Tandy Leather Factory Inc (TLF) 2008 Q2 法說會逐字稿

Greetings and welcome to the Tandy Leather Factory incorporated second quarter 2008 earnings conference call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Shannon Greene, Chief Financial Officer for Tandy Leather Factory, Incorporated. Thank you, Ms. Greene, you may begin.

Thank you. Good afternoon, everyone, thank you for joining us for our second quarter 2008 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Additional members of the company's senior management on our call today are Ron Morgan, our Chief Executive Officer, and Jon Thompson, our newly appointed President.

I 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 other forward-looking statements. You are reminded of the inherent uncertainties of looking into the future, and 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 form 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's EDGAR system. and through the investor relations office. Also. statements today made by us as management of Tandy Leather Factory are made as of this moment and we disclaim any duty to update those statements.

Overall, our second quarter was a good one. We had a sales gain of 4%, which in this economic environment is respectable. Gross profit margin improved slightly, and most importantly, operating expenses were down and profits were up. We're continuing to see relative strength in our retail business as evidenced by a 7% sales gain for the quarter in our retail Leathercraft segment made up of the Tandy Leather stores. The weakness in our sales continues to come from our wholesale business. We are convinced that our wholesale customers are struggling. Their business is off and they don't have much cash so they have cut back substantially on their purchases in an attempt to survive these tough economic times. We've all seen the news of the various retailers filing for bankruptcy. Those bankruptcies mean some vendors lost customers. The smaller the vendor, the more devastating it can be to lose customers, so our small mom and pop type customers, whether it's the small manufacturer or the retailer, are trying protect their business and livelihoods about being careful about the money they spend.

Our international operation is doing very well and we are pleased with the continued growth of our customer base there and the corresponding sales. The UK store was actually profitable in the month of June, well ahead of internal expectations. Compared to year-end 2007, our cash increased by almost $3 million and our inventory was down by $2 million. We did not open any new stores in the second quarter. However, at this time, it is still our intention to open four to five new retail stores in the US and or Canada in 2008. Our wholesale Leathercraft division posted a very small sales increase of 0.5% for the second quarter. The wholesale stores were down 4%. and the national account group was up 34%. Gross profit decreased from 57 to 54%. Operating margin was up 27%. Our retail Leathercraft division reported a 7% sales gain for the quarter, the Tandy Leather retail store chain grew from 68 to 74 stores during the trailing 12 months ended June 2008. Gross margins increased nicely from 59% to 62%. and operating margin improved by 115%.

Now for the numbers from today's press release. Our second quarter consolidated sales increased 4%. Current quarter sales were $13.8 million compared to last year's second quarter sales of $13.4 million. Wholesale Leathercraft sales were $7.2 million this quarter, the same as in the second quarter last year. Pricing that down further, the distribution centers posted a 4% sales decline. reporting sales of $6.1 million compared to $6.3 million in Q2 '07. Our national account group posted a 34% sales gain. reporting sales of $1.1 million compared to $860,000 last year. Our retail Leathercraft division reported sales at $6.2 million, a 7% improvement over last year's second quarter sales of $5.8 million. Sales from the 40 stores were $208,000 this quarter. The 68 comparable stores posted sales of $6 million, an increase of 3% compared to last year.

Our international Leathercraft segment, which consists of the one store in the UK which opened in February, reported sales at $194,000 for the quarter. Consolidated gross profit margin for the quarter was 57.9%, up slightly from last year's margin of 57.5%. Wholesale Leathercraft's wholesale gross profit margin was 54.1%, compared to 66.9% in Q2 '07. Retail leathercraft gross profit margin improved from 59% in last year's second quarter to 62.5% in this year's second quarter. International leathercrafts' gross profit margin for the second quarter was 57.9%. Consolidated operating expenses were $6.9 million or 49.9% of sales in the current quarter compared to $7 million or 52.2% of sales last year, a decrease of $61,000 or 1%. Wholesale Leathercraft reported operating expenses totaling 46.8% of its sales. versus 51.2% last year, retail Leathercraft reported operating expenses totaling 53.3% of its sales compared to 54.5% last year. International leather craft operating expenses for the quarter were 61.8% of its sales.

As indicated in our press release today, the reduction in operating expenses for the quarter doesn't seem like much. However, if you eliminate the expenses for the stores that didn't exist last year, the reduction would be more in the $300,000 range. We have trimmed personnel costs, supplies and professional fees. Rent expense is also down because we're not paying rent on our corporate offices now, which reduces operating expenses. The offset, however, is that we're paying interest expense on the building debt. For comparison purposes, we're saving approximately $85,000 per quarter in rent expense while we're paying approximately $90,000 per quarter in interest expense, so it's almost a wash to earnings. Income from operations was $1.1 million for the second quarter, up 55% compared to Q2 '07's operating income of $704,000. On a year to date basis, consolidated sales decreased 3%. 2008 sales were $27.1 million compared to 2007 sales of $27.9 million.

Wholesale Leathercraft sales were $13.9 million this year, down 8% from last year's sales of $15.1 million. Further breakdown reveals an 8% sales decline at the stores, with sales this year of $11.7 million compared to $12.7 million last year, and a 5% sales decline for national accounts with sales this year of $1.9 million versus $2 million in '07. A retail Leathercraft division reported sales of $12.5 million, a 3% improvement over last year's sales of $12.1 million. Sales from the eight new stores were $767,000 this year. The 64 comparable stores posted sales of $11.7 million, a decrease of 2% compared to last year's sales of $11.9 million. Our international Leathercraft segment reported sales of $235,000 so far this year.

Consolidated gross profit margin for the year is 58.1%, off slightly from 2007's gross profit margin of 58.4%. Wholesale leather crafts gross profit margin declined from 58% to 54.6%. Retail Leathercraft's gross profit margin improved from 59.8% last year to 62.4% this year. International Leathercraft's gross profit margin is at 60.3% so far for the year. Consolidated operating expenses were $13.9 million, or 51.4% of sales in the current year, compared to $13.6 million or 48.9% of sales last year, an increase of $315,000. Wholesale Leathercraft reported operating expenses totaling 49.9% of its sales versus 46.4% last year. Retail Leathercraft reported operating expenses totaling 52.9% of its sales, currently the same as last year. Of the $315,000 increase, $190,000 is operating expenses associated with the UK store and $275,000 is operating expenses at the four Tandy stores that did not exist during the first six months of 2007. Also, you might remember we had some one-time expenses in the first quarter of '08 associated with our corporate move and the accelerated depreciation on our old facility for a combined $250,000. So, again, while operating expenses on a year-to-date basis are up in terms of dollars, the apples to apples comparison would reveal a pretty nice reduction in operating expenses.

Income from operations was at $1.8 million, down 32% compared to 2007. Specifics regarding the performance of the Tandy retail stores in this second quarter. Sales were $6.2 million, gross profit 62.5%, operating income 9.2%. In looking at the store performance based on the year opened, gross profit margin ranged from 63% to 59%, and operating income ranged from a positive 16% to a negative 7%. Looking at the individual stores, average monthly sales ranged from $79,000 per month to $11,000 per month, and operating margins range from a positive 22% to a negative 22%. In this second quarter of 2008, average sales per store per month was $29,000. Based on the year the stores were opened, average monthly sales range from $38,000 to $18,000. There were seven stores with operating losses as of the end of June, totaling $113,000, six of the seven were opened in 2007 and one was opened in 2006. All of our leather factory stores are profitable as of June 30th. Operating margin ranges from 20% to 1%. Mid-Continent leather sales, which is part of the Wholesale Leathercraft division is posting average monthly sales of $53,000 this year and is not profitable. The gross profit margin has improved by 20 percentage points, and we have made some changes to the operation that should get it headed in the right direction to begin generating a profit.

To summarize, the economic environment continues to put a strain on all of us, as a company and an individuals. And there are a lot of companies who couldn't survive under the stress. Sharper Image, Shoe Pavilion, Linen and Things, Mervyn's, et cetera. We will not be added to that list. This is a good company, with knowledgeable and experienced management. We believe we have been smart with our cash, with our inventory investment, with our debt and with our investment in stores. The rest of 2008 will continue to be tough from a sales perspective, particularly in the US and at the wholesale level. Continued investment in our international operation makes sense, although as Ron commented in today's press release, the economic issues that we are experiencing here in the US are not unique. With that said, we believe the potential for continued growth internationally is there for us and we will continue to position ourselves to make the most of the opportunities abroad. We accomplished what we set out to do in the second quarter, less inventory and fewer expenses. While we don't expect inventory to get any smaller, we will continue our efforts at expense control and reduction in order to maximize profits.

That concludes the prepared remarks. Operator, we are now ready to take questions.

Thank you. We will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). One moment, please, while we poll for questions. Our first question comes from the line of Clayton Ripley with Bares Capital. Please go ahead.

Hi, good afternoon.

Hey, Clayton.

Could you talk about your advertising efforts internationally and in the UK in the second quarter, and then maybe what they will be going forward?

What we're doing right now is we've did like we did anywhere else. We bought a mailing list of some new names, we added the names we already had existing, doing a mailing of fliers, mainly business right now. We don't have a lot of retail, but sending fliers out to customers that we found. We did a grand opening, so we're going to send right now every 60 days flier pieces out to those customers, and obviously we're adding new customers all the time to that list. So there will be an ongoing campaign with a new flier every 60 days to those people.

What's the feedback been like on that campaign?

Well, it's been fantastic. Obviously being new in the country, we got a lot of calls. It was probably better than what we normally see here. We probably got about a 20% response on that, which is pretty good for us, especially a blind list in a lot of cases. So we had -- we had a very good attendance, people showed up in the -- at the grand opening there in person. We had people drive from as far away as five hours away to get there and everybody we talked to was very excited, very happy to see us, very excited to get the flier. So it was very positive.

You said that store was profitable in the month of June?

It was.

Okay. How about the -- we talked on the last call about your camp business. Was that as positive as you thought in this quarter and then is there any sort of special situation like that in the third quarter that helps your performance?

The camp business has been -- this is Ron Morgan. The camp business has been pretty much as we expected. I don't believe it's been quite as good as we anticipated it was. It's still good business and we have written a lot of camp orders and have shipped it. In the third quarter there's really, as far as that type of business, I'm trying to think if there's any particular thing that will generate any extra push like the summer camps. We will still have some summer camps buying. The summer camp business is really not over until late, oh, probably mid-August, so we'll get a month and a half still of summer camp business this quarter and then -- and then the only thing that gives us a little extra kick sometimes in sales is in the parts of the United States that have good school programs, and there are some areas that are better than others. The schools with art industrial arts departments that do have leathercraft will be ordering that type of gear for the following school year as well as the afterschool programs that the 4-H and other organizations have with fuels today trying to keep the kids in school or close by school and off the streets. Those programs start kicking in a little bit right at the last month of the quarter. Does that help you?

Okay. Now we've been talking about the move for a long time and now that your move is complete, did it have the impact on your business that you were hoping. and is it -- is it all going to plan, I guess?

I want to answer this one and because I believe it's actually better than we anticipated or expected it. How we were able to do business sometimes out of those five separate buildings, a lot of times staging or packing orders for our stores inside trucks. because we didn't have the staging area. and the conditions of trying to have meetings with departments in different buildings when it rained or in this temperature today at 105, 106 degrees, it's nice to be able to call a meeting and have everybody be able to get there in a few minutes without getting wet or otherwise. As far as the warehouse's ability to receive and ship goods, it's -- and I don't think it's ever been -- it's ever -- since we started the company, it's not been this good, so right now the -- I don't know that we've seen the economical savings that we anticipate as time because we've only been in it three or four months and we're still working out some bugs and getting a few little things done to make it work a little better. But I fully anticipate to be one of the best things we have done. It helps the company in the long run.

Okay. Great. Thanks. That's it for me.

Thanks, Clayton.

Thank you. Our next question comes from the line of Joseph Coster with Chanticleer Holdings. Please go ahead.

Good morning. Congrats on a great quarter. Just one question, I just wanted to see if there was any update on the oil and gas lease for the second quarter.

Not sit. Right now what we're waiting on is an addition of a pipeline from the north side of the freeway to connect that property. Until they can get that done and connect it, they probably won't start drilling. The pad is there and the fence is up around the property so they're ready but just waiting for connecting pipeline to get those. So once they start drilling, the supplies can come off that property. So --

Okay. And so far you've received, right, $100,000 for the signing bonus at the end of the year and then another $215,000 in the first quarter and that's it so far?

That's correct.

Yes, until they start drilling and getting any production off of that.

Okay. Thank you.

Thanks, Joe.

Thanks. Our next question comes from the line of Ruthanne Roussel with the Robins Group.

Hi, everyone, it's Ruthanne Roussel speaking.

Hi, Ruthanne.

I appreciate any color you can give on the UK store. Now, Ron, I think you mentioned that it was doing more wholesale business than retail, but I'd also be interested in knowing whether it's yet serving other parts of Europe besides the UK as was mentioned at some point or whether it's too early for that. And just any more details you can go into about it.

I'm going to let Jon Thompson answer this because Jon has been there several times. He's the man that keeps an eye on it. He's been at the store. I think he goes for a week or two about every other month, it seems like it, so make sure it works out above. He pays attention to everything they're selling, when they're selling and how they're selling it. Jon?

Right now we've got a little website up also that has all the products that is in town. We're seeing good orders off of that. The orders that we are seeing are all over from Europe. We're actually getting a little orders that we're able to ship. Again, this is the client that I think we were going for, that we would not have got if we hasn't opened there that are ordering 30, 40, $50 and if they had order that had from the United States, we wouldn't be able to afford the airfreight on it, but I'm seeing orders from everywhere in Europe every day, and this is exactly what we were looking for. We are also still servicing our dealer accounts over there in Germany, France, Italy, but, yes, we're getting a lot of retail-type customers coming through the web, calling on the phone, asking for catalogs, making little orders like I said on the phone. Mail order customers, so it's pretty much operating to plan from what I can see.

Terrific. Glad to hear it. I'll get back in the queue.

All right.

Thank you. (OPERATOR INSTRUCTIONS). Ms. Greene, we have no further questions in the queue at this time.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.