholesale stores reported quarterly sales of $6.4 million in 2007 down $500,000 from the fourth quarter of '06. Our national account group reported quarterly sales of $929,000 compared to $908,000 in the prior year, an increase of 2%. Mid-Continent leather sales added a $166,000 in sales for the quarter. Retail Leathercraft sales were $6.9 million for the quarter compared to the prior year of $6.7 million, an increase of 4%.

Consolidated gross profit margin for the quarter was 57.8% down from 58.8% last year. Wholesale Leathercraft's gross profit margin fell to 54.3% currently versus 57.9% last year while retail Leathercraft's gross profit margin improved to 61.5% from 60.9%. Consolidated operating expenses increased a mere $39,000 for the fourth quarter to $6.7 million or 45.8% of sales compared to 44.9% of sales last year. Wholesale Leathercraft reported operating expenses totaling 40.4% of its sales versus 43.4% last year, retail Leathercraft reported operating expenses totaling 51.9% of its sales compared to 46.1% last year. Income from operations was $1.7 million for the quarter, a decrease of $317,000 or 15.4% compared to the fourth quarter of '06.

Now for the 2007 annual results. Consolidated sales were up 0.2% over 2006. Sales were $55.3 million compared to $55.2 million last year Wholesale Leathercraft sales were $29.6 million versus $30.7 million a year ago. Within the division, the wholesale centers reported sales of $25.1 million, a decrease of 4.9% over 2006 sales of $26.4 million. The national account group reported sales of $3.7 million compared to $4.2 million in 2006, a decrease of 13%. Mid-Continent leather sales added $720,000 in sales for the year. Retail Leathercraft sales were $24.7 million compared to last year of $22.5 million, an increase of 9%. We opened 10 new retail stores in 2007. The new stores, which are these 10 plus 10 of the stores opened in 2006 contributed sales of $3.8 million in 2007. The 52 comparable stores contributed sales of $20.9 million in 2007, which translates to same store sales growth of 0.4% over 2006.

Consolidated gross profit margin for the year was 57.3%, the same as in 2006. Wholesale Leathercraft gross profit margin decreased to 55.7% this year compared to 56.2% last year. Retail Leathercraft gross profit margin decreased from 60.8% to 59.7%. Consolidated operating expenses was $27.2 million or 49.1% of sales in the current year compared to $24.6 million or 44.5% of sales last year. Wholesale Leathercraft reported operating expenses totaling 46.1% of its sales versus 40.5% last year. Retail Leathercraft reported operating expenses totaling 53.5% of its sales currently compared to 50.5% last year. Income from operations is $4.5 million this year, a 36% decrease over 2006 of $7.1 million.

Total assets grew 18% in 2007 compared to the end of 2006, as we ended the year, with total assets of $37.6 million. We held $6.8 million in cash at year end, a 1% increase from the end of '06. Accounts receivable decreased $60,000 and inventory increased by $300,000. Current liabilities decreased by $1.6 million. Total liabilities increased by $2.2 million. Our bank debt which is related to our recent building purchase is $4.1 million. Our current ratio is 7.5 and EBITDA for 2007 was $5.6 million.

Some specifics regarding the Tandy retail stores performance. Start with fourth quarter and then provide the same information on an annual basis. Fourth quarter; the stores opened in 2002, their sales were $1.9 million; gross profit, 61.6%; operating income, 15.8%. 2003 stores, $1.2 million in sales; 63.5% gross profit; operating income of 13.5%.

2004 stores, sales were $1.7 million for the quarter; gross profit was 60.7%; operating income, 10.1%. 2005 stores, $648,000 in sales; 61.2% gross profit; and operating income was 7.6%. The 2006 stores, sales for the quarter, $842,000; gross profit, 63.3%; operating income, 4.6%. The 2007 stores, sales for the quarter, $573,000; gross profit, 56.9% at an operating loss of 11%.

On a year-to-date basis, the 2002 stores generated sales of $6.9 million. Their gross profit was 60%; operating income, 11.9%. 2003 stores generated sales of $4.7 million; gross profit of 62.2%; operating income of 11.7%. 2004 stores generated sales of $6.3 million; gross profit, 59.1%; operating income, 8.6%. 2005 stores generated sales of $2.3 million for the year; gross profit of 59.6%; operating income of 1.5%. The 2006 stores generated sales of $3.1 million; gross profit at 60.4%; operating income at 0.6%. The 2007 stores generated sales for the year of $1.4 million. Gross profit is 58.5%. They had an operating loss of 14.7%.

For the fourth quarter of 2007, average monthly sales per store was $32,000. In the fourth quarter, we had 13 stores that had operating losses totaling $115,000. On a year-to-date basis, the 72 Tandy stores in existence, there are 17 with year-to-date losses totaling $394,000.

As we have announced previously, we expect 2008 sales to be almost the same as 2007 sales, right at $56 million. At this time, we still plan to open four to five new retail stores domestically in 2008, but don't expect that we will open any of these until the last half of the year. We also announced this morning that our UK store is opened as of this week.

Our balance sheet is in good shape and I was very happy to see the progress we made in getting our inventory down. We ended the year within 7% of my inventory projections. Cash balance recovered nicely in the fourth quarter as we ended the year with $6.8 million. Current liabilities are down 30% from last year. We are in good shape going into 2008 from a balance sheet perspective.

I think we did a good job managing expenses in the fourth quarter and I hope you can see that. Operating expenses only increased $39,000 for the quarter and we have 10 more stores now than we had in the fourth quarter of 2006. If we take out the operating expenses for those 10 stores which totaled $389,000 this quarter and the additional depreciation expense we are incurring to get our current lease hold improvements fully depreciated by the time we move. That means our operating expenses dropped by $450,000 this quarter. Frankly, I hope that helps reduce some of the skepticism out there about our ability to effectively manage this Company.

One last thing before we go to questions. We have had numerous questions recently about a stock buyback. But here is where we are. We ended the year with $6.8 million in cash and $4.1 million in debt. Our business is somewhat seasonal in that we normally generate cash in the first quarter, burn it in the second and third and generate more cash in the fourth. Over the course of the year, our free cash flow is usually substantial. The $4.1 million in debt on our balance sheet is from the building we purchased in July of last year to house our headquarters, central warehouse and factory. We are currently undergoing an extensive remodel, which will cost us an additional $2 million to $2.5 million by the time it is completed in late March.

We do believe that our stock is cheap right now. As you may know, management and the Board own quite a bit of stock, roughly 29% as of the last proxy statement. We would like nothing better than to be buying back stock at the current price. However, we are also very debt averse, a habit that has served us well in the past and we believe will serve us well in the future. Accordingly, the Board of Directors has decided to not authorize a stock buyback at this time. We will continue to revisit this issue as conditions change and cash likely builds throughout the year. We will also continue to do everything we can to ensure that Tandy Leather Factory remains well run and conservatively financed in order to prosper through market cycles.

We appreciate your time today and we will be happy to answer whatever questions you may have. Operator, we are now ready to take questions.

Thank you very much. Ladies and gentlemen, the floor is now open for questions. (OPERATOR INSTRUCTIONS) And we will take the first question from [Clayton], your line is live.

Just a little bit of clarification on the share buyback. So, obviously it's not going to happen right now. How often does that subject get revisited?

Clayton, it's discussed at every Board meeting and in between Ron and I talk to our outside directors fairly frequently probably at least one of them once a week. So, it will continue to be an item of discussion at Board meetings and in between Board meetings. Frankly, it's a situation where we are sitting on a certain amount of cash right now. I expect the cash to build some in first quarter given the progress that we have made and the way we are doing things. But we are going to use up some of that cash in second and third quarters and of course, then we got the cash to be spent on finishing up the buildings. So, when we looked at it, ran all the numbers, frankly, while it looks like we got lots of cash, I don't think we got as much as it appears, that's available to just spend on whatever, and frankly we don't want to borrow any money to do a stock buyback. We think that's the prudent thing to do right now. We think cash is important given the current environment in the market and the Board just decided that while --- there is just not as much cash as it looks right now given what we are going to need this year in order to avoid having to take on a bunch of debt.

Okay. And maybe I missed it, but on the cash subject, what did you say the impact of the new move of the headquarters will be in March?

We got about $2 million still to spend between now and the end of March to finish the remodel of that facility in order to be able to move the end of March.

Okay. And that will hit next quarter I guess?

As far as the cash being spent?

Yes.

Yes, I suspect it's probably going to be a March and April thing.

Okay. And then your UK expansion, I guess what is your optimism level, I mean how it that going so far?

So far, so good. The set-up went well, right on schedule. We had our first sale two days ago. So, they are open for business and getting lots of interest. So, we are expecting $1 million or better in revenue out of that store; $600,000 to $700,000 of which we have been doing here over this last year or so. So, that European international business will move over there and we think then he can add another, what is that, 30%, 40%, 50% on top of that to do -- the first year about a million dollars or a million two in revenue over there. Don't have any reason to think that won't happen.

Okay. In those four to five stores you plan to open in 2008, that was just domestic, right? There is no further plans in Europe for a new store yet.

Right. No, there will -- we don't expect any more European expansion. We are going to -- the UK operations got to get going, got to be profitable before we do a bunch of expansion over there. The four to five stores will be either in the U.S. or Canada.

Okay. I think that's it, thanks for your time.

Thanks, Clayton.

Thank you. We'll take the next question Ruthanne Roussel. Your line is live.

Good afternoon everyone, thanks for taking our questions. Shannon, do you think you could go into just a little more detail ask to how you achieve these reductions in the operating expense? I remember looking at this a few months ago and thinking, "Gosh, where are they are going to cut anything?"

Sure, payroll. We were able to tighten up on payroll expenses in the quarter. Actually, our advertising looked a little bit better, a little bit more effective and efficient. Let's see our -- we managed to negotiate new contracts with our credit card processor, managed to pick up some savings there, tightened up on general supplies throughout the system. Now that made a big difference. We are -- we have saved some money in utilities in all of the locations due to some kind of changes in efficiencies we are gaining there. But the big dollars were employees and payroll, payroll taxes and labor. All the stores tightened up just a little bit on their hours and the number employees. We certainly did it here at the corporate level more so than anywhere else, and I think it turned in to making a real big difference.

Okay, thank you. And I am also interested, of course, as everyone is in hearing that the UK store is doing so well. I guess I don't really have any more questions about that though since they have basically been answered. So, thanks very much.

Very good, Ruthanne, thank you.

(OPERATOR INSTRUCTIONS) And we will take the next question from Robert Straus. Your line is live.

Hey Shannon, how are you?

I am good. How are you?

Good. I am just going to make you repeat a couple of numbers for me because I missed them. On the gross profit margin for the fourth quarter, can you just run down the retail, wholesale and other gross profit margins again?

Sure. Consolidated gross profit for the quarter 57.8%, wholesale was 54.3%, retail was 61.5%.

And what was other?

59.1%.

Okay. And then the only other thing that I have to ask is you had mentioned that you are being more efficient with your advertising. From the standpoint of considering your advertising and the mailings that you do, what kinds of things have you been doing more recently in order to maybe change things up a little bit to drive some additional incremental traffic during these challenging times?

Robert, this is Ron Morgan, how are you today?

Good. How are you, Ron?

Doing great. We constantly experiment, in this day and age, once you think you know everything about advertising, that's when you find out how little you know, and because of when the market is tough and you cannot get the consumer wanting to come into your store because or for whatever reason, and we constantly experiment, we always have. We are being a little more selective in our mailings. We mail typically our retail pieces, we mail typically every 30 days. Those pieces we had been mailing back as for as 18 months. We know that's a luxury. We have pulled those mailings down and that means the last time anybody shopped our store within 18 months we mailed, we pulled that luxury down to 12 or 14 months, depending on the time of the year, and that cuts out print qualities and postage qualities. We are also being more aggressive with our gathering e-mail addresses in our Internet business so that we can e-mail these customers a flier instead of mailing it to them and giving them the option because still the customer is really the boss, despite what we think. And we give them the option and make a benefit to them whether they will take the flower via e-mails or via printed and mailed to them. And there is considerable savings there, we are pursuing and testing that a lot. We would love to be able to just e-mail our sales pieces to every customer. We know that it would save us $1.5 million a year of the retail piece alone. Unfortunately, not all of them will take it that way, but any that do, it really is a savings. Is that giving you an idea?

Yes, sure. And then the other question I guess is your annual catalog that you send out in October traditionally has set prices for a full year. Is that still the case?

Yes, it is.

And may be you can reflect and just give us an opinion on the prices that you set, how are those sticking and how do those prices that you set relate to the raw material cost that you are dealing with today?

Okay. The catalog prices that we print remember are our retail base, they really affect the Tandy Leather Store or the retail chains the most. Those retail prices are fixed and we try to hold them for a year. All other price levels are wholesale and our business prices or a say price list based off of those retailers. So, those prices can change and do change during the year even though we try not to change them very often. So far we have probably been more aggressive this past year than most in 2007 in most years, just looking for product and testing and sampling more new product at any time in our history. I think I mentioned that we introduced over 400 new items in that catalog with just at least 20% more than we ever did in any year. And that's one way we could help maintain gross profit. If introducing product, it may have just have a slightly higher gross profit. In featuring those items and not featuring items that prices might increase as much. Plus we have been into, we travel all the shows all over of the world and have been very active as of this year, the Hong Kong Leather Show, the Milan Italy Leather Show, the shows in Leon, Mexico. We just got back from [Baeda], they are in England. So we are aggressively in the marketplace more so, in these tough times than ever, we always do them. I feel like we do a good job with it, I think we are doing a better job of buying and putting an effort to controlling our cost of goods than any time that I can remember. That's how we control, we control our goods cost by just working harder in these times and it's good every once in a while to have some tough times because it does make you tighten the belt and work a little harder.

Okay, thank you, good luck.

Thanks, Robert.

(OPERATOR INSTRUCTIONS) Okay, it appears we have no further questions. Any closing comments you like to finish with?

Sure. On behalf of Ron Morgan, myself and the entire management team, I would like to thank you for participating in our 2007 earnings conference call today. We look forward to speaking with you again next quarter. Have a good afternoon.

Thank you very much. Ladies and gentlemen this concludes today's conference. You may disconnect your lines and have a wonderful day.