Tandy Leather Factory Inc (TLF) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Tandy Leather Factory's sponsored first-quarter 2008 earnings conference call. At this time, all participants have been placed in a listen-only mode and we will open up the floor for your 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.

Good afternoon, everyone. Thank you for joining us for our first-quarter 2008 earnings conference call. I'm Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Joining me today is Ron Morgan, our Chief Executive Officer, and Jon Thompson, our Senior Vice President.

I call your attention to the fact that the conversations today will contain forward-looking statements, to the extent we speak today of any future event or make 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 our Form 10-K for 2007 and subsequent Forms 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's EDGAR system and from our investor relations office.

Also, statements made today by us as management of Tandy Leather Factory are made as of this moment, and we disclaim any duty to the update of those statements.

First of all, I will tell you that the press release on the earnings is out at of the wire service. It should be out momentarily -- probably before we get off this call.

It has been an interesting first quarter. Sales were weak, as we discussed repeatedly. Gross margin was off slightly, and we've had some unusual expenses to deal with. All of these combined to result in lower profits this quarter compared to the first quarter of 2007.

However, we expected that; and if you listened to our last conference call you should have expected it, too.

I'm pleased to report that the move of our corporate offices, central warehouse, and support departments went very well. What was originally planned to take place over the course of two weeks managed to get done in about five days due to the enormous efforts of our staff. We lost a few production days in our factory and warehouse, but overall it went much better than we expected.

As you are probably aware, we opened our first store outside of North America during the quarter, located in Northampton in the United Kingdom. We are pleased with the store so far. We will be mailing our first sales flier there in mid-June and are anxious to see what results are generated from that.

So far, the business we're doing is generated from word-of-mouth and inside sales work by the staff there. Our grand opening is scheduled for the end of June.

Compared to the year-end 2007, our cash increased by almost $2 million, and our inventory was down a little more than $1 million. We've completed the remodel of our new corporate facility with a price tag of about $3 million. With the exception of the UK store, we did not open any new stores in the first quarter. However, we still intend to open four to five new retail stores in the United States and/or Canada in 2008.

Our Wholesale Leathercraft division posted a sales decline of 15% this quarter. The Wholesale stores were down 12% and the National Account group was down 34%. Gross profit decreased from 59% to 55%. Operating margin was down 90%.

I would like to remind everyone that the Wholesale Leathercraft division also includes the central support unit, so the moving expenses, the accelerated depreciation expense, etc., is reported as part of this division.

The stores themselves achieved a 10% operating margin this quarter, the same as last year's first quarter.

Our Retail Leathercraft division managed to squeak out a very slight sales gain of approximately one-quarter of 1%. The Tandy Leather Retail store chain grew from 65 stores to 72 stores during the trailing 12 months ended March 2008. Gross margins increased nicely from 60% to 62%, and operating margin improved by almost 11%.

Now for the numbers from today's press release. I will go through these slow since you haven't seen them yet. Hopefully we will see them shortly.

Our first-quarter consolidated sales decreased 9%. Current quarter sales were $13.3 million, compared to last year's first-quarter sales of $14.5 million. Wholesale Leathercraft sales were $6.7 million this quarter compared to $7.9 million a year ago, a decrease of 15%.

Breaking it down further, the Wholesale stores posted a 12% sales decline, reporting sales of $6 million compared to $6.8 million in the first quarter of 2007.

Our National Account group posted a 34% sales decline, reporting sales of $746,000 compared to $1.1 million last year.

Our Retail Leathercraft division reported sales of $6.3 million, the same as last year's first-quarter sales.

Sales from the seven new stores were $381,000 this quarter. The 65 comparable stores posted sales of $5.9 million, a decrease of 6% compared to last year.

Consolidated gross profit margin for the quarter was 58.4%, compared to 59.3% in the first-quarter 2007. Wholesale Leathercraft gross profit margin declined from 58.9% to 55.2%. Retail Leathercraft gross profit margin improved from 60.5% last year to 62.3% this year.

Consolidated operating expenses were $7 million or 52.9% of sales in the current quarter, compared to $6.6 million or 45.8% of sales last year. Wholesale Leathercraft reported operating expenses totaling 53.4% of its sales versus 42% last year. Retail Leathercraft reported operating expenses totaling 52.5% of its sales currently, compared to 51.6% last year.

On a consolidated basis, we incurred a few unusual expenses in the first quarter. Specifically, we moved our corporate offices, central warehouse, factory, and support departments at the end of the quarter. The cost for that move was approximately $125,000. Also, as we discussed in our last several conference calls, we accelerated the depreciation on the leasehold improvements at our old offices in order to get them written down by the end of March. The impact on the first quarter was $125,000.

We have $75,000 in operating expenses at the UK store which, while not unusual, does affect the comparison of operating expenses to the prior year. Finally, we have the operating expenses associated with the seven Retail stores in existence now that didn't exist last year, which approximated $350,000.

If you eliminate the impact of these unique or new expenses, we actually reduced our operating expenses slightly compared to the first quarter of 2007, although I still think we can do more.

The income from operations was $721,000 for the quarter, down 63% compared to the first-quarter 2007.

Looking at our balance sheet, total assets have increased to almost $40 million. From December to March 31, cash increased $1.8 million or 26%. Accounts receivable decreased $495,000, and inventory decreased by $1.2 million. Current liabilities increased $1 million due to an increase in accrued expenses of $575,000, which is primarily the inventory in transit at March 31; income taxes payable of $203,000; and current portion of long-term debt.

Our debt consists of $4 million in bank debt for the purchase of our building and $800,000 in the form of a 36-month capital lease for the air-conditioning system installed at the new building. Principal payments will start on the bank debt this month; payments on the lease started in April.

We have increased our cash position by 43% during the last 12 months, from $6 million at March 31, '07, to $8.6 million at March 31, '08. During that same period we've opened seven new Retail stores in North America and one in the United Kingdom.

Our current ratio is 5.9. EBITDA for the first quarter of 2008 was $1.2 million.

Some specifics regarding the performance of the Tandy Retail stores in this first quarter. Sales again were $6.3 million. Gross profit was 62.3%. Operating income was 9.8%.

In looking at the store performance based on the year opened, gross profit margins ranged from 63% to 60%; and operating income ranged from 13.7% to a minus-7%.

Looking at the individual stores, average monthly sales range from $71,000 per month to $10,000 per month; and operating margins range from 22% to losses of 34%.

In this first quarter of 2008, average sales per store per month was $29,000. Based on the year the stores were opened, average monthly sales ranged from $39,000 a month to $17,000 a month.

There are nine stores with operating losses as of the end of March, totaling $60,000. Six of the nine were opened in 2007; two were opened in 2006; and one was opened in 2005.

Wholesale Leathercraft results are as follows. Sales of $6.7 million. Gross profit of 55.2%. Operating income of 1.8%. We have one Wholesale store with an operating loss as of March 31. Operating margins range from 20% to minus-6%.

Mid-Continent Leather Sales is posting average monthly sales of $54,000 this year and is currently not profitable, although we have improved the gross profit margin at that store by more than 10 percentage points.

To summarize, the economic environment we're working in right now is tough. We will make the most of the opportunities as they arise. We want to be smart with our cash, with our inventory investment, and with our investment in our stores.

We firmly believe the international expansion was the right decision. We also believe that, while initially painful, the purchase of the building and the move was the right one. It became apparent that we were going to spend a lot of money on repairs at the old facility, and we didn't own it. Frankly, if we're going to be responsible for the continued upkeep, I would rather have something to show for it at the end of the day.

Looking ahead in the short-term, we're competing with every other company out there for the consumers' discretionary dollars. And most consumers would probably tell you that they are spending more of those dollars to put gas in their car or put food on their table. As a result, we are not only competing against other craft and recreational activities, but we are also competing against every other retailer.

If you watch the sales promotions they are running, you know that the competition is tough.

The balance between sales and gross profit is one we deal with on a daily basis. We firmly believe profit is ultimately king. We are headed into the weaker two quarters of the year for us, although our April sales were encouraging.

However, I would emphasize that one month does not make a sales trend, and we do not believe that the end of our weak sales has arrived. We will continue to manage conservatively, looking for continued expense cuts without sacrificing operational effectiveness.

We recognize that there is always more to be done to achieve higher sales, higher margins, and higher profits. Sometimes it's more challenging than at other times, but that is what keeps us all motivated.

Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) [Clayton Ripley].

Hi, how are you all doing? Could you talk a little bit about the move to the new facility? Are all those expenses been recognized and now the only I guess expense related to that is paying for the bank note?

That is basically correct, yes. All of the moving expense is in these results. The cost of the moving company and everything associated with that. We have, I think, we've got the majority of all the construction invoices in and recorded. That was right at $3 million is what I mentioned.

So as far as the actual physical move itself, all of that is in first quarter. We won't have any carryover moving expense type issues or expenses in the second quarter.

And those were all under the Wholesale division?

That is correct.

Okay. At what point are you going to breakout the UK into a new division or a fourth division? Is that ever going to happen?

It is, and if -- I know the earnings release today crossed at -- I have 4.42 Eastern Time. It is going to be a separate segment. It is going to be reported that way in the Q this year. I mean in the Q this quarter.

So you're going to have Wholesale Leathercraft, which is basically the Wholesale stores located in US and Canada; Retail Leathercraft, which will be the Retail stores in US and Canada; International which is going to be the UK division; and then our Other.

Okay. Your new stores, you said four to five new stores in '08. Is that set in stone, or is that going to be dependent upon the continuing economic conditions?

As of right now, we are making plans and working that way. So we're not changing that. I think four to five stores in US or Canada before the end of the year is still the number -- is still what we're looking at.

I suppose if things continue to get worse on the economic front, I suppose we might change it. But we will certainly let you know. We are seeing some really good things out of Canada right now. I think everything I'm seeing, their economy seems to be better than ours, maybe considerably better than ours. There is some real strength there.

So four to five is still the number. We think we can get that done between now and the end of the year.

Okay, and then, this is a continual question we have. Any big plans for cash? I know we talk about share buyback all the time. But has that been discussed recently? Could you give me maybe an update on the status of your plans for cash?

Well (inaudible), first of all, we have a Board meeting scheduled in a couple of weeks, in conjunction with our annual meeting. It is on the agenda again to discuss with the Board.

Now that we are through first quarter, we are through the move, we know what the total construction of this facility is. So it will be very much a discussion at the Board meeting here in a couple of weeks -- two weeks, I guess.

The only other thing I would tell you at this point is that second and third quarters tend to be the quarters that we use cash, because those are our weakest quarters.

So we will very much -- we will discuss it in detail at the Board meeting. I haven't gotten any indication from any of the Board members that they are considering anything different than what we have already said, which is that we don't want to it at this point.

But now that we're kind of -- now that we know what the building's cost was, and we've got the move done, it is up for discussion again. We will talk about it in two weeks.

Okay, and final question. You said you're not satisfied with the amount of expense reduction. How do you plan on reducing expenses further from what you have already done? Where could you I guess trim the [tide] a little bit?

We're still looking at -- we have made some good improvements with our employees. Employee labor costs are our greatest expense at the store level and at the support level. Employee benefits, everything that has to do with employees; and of course they're our greatest asset as well.

But we are -- now that we are through the move, now that we've got the departments all set, we are looking at that here.

We are also -- we have made some nice improvements in our advertising budget. Our director of advertising has done a fantastic job at more bang for the buck. Cheaper paper, all of that kind of thing. So we're continuing to work on that.

We have --starting the first of April, we converted to doing a biweekly payroll instead of weekly payroll. So we're cutting our processing costs in half, effective second quarter. You're not -- I'm not talking huge dollars, but $10,000, $20,000 at a pop is going to make some difference.

So we're overseeing supplies. What we're buying as far as supplies. Those kind of normal things. We are looking at utilities.

We are moving some stores, Ron and I talked about that this morning. We have relocated some stores in late '07 and in '08; and we've got plans to move some more. Better locations for cheaper rent. I think we're going to -- stores certainly won't suffer any. There is a little bit of manpower in terms of getting a store relocated; and then we normally send out a postcard to our mailing list notifying them of the new address. But we will pick up some savings there from reduced rent dollars at the stores, which will help.

So it is lots of little things. You know, you're going to hear us say that we can always find ways to cut one more dollar. While that gets kind of old and everybody goes yes, yes, whatever, we absolutely believe that. So we will be looking for those dimes and nickels and quarters that we can pick up, because it will make a difference to the bottom line come the end of the year.

Okay, thanks, Shannon.

Ruthanne Roussel.

Hi, Shannon. Hi, Ron. Good afternoon. Thank you for taking our call. I just had a couple of questions. This is kind of off the beaten path, but a little bird told me that the Boy Scout camps all have to order all their stuff for the whole camp in April in order to get the camp stocked up by mid-June. Do you actually see a bump in April from -- maybe not just the Scouts, but from summer camps in general stocking up? And where with that show up?

Generally it shows up in May, not really in April. There's a few camps that will order early I think I heard of. But in past years, camps are really kind of -- I heard yesterday in North Carolina that one of our stores there, it had a sales loss in April. I was real concerned; the store shouldn't have. But all of a sudden in May, they get an order, and it was like a $15,000 from a Boy Scout Camp that came one month earlier than it did others.

So there is really no real pattern, and every area and every council has got their own. Generally, it could happen as early as April; but usually camp orders start being received in May, June, and actually as late as -- we will get some in July. But May and June are the real -- when we will get most of the camp orders.

And we expect to do a good camp business this year. We were real pleased with the business we did last year, and if we get a -- if the parents can afford to buy the gas to get the kids to school this year or camp this year, we expect a tremendous camp season this year.

So they are ordering from the stores then, rather than having some sort of National Account Scout Camps?

Yes, ma'am. That is what they always do. Individual stores. Because in some cases, our managers do out to these camps, help them set up the program, teach their counselors how to do leather craft and work on [foot], and the whole -- check, help them check the orders in. We really service the camps real well, and that is the reason that they continue to come to us each year.

Call right. Then a little bit more of a financial question. I may have a crossed wire here, but I had somehow got the impression that the UK store was supposed to contribute somewhere around $500,000 in revenues a year. If that number is right, then I don't see how we are supposed to get there from the $30,000, $42,000 types of monthly numbers we had in March and April. So it made me suspect that I had the first number wrong.

Well, it's kind of like when we open a store in the United States or anyplace without our customers and notifying people. We have been checking out all the bugs, and making sure we understood all the -- it is new for us to do business there, so we're making sure we have got everything set up the way we want it.

We have not advertised, and advertising is key to not only the USA, it will be key to the UK. In the business they are doing, I am quite frankly amazed that they are stumbling on the amount of customers they are. They are finding us by word-of-mouth, as I say, and calling people on the telephone.

Once we can advertise and when we do our grand opening, we will be sending mailings out to 25,000 people in the UK. Not in Europe, just in the UK that have some knowledge or do something with leather. That will cause an immense hit.

We're so worried about that, we are going to send it out in two different tranches, about 11,000, 12,000 pieces one week; wait a week or so. Because we're afraid we will get so much business off of that that we will not provide the service we want.

That is what will cause the sales. I fully expect once that is done you will see the sales triple or more going forward, and continue to grow for a while. It's the same thing that happens when we do it in the United States historically.

Okay, but the $500,000 was more of a target for when the store is fully up and running and fully annualized?

No, it is really not. But I really almost -- we expect considerably more dollars out of that.

I think, Ruthanne, the clarification was $0.5 million first year. Open in mid-February, we are not even going to start -- we are not even going to get a flier out till mid-June.

So $0.5 million first year; but no, we think $1 million or better easily once we really get going.

All right, thank you.

You bet.

[Patrick Wye]

Hi, Shannon and Ron. Shannon, did you -- did I understand you to say that about nine stores were unprofitable here in the first quarter?

Yes. I've got six of the ones opened the latter part -- the last of the six opened in 2007. I've got one -- we've got one problem child from the store that we opened in 2005. Then there were two that were just almost profitable from 2006 -- that we opened in 2006. Just not quite there this time.

Do you anticipate closing? I know you mentioned a while ago something about relocating a couple or a few stores here. Do you have any areas that are just -- that you're just planning on closing the store and abandoning the area?

No, not all. We have absolutely no plans to close any stores. We are moving some within the city that they are in. For instance, we just moved Kansas City. We are moving Winnipeg this weekend. But they're staying within the city, so it is just a better rent, location is better, maybe the store when we first opened it -- maybe the square footage is too much and we can operate as effectively with less square footage.

So we are moving them within the same Metro area; but no, we don't have any plans to close any stores right now, and have never closed one.

My last question is here, I guess in the last few years at least have kind of been operating in an economy that has more less been pretty good or expanding. The news from you guys has really been pretty good the last few years. One good thing is you have paid off a lot of debt. Most all your debt, really, with the exception of this building you bought now, which of course I'm in the real estate business so I think that is a very good idea.

But my real question is here, do you guys still feel that over the long term here that you've got a product and a business model that will succeed over the long term? Is it possible here that it works good when things are going well; and not well at all when things are so good?

Because all of us, I guess, remember Tandy, the Tandy situation. So do you guys think you still -- do you still feel like you've got a model and a business plan here that is going to succeed over the long term?

Yes, I do. The big reason I do is because of the way we have structured. The old Tandy system, they were purely dependent on the Retail buyer. They really didn't pursue -- at one time in early days, from about 1919 to about the mid-'70s, they pursued the institutional, the school, hospital, youth group, etc. And when -- and that is our bread and butter.

So our mix, our sales mix is so different that our business is more -- I don't think any one segment of the economy will knock us down as bad. We give a lot more liberal -- our policies on selling are a lot more liberal. We don't try to make our stores conform to any type of look. They conform to the markets they are in, and they sell the products that is best suited for them.

So I feel pretty good about it. I do know that I've been in, as I say, the leather business 40 years and been through a bunch of different cycles of it. I think that there were some years the bad economy -- when there was a bad economy, the business was better than when the economy was running real strong.

Do I think our business model is good? As I look at the -- I probably invest in 100 different stocks. I would say it is better than most of them right now, because we keep making a profit even though times are tough.

So yes, I feel pretty good about our business model. We will keep tweaking it. If we can think of one thing to do -- and one thing we're not going to ever do is ever believe this is cast in stone. If we can tweak it away or at a product line or a different situation that will cause us a new opportunity, we will keep tweaking it. Because we are going to be very open to what the customer or demand will always be. Does that help you?

Yes, okay. Yes, that answers the question. Thank you.

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

Sure. I appreciate your time today. I would also like to remind everyone about our 2008 annual meeting of stockholders to be held on May 21 at 10.30 AM Fort Worth time. The meeting will be held at our new corporate facility, as we are anxious to show off our new home.

We will be giving a tour of the facility at 9.30 followed by the meeting at 10.30. John McNiven will be here from the UK to update everyone on the UK market and what he sees as the potential for us there. Please consider yourself personally invited.

On behalf of Ron Morgan, Jon Thompson, and the entire Company, thank you for your participation in today's call. We appreciate your interest in our Company. Have a good afternoon.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines and have a wonderful day.