Tandy Leather Factory Inc (TLF) 2008 Q3 法說會逐字稿

Greetings and welcome to the Tandy Leather Factory Inc Third 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)

It is now my pleasure to introduce your host, Miss Shannon Greene, Chief Financial Officer for Tandy Leather Factory. Thank you, Miss Greene, you may now begin.

Thank you. Good afternoon, everyone, thank you for joining us for our third quarter 2008 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Joining on our call today is Jon Thompson, our President.

Before we get started I must call your attention to the fact that these conversations will contain forward-looking statements to the extent we speak today of any future events 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 a management of Tandy Leather Factory are made as of this moment and we disclaim any duty to the update of those statements.

We are very pleased with our third quarter earnings, even though our sales were weak. Earnings increased 145% compared to the third quarter of 2007 and that was accomplished despite a 4% sales decline. Gross margin improved nicely and, more importantly, operating expenses were down significantly.

Relatively speaking, our retail stores are our strength, if you can call it that, reporting a 1% sales gain for the quarter. As we discussed in last quarter's conference call, the weakness in our sales continues to come predominantly from our wholesale business as our wholesale customers are struggling.

Our international operation continues to do well despite the UK's economic concerns. The UK store generated operating income for the third quarter and on a year-to-date basis, which is very encouraging.

Compared to year-end 2007, our cash increased almost $4 million and our inventory on hand is down by more than a million. Let me point out, when you look at our balance sheet, that we've broken out the CDs from cash because most of them have six-month maturity dates. So the $4 million cash increase I just mentioned is for our total cash, not just the cash in our operating account.

We opened on store in the third quarter in Cheyenne, Wyoming and it is doing well despite the economy. We have one location still to open this year, although our Internal Site Planner told me this morning that the landlord of the site we selected is not moving as quickly as expected on the space modifications, and it may realistically be early January before we can actually get the store open. As we discussed previously, whether that one store gets opened this year or not will not impact our ability to meet our 2008 revenue and earnings target.

Our Wholesale Leathercraft division posted a 14% sales decline for the third quarter. The Wholesale stores were down 14% and the National Account Group was down 10%. On a positive note, gross profit increased from 52% to 56% and operating margin was up 1,200%.

Our Retail Leathercraft division reported a 1% sales gain for the quarter. The Tandy Leather Retail store chain grew from 72 to 73 stores during the trailing 12 months ended September 2008, gross margins increased from 57% to 60% and operating margin improved by 300%.

Now for the numbers from today's press release. Third quarter consolidated sales decreased 4%. Current quarter sales were $12.2 million compared to last year's third quarter sales of $12.8 million. Wholesale Leathercraft sales were $6 million this quarter compared to $6.9 million in the third quarter last year.

Breaking it down further, the distribution centers posted a 14% sales decline, reporting sales of $5.3 million compared to $6.1 million in Q3 '07. Our National Account Group posted a 10% sales decline, reporting sales of $708,000 compared to $783,000 last year.

Our Retail Leathercraft division reported sales of $5.7 million, a 1% improvement over last year's third quarter sales of $5.6 million. Sales from the three new stores were $137,000 this quarter. The 70 comparable stores posted sales of $5.6 million, a decrease of 1% compared to last year.

Our International Leathercraft segment, which consists of the one store in the United Kingdom which opened in February, reported sales of $324,000 for the quarter. Consolidated gross profit margin for the quarter was 58.3%, up from last year's margin of 54.2%.

Wholesale Leathercraft gross profit margin was 56.3% compared to 52% in Q3 '07. Retail Leathercraft gross profit margin improved from 57.5% in last year's third quarter to 60.3% in this year's third quarter. International Leathercraft gross profit margin for the third quarter was 69.3%.

Consolidating operating expenses were $6.4 million or 52.1% of sales in the current quarter compared to 6.8 million or 53.4% of sales last year, a decrease of $459,000 or 7%. Wholesale Leathercraft reported operating expenses totaling 49% of its sales versus 51.5% last year. Retail Leathercraft reported operating expenses totaling 56.2% of its sales compared to 56.5% last year. International Leathercraft operating expenses for the quarter were 52.3% of its sales.

Please note that the greatest reduction in operating expenses was in our Wholesale Leathercraft division, which also includes our central support unit, our central warehouse, the factories, accounting and advertising departments. Approximately half of the expense reduction this quarter in this division came from those departments.

Income from operations was $765,000 for third quarter, up 627% compared to Q3 '07's operating income of $105,000. On a year-to-date basis consolidated sales decreased 3%. 2008 sales are $39.4 million compared to 2007 sales of $40.7 million.

Wholesale Leathercraft sales were $19.9 million this year, down 10% from last year's sales of $22 million. Further breakdown reveals a 10% sales decline at the stores, with sales this year of $17.3 million compared to $19.3 million last year and a 6% sales decline for National Accounts with sales this year of $2.6 million versus $2.8 million in 2007.

Our Retail Leathercraft division reported sales of $18.2 million, a 3% improvement over last year's sales of $17.7 million. Sales from the nine new stores were $1.2 million this year. The 64 comparable stores posted sales of $17.1 million, a decrease of 2% compared to last year's sales of $17.3 million. Our International Leathercraft segment reported sales of $560,000 so far this year.

Consolidated gross profit margin for the year was 58.2%, improving from 2007 gross profit margin of 57.1%. Wholesale Leathercraft's gross profit margin declined from 56% to 55%. Retail Leathercraft's gross profit margin improved from 59.1% last year to 61.7% this year. International Leathercraft's gross profit margin is at 65.5% so far for the year.

Consolidated operating expenses were $20.3 million or 51.6% of sales in the current year compared to $20.4 million or 50.3% of sales last year, a decrease of $143,000. Wholesale Leathercraft reported operating expenses totaling 49.7% of its sales versus 48% last year. Retail Leathercraft reported operating expenses totaling 53.9% of its sales currently versus 54.1% last year.

As you might remember, we had some one-time expenses in the first quarter associated with our corporate move and the accelerated depreciation on our old facility for a combined $250,000. In addition, we've got operating expenses associated with the UK store this year that we didn't have last year, totaling $360,000. So if you could adjust for those new or unique expenses, we've actually reduced comparable operating expenses by approximately $750,000 so far this year.

Income from operations was $2.5 million, down 6% compared to 2007. Some specifics regarding the performance of the Tandy Retail stores in the third quarter, sales of $5.7 million, gross profit 60.3%, operating income 4.1%. And looking at the store performance based on the year open, gross profit margin ranged from 63% to 57%, operating income ranged from a positive 12% to a negative 8%.

Looking at individual stores, average monthly sales ranged from $84,000 per month to $10,000 per month. In this third quarter of 2008 average sales per store per month was $27,000. And based on the year the stores were opened, average monthly sales ranged from 36,000 per month to 17,000 per month.

There are nine stores with operating losses as of the end of September, totaling $139,000, the one opened in September, five that were open in '07 and three that were opened in '06. All of our Leather Factory stores are profitable as of September 30 and comfortably so, I might add, despite the sales losses.

Operating margin ranged from 19% to 1%. Mid-Continent Leather sales is posting average monthly sales of $49,000 this year. Although it is not profitability for the year yet, it has started generating profits on a monthly basis. And if things continue, I expect it will be profitable for the year.

To summarize, this is a very difficult business environment. But we are not only surviving, we are achieving success even without the sales growth. We will continue to do the things that keep our Company profitable and stable.

The fourth quarter will be tough, as evidenced by our announcement this morning regarding our October sales. We have some good things in the works that we're not ready to publicly discuss yet that should have an impact on our sales in 2009. But please know that we are not content to sit back and wait on this economy to improve. We will be smart and we will be conservative.

We know this business in good economies and bad ones. And, while we obviously can't run top-line sales gains month after month after month, just like the stock market can't continue to go up indefinitely, we can make the most of the opportunities we have to make this Company successful.

Once again, we accomplished what we setout to do in the third quarter, less inventory and fewer expenses, regardless of what sales were. We did what we said we were going to do and eventually someone out there is going to begin giving us credit for that. That concludes my prepared remarks today. Operator, we are now ready to take questions.

Thank you. (Operator Instructions). Our first question is from the line of Graeme Rein with Bares Capital. Please go ahead.

Hi, Shannon.

Hi, Graeme.

Can you provide a little bit more detail where you're taking these expenses out of the income statement? I mean it's a great job, but I was just curious as to what exact line items you're cutting.

In personnel costs we have trimmed back particularly at corporate in headcount. In 2008 we cut back our Company match on our 401(k) account. We redid our health insurance program in June, which has reduced the Company's cost of the benefits provided to the employees. We have made some changes in advertising, we're doing an awful lot of email advertising.

We're being smarter about the flyers that we're mailing. We changed printers on our catalog this year that we distributed October 1, cut our printing costs from last year by about $50,000. We are keeping a tight rein on our office and shipping supplies here at the corporate offices. Freight out is down some, we've renegotiated our contracts with some of our carriers.

We've changed our payroll processing from weekly to bi-weekly, we did that earlier this year which has cut our payroll processing cost in half. It has also cut our shipping cost, documents mailed from here to the stores, from every week to every other week.

Those are probably the big ones, advertising and our personnel costs are probably the two biggest. But I think we've done that certainly without sacrificing sales and customer service throughout the system. We're just expecting everyone to do a little bit more with a little bit less.

Okay that sounds great. What does the pricing environment look like? I know the yearly prices are coming out in the next -- do they come out in October?

You're talking the prices of the catalog?

Yes. What are the pricing trends looking like? Are you raising prices? Are you lowering prices?

We raise prices, obviously, to maintain margins through the year with the increased cost of metal, freight. Our costs did go up so we did raise the prices accordingly.

Okay.

That's Jon Thompson, our President, by the way, Graeme.

Okay. And any progress on, I know you were looking at selling off little pieces of the land you bought, any update on that?

We've not had any offers that we were interested in. We've had a few nibbles but nothing at the price that we wanted. We have it still listed, there are signs on both sides of our property, and we expect to probably still have some offers on it. The VA Hospital that is going to be constructed across the freeway from us is being constructed now, so I think that'll start probably getting some more interest in this piece property by us, once they start to see that go up.

Okay. And then just looking at the balance sheet, the AR, have there been any increases in bad debts? Or do you feel pretty good about collections?

We feel pretty good about it, haven't run into any major problems. A lot of these guys have been in this industry a long time and know the customers. So we're careful. I mean our credit policy, I think, has tightened up. Jon in particular approves open accounts and has gotten tighter and tighter on that as things have progressed over the last year or so.

But we don't have anything out there that we're nervous about. We're having to work with some customers, they're having a hard time keeping their accounts current. But that just means that we sell them a little less until they can get themselves current.

So we stay very much in tune and in touch with all of our customers. I can't think of any account out there that I'm nervous about in terms of we're really going to get hung.

Okay. And then what about the inventory? Is there any that's slow moving or that you expect to write down?

No. In fact we had a meeting about that earlier this week. I think of the items that we have considered discontinued this year, I think we have $20,000 left that we're moving out between now and the end of the year.

But remember, our inventory does not become obsolete. We make the choice as to whether we want to feature it and include it in our catalog or not. And effectively we've got nothing in the system now that's not currently part of our catalog and going to be offered.

Right. Okay. So if you look at your balance sheet, just looking at your tangible assets, cash, AR, inventory, property and equipment, you back out all your liabilities, your tangible book value is still well above where you're currently trading. I was just curious as to uses of cash. I mean if you buy back stock, every time you buy a share increases the book value per share. I just wanted to know what your thoughts are or reactions to that.

Sure. The balance sheet is very clean. The tangible assets are clean. There are no hidden potential write downs anywhere, so no issues there. We are, and you're probably aware of this, we are in the middle of a repurchase with our ESOP participants with that plan winding down.

As of the end of October we've bought back about 200,000 shares of a potential 0.5 million to the tune of about $0.5 million. We hope to get a chunk of those in between now and the end of November when the offer goes away or expires. Cash has done well, we've obviously continued to increase cash all through the second and third quarters, which is kind of remarkable for us. And we've got another Board meeting in a month to discuss again.

Now we got through the year, we're in good shape inventory wise, receivables look like they're in good shape. We don't really have anything out there that's too unusual, so what else do we need to do as far as looking at stock buy-back, particularly where the stock price is now.

Okay. Well I think you guys have done an admirable job with the expenses, so keep it up.

Thanks, Graeme.

Thank you. Our next question is from the line Matt Miller with Chanticleer Holdings. Please go ahead.

Shannon, good afternoon, how are you?

Hi, Matt, I'm good. How are you?

I'm doing well, thanks. I wonder if you could give a little bit of clarity on the buy back, which we certainly appreciate. I wonder if you could talk about the reasoning to proceed in the manner that you have, approaching some of the ESOP participants as opposed to making it an open-market repurchase.

Well I think the open-market repurchase is certainly still on the table. But frankly, the way the ESOP works, or the way your plan termination works, we made the decision toward the end of '06 to terminate that plan as of December 31 of 2006. It has taken until August of 2008 to get the final sign off from the IRS to go ahead and distribute all the assets out of that plan.

As you can imagine, participants, employees and former employees have been very anxious about what's going to happen with their holdings or the value and the assets that they were entitled to inside that plan. And it's one of those things that we waited and waited to get, not knowing when we were going to get the sign off from the IRS, finally got it after a year and a half, and didn't want to mess around too long, frankly, in terms of how to get those accounts distributed to everybody.

Frankly, with 900,000 shares in that ESOP plan distributed out to all the participants, I have absolutely no doubt in my mind that if we had distributed stock to all of those participants, employees and former employees, there would have been a flood on the market of Leather Factory shares, people wanting to sell their shares regardless of the price and get cash.

The Board moved quickly to approve a limited repurchase plan from the ESOP participants specifically, excluding the executive officers, in order to basically protect the existing shareholders from the flood of shares that would have hit the market. There's no telling what would have happened, given that the volume of our stock is as low as it is right now.

So obviously we had cash. If we bought everybody's shares in the ESOP, excluding executive officers, we're talking 475,000, 500,000 shares. At the time we were talking about it the stock was somewhere between $2.75 and $3. We're looking at a maximum from $1.5 million in cash, we obviously have that. To buy those shares basically protects the stock price and protects the existing shareholders from just an absolute run on the stock.

So that was really the motivation, good use of cash, to protect the existing shareholders, certainly give the employees and those ESOP participants a way to get out of the shares without paying brokerage and commissions and all of that. Plus there's an orderly liquidation to it without them just running to a broker and dumping it.

So that was really the thought process. We will continue to talk about either some sort of Dutch tender offer or an open-market repurchase program. But we had to move quickly enough on this ESOP thing because we've got to get everything distributed before the end of the year. So it was an easy kind of a small step to get started and then we'll see where we go from there.

Sure. Sounds great, great explanation. I wonder if you started to think about capital spending as you move into 2009, and I assume that's going to be coming down to more normal levels, but I wonder if you've started any planning on that end and if you have any thoughts there.

Generally speaking, Matt, our capital expenditures are pretty low. And frankly, when I look at even what we've had to buy this year, excluding the building and the issues, the stuff getting set up here, probably 95% of what we buy is computer equipment. Replacing systems out in the stores, replacing systems here.

I don't have a final budget from IT yet in terms of what they anticipate spending for next year, but I can tell you that I think it's going to be fairly minimal. None of us likes to spend any money and our IT Director, fortunately, is one of those that works very hard to spend as little as possible and try to reuse machines as much as we can. So I don't have a good number for you yet, but --.

That's fair.

We're working on it, but I don't expect it to be a lot.

Okay. And then just finally, if I might ask one last question, the success you've seen so far in the UK, I wonder if you could speak to the incremental sales generation that you believe you've seen. I believe in the past, as we've spoken, you did do some sales to Europe and the UK. I wonder if you could talk about if you have any feel towards how much of the sales this year are incremental beyond that.

Beyond the US?

Beyond that which you were previously servicing from the US

Yes you know what we're seeing is really there are a lot of new sales since we're on the ground. We had, yes, some existing dealers and existing business that we were doing already. Primarily it was dealer business, a business-to-business type sale. We didn't get a lot of the retail type business, the little crafter or the people doing reenactment trade where they're making items for reenactment type groups.

We're seeing a lot of new business. Probably 60 70% of the business we're doing over there now is retail type trade, which we would not have been able to do, which we weren't getting from here because of the expense shipping it overseas.

Okay.

We're still certainly servicing the dealers and we're getting also new inquiries from dealers that are more interested dealing with us now that we're closer to them. And our dealers are certainly happier being able to get a certainly faster shipping and shorter lead times for their products. It's certainly helping them out tremendously.

Great. Sounds good. Thanks, guys.

Yes.

Thanks, Matt.

Thank you. Our next question is from the line of [Len Fuchs] with State Partners. Please go ahead.

Hi. How is your Internet site doing? And do you have any further plans for it?

Well the Internet site, we're down a little bit but we've got a brand new site that we're hoping to roll out this month. We're not giving an exact date, but we've got very close so we're hoping within maybe a week, two weeks, to have the new site up.

It will have multi currency, so we'll have US and Canadian dollars on the site. Later we'll add the UK site and then have that in pounds also. So hopefully very soon you'll see something, but we're down about 3% from last year. So we're excited to get this new site out, up and running. And I think it'll help boost our sales.

Will you be able to sell in the European market from the site? Or is the transportation prohibited?

Well we're still using a separate shopping cart and separate website for the UK site. If you look at it now, there's a link to that site now. We'll continue probably for another three or four months until we add them in.

And our advertising department, Dana Jones, is working on that too. And like I said, he expects maybe 90 120 days to add that in too. We still have that functionality, it's just we certainly don't like it sitting outside our main site. But it's there and it has a link from the main page.

Okay thank you.

You're welcome.

(Operator Instructions). Our next question is from the line of Ivan Zwick with Raymond James. Please go ahead.

Hi. My question is, when things start straightening out, what's our plans as far as expansion or utilizing some of this money to grow the Company?

Ivan, we will get back to opening stores as quickly as we can. Certainly, as you know, having the working capital to get those stores open is not an issue. The economy being the way it is, we're not shying away from opening new stores, even with things like they are. But as our sales reflect, it certainly plays on everybody's mind and it influences the decision some.

Let's assume that by June of next year the US economy really turns around and kind of gets headed in the right direction again, we'll get back to opening stores more on the pace that we were before. Right now where we sit, given that we think the '09 economy is not going to be any better, the plan is to open probably four stores in the US and Canada next year.

I think we can do that pretty easily, we've got some good markets that we need to be in. That has not changed, even though the economy is not going well. The other piece of that puzzle is having manager trainees that are qualified to run stores.

And we've had to use in the last year or so an awful lot of our trainees to replace retiring managers and some issues like that, and some poor performers. So our manager trainee pool we need to continue to strengthen. We think we can do four stores next year in good markets and we'll have the trainees ready to take those stores.

We will continue to make plans to get back to the 8 to 10 to 12 stores a year if we can get the economy to cooperate at some point. So definitely we're not changing our expansion plans. They have slowed down a little bit, that is two fold. The economy is one, manager trainees, having the time to get those guys trained and qualified to really be successful in their stores, that's been the other thing.

So we are still planning on expanding, would like to get back to kind of the pace we were on for a while and we're certainly working toward that internally. And we just need the economy to help a little bit too.

Well that sounds like a sensible and good plan. Thank you.

Thanks, Ivan.

Thank you. We have a follow-up question from Len Fuchs. Please go ahead.

Can you report anything about the Tractor Supply experiment?

Got an update this week. The pilot stores are still ordering but they have not pulled the trigger on further expansion into any of the rest of their stores. We're still continuing to work on programs for them, but it's slow progress.

So I guess I would tell you, Lenny, that I guess it's a good thing that they haven't kicked us out and said, no, we don't want this. But we certainly haven't got them to get to the point that they're ready to move forward.

I did talk to our National Sales Manager this week and he said that the buyer that he's working with is relatively new and a little bit skittish about really pulling the trigger. But he is continuing to, without being a total pest, trying to stay in there and get some attention.

We are trying some new things with National Accounts, we will be at the Toy Show in New York City in January. We're going to try some new things, got some new products coming out to continue to work on our National Account. So some good things in the works, trying some new things and then we will continue to work on the Tractor Supply and then all the other National Accounts as well trying to continue to add business.

How do the reorders look to you for Tractor Supply? Are you pleased with them? Or is it --?

They're steady. Like I said, they continue to order in those pilot stores, but they're not ordering substantially more than they did initially. But they are replenishing, so I think that's good. Again, it's a slow process and people are kind of skittish about trying new things and really investing a lot of capital in something that's a little bit new.

So we'll keep at it. We're doing some changing of some product and things that may work a little bit better. And then we'll just keep at it and see if we can convince the buyer to give us a shot.

And how has the Canadian market been?

The Canadian market has slowed down. It was a little bit behind the US in terms of really noticing anything. Our Canadian stores, definitely the first quarter and into second quarter, they were continuing to run really good sales gains while the US stores were all slowing down.

We're seeing slowdown there, just like we are here. It's worst on the east side of Canada than it is on the west side. Our eastern Canada stores are struggling, business is tough, particularly on the wholesale side, just like it is down here. So they very much follow and mirror what's happening in the US Certainly not in any danger of anything horrible happening, but it's slowing down up there, there's no doubt.

Right. Is this the first time you're going to be at the Toy Show?

Yes. It's a brand new show for us and I believe it's in January, if I remember right. Yes we will be showing for the first time and we'll see how it goes.

Is it a product for kids or adult kids?

No it's very much geared for children. We're doing some new things and children are where we start, as you know, in some of the customer development. We've done some new things, some different colors in our kits and that kind of thing. And we're going to give it a shot and see how it goes.

So what have been trends in your leather costs and metal recently, like in the last couple of months?

Well until the dollar turned around we were really getting some spikes up in leather costs, metal prices were still up. Right now that's really the only factor. We've seen freight certainly making some difference now, we're starting to see now that gas prices are going down we're getting some discounts.

But as far as the prices themselves in the metals and the hides, they've remained up from everything that we've seen. But we're just facing at least lower prices with the US dollar being a little stronger. We really probably had more trouble with the US dollar against the Brazilian real than any. But we've seen decreases in all our costs just based on the stronger dollar.

All right. When you say metal costs down a little, is that 10 to 20%?

No. I mean we haven't seen that come through yet. Really what we're seeing is just a drop just because of the cost based on the translation of the stronger dollar. And of course new freight prices, we're already seeing drops in freight prices. So I don't know that we see immediate and I don't expect immediate in metal prices from our suppliers.

Just kind of a lag on the way down.

Oh yes always, they usually try and pick up a little bit when they can.

It goes faster on the way up.

Always.

Okay thank you.

Thank you.

Thanks, Lenny.

Thank you. We have another question with Matt Miller with Chanticleer Holdings. Please go ahead.

Shannon, hi, just one follow up if I might, on buyback thoughts. You certainly did mention volume and we've seen certainly over the last couple days perhaps a significant increase in that volume. And who knows how long that might be here. You mentioned also that there is a Board meeting in about a month. Is that really the type of time horizon that you'd have to look at? Or is there any chance that something might be considered before that?

I talk to the Board members all the time, but honestly I think generally, to be the most realistic, I think they're probably looking at decision made at Board meeting.

Okay fair enough. Thank you.

Yes.

(Operator Instructions). Miss Greene, we have no further questions in the queue at this time.

Very good. On behalf of Jon Thompson and myself and the entire Company, thank you for your participation in today's call. Have a good afternoon.

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