Tandy Leather Factory Inc (TLF) 2008 Q4 法說會逐字稿

Greetings and welcome to the Tandy Leather Factory, Inc. fourth quarter 2008 earnings conference call. At this time all participants are in a listen only mode. A 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, Shannon Greene, Chief Financial Officer for Tandy Leather Factory, Inc. Thank you, Ms. Greene, you may begin.

Thank you. Thank you for joining us for our 2008 earnings conference call. I'm Shannon Greene, Chief Financial Officer and I'm joined by Ron Morgan, CEO, and Jon Thompson, President. We will be discussing our fourth quarter and year-end 2008 results as well as our plans for 2009.

Before we get started, I'll call your attention to the fact 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 there are risks to Tandy Leather Factory that could prevent these events from occurring in a 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 from 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 update those statements.

Given the economic environment we have to be pleased with our results, although lower sales and lower profits from the year before tends to cast a shadow on the year as far as we are concerned. The general theme these days seems to be things are not as bad for us as they are the Company down the street, so somehow that makes things good, and while every Company is trying to find something good to say, relativity doesn't go over very well around here. With that said, here are our highlights, both positive and negative for 2008. Our 2008 sales were lower than 2007 by 4%, ending a nine year streak of consecutive sales gains. 2008 was our 12th consecutive year of operating profits, but decreased 7% from the year before. Our consolidated gross profit margin improved for the 12th year in a row.

We were profitable for 2008, although profits were down for the second year in a row. We opened one new Tandy Leather Retail store in 2008 domestically, bringing the store total to 73. We also opened our first store outside of North America, and it generated an operating profit in its first year of existence. We ended the year with the most cash we've ever had, almost $11 million, and that's after spending almost $1 million on a limited stock repurchase program and $3 million on the renovation of our corporate headquarters facilities. We do have debt on our balance sheet totaling $4.5 million, all related to the purchase of our corporate headquarters. The amount owed is more than secured by the value of the property.

Our Retail Leathercraft division ended the year with a 2% sales increase over 2007. As I mentioned, one store was added during the year. Our Wholesale Leathercraft division ended the year with an 11% sales decline. Consolidated gross profit margin improved, operating profit was down 7%.

Quick run through of the numbers for fourth quarter and the year. Quarterly results are as follows: consolidated sales decreased 5%, sales were $13.8 million this year compared to $14.6 million in the prior year. Wholesale Leathercraft sales were $6.5 million this quarter compared to $7.5 million a year ago. A decrease of 14%. Within the Wholesale Leathercraft division, the wholesale stores recorded quarterly sales of $5.8 million in 2008, down $747,000 from the fourth quarter of '07. Our National Account Group reported quarterly sales of $647,000 compared to $929,000 in the prior year, a decrease of 30%. Retail Leathercraft sales were $7 million for the quarter, compared to the prior year of $6.9, million an increase of 1%. Consolidated gross profit margin for the quarter was 61.1%, up from 57.8% last year. Wholesale Leather Craft gross profit margin increased significantly to 60.8% currently, versus 54.3% last year, while Retail Leathercraft gross profit margin fell slightly from 61.5% to 61.2%.

Consolidated operating expenses increased $182,000 for the fourth quarter to $6.9 million or 49.6% of sales compared to 45.8% of sales last year. Wholesale Leathercraft reported operating expenses totaling 49.1% of its sales versus 40.4% of its sales last year. Retail Leathercraft reported operating expenses totaling 50.2% of its sales compared to 51.9% last year. Income from operations was $1.6 million for the quarter, a decrease of $145,000 or 8.4% compared to the fourth quarter of '07.

Now for the 2008 annual results. Consolidated sales were down 4% from 2007. Sales were $53.2 million compared to $55.3 million last year. Wholesale Leathercraft sales were $26.4 million versus $29.6 million a year ago, down 11%. Within the division, the wholesale centers reported sales of $23.2 million, a decrease of 10% from 2007 sales of $25.9 million. The National Account Group reported sales of $3.2 million compared to $3.7 million in 2007, a decrease of 12%. Retail Leathercraft sales were $25.2 million compared to last year of $24.7 million, an increase of 2%.

We opened one new retail store in 2008. The new stores which is this one plus seven of the stores opened during 2007, contributed sales of $1.5 million in 2008. The 65 comparable stores contributed sales of $23.7 million in 2008, which translates to a same-store sales decline of 1% from 2007. Consolidated gross profit margin for the year is 58.9%, improving from 2007's consolidated gross profit margin of 57.3%. Wholesale Leathercraft gross profit margin increased to 56.5% compared to 55.7% last year. Retail Leathercraft gross profit margin increased to 61.6% this year compared to 59.7% last year. Consolidated operating expenses were $27.2 million, or 51.1% of sales in the current year, compared to $27.2 million or 49.1% of sales last year. Wholesale Leather Craft reported operating expenses totaling 49.6 percent of its sales this year versus 46.1% last year. Retail Leathercraft reported operating expenses totaling 52.9% of its sales currently compared to 53.5% last year.

Income from operations is $4.2 million this year, a 7% decrease over 2007, of $4.5 million. Total assets grew 9% in 2008 compared to the end of 2007. We ended the year with a total assets of $40.9 million. We held $10.8 million in cash at year-end including certificates of deposit, a 59% increase from the end of 2007. Accounts receivable decreased $1.3 million, inventory decreased by $1.5 million. Current liabilities increased by $1.3 million, total liabilities up by $1.9 million. Our debt, which consists of bank debt, and one capital lease, all related to our real estate purchase in 2007 is $4.5 million. Our current ratio is 5.7 EBITDA for 2008 was 5.5 million.

Some specifics on the Tandy Retail stores performance in the fourth quarter. Sales are $7 million, gross profit is 61.2%, operating income was 10.9%. In looking at the store performance based on the year open, gross profit margin ranged from 59.4% to 62.4% and operating income ranged from 16.9% to 5.3%. Looking at the individual stores, average monthly sales in the fourth quarter range from $100,000 per month to $10,000 per month, and operating margins ranged from a positive 25% to a negative 23%. For the fourth quarter of 2008, average monthly sales per store was $32,000, there were eight stores with operating losses in 2008, totaling $205,000. Our Leather Factory stores are comfortably profitable except for Mid-Continent Leather despite the sales losses. We have made changes to Mid-Continent's operating structure in 2008 that should help it get headed in the right direction in 2009.

Our balance sheet is in really good shape. We've increased our cash holdings during 2008 by almost 60%. Accounts receivable balance is down 54% at the end of 2008 compared to the year-end 2007, partly because of the intentional tightening of our credit policy and partly because of our increased collection efforts. Frankly, since I got here in 1997, I don't remember AR ever being as low as it is right now, and that's probably a good thing given all that is going on with small businesses. We continue to tighten up on inventory as it has decreased $1.5 million this year and that's with the new UK store open now. I don't know that there's much more we could do to position ourselves any better when I look at our balance sheet.

I think we continue to make good efforts on managing operating expenses as they were only $38,000 higher in '08 than in '07, but if you take out the "new expenses" we did even better. For example, our UK operation, which just opened this year had $517,000 of operating expenses this year compared to zero expenses last year. Our property taxes have increased $120,000 this year because of our new building. We spent $125,000 this year to move from our old facility to our new one in the first quarter, a one-time expense. The one new retail store added operating expenses of $60,000. So considering just those few items means comparable operating expenses this year to last year, results in an operating expense reduction of $785,000, or approximately 1.5% of sales. I think our Management team has done a good job in this area but we can't let us as I don't think sales will significantly turn around any time soon.

Looking at 2009 I'm sure everyone wants to know how the year will turn out or at least what we expect. I'll start by saying that trying to predict anything right now is virtually impossible. I can tell you that our goal, as is the goal of every Company I'm sure, is to maintain sales and maintain earnings. Whether that goal is realistic, however, is anyone's guess. Our retail business is doing pretty well all things considered, but we don't know when our wholesale business is going to turn around. I can tell you that we're working harder than we probably ever have on our sales, and if effort resulted in sales gains, we would definitely have one. Unfortunately it does not work that way, at least not in the economic storm we currently live in. We do have control over our expenses and will continue to keep those in check. We have already opened one new retail store in Tucson in 2009 and our plans are to open a few more this year. Given everything we know right now, I have no doubt that we will be profitable in 2009.

Regarding a possible stock buyback. We are not prepared to specifically answer questions about a stock buyback on today's call, but should be in a better position to do so shortly. Said another way, we will let you know something as soon as we can. One last thing before we go to questions: In case you missed the announcement last week, we announced Ron Morgan's expected retirement and resignation as CEO on June 30 of this year. It is expected that the Board will elect Jon Thompson, our President, to take over the CEO position effective July 1. We had a conference call last Wednesday to answer questions about the transition between the two and we'll be glad to do so again today if you didn't get a chance to be on the call or ask questions last week.

That concludes the prepared remarks. We appreciate your time today and we'll be happy to answer whatever questions you may have. Operator, we are now ready to take questions.

Thank you, Ms. Greene. (Operator Instructions). Our first question comes from the line of Graeme Rein with Bares Capital. Please proceed with your question.

Good afternoon.

Hi, Graeme.

Jon, congratulations on the appointment and also the expansion in the UK seems to be going well. I know you've been involved with that. Is there any chance of expanding further in the UK opening any more stores there or are you satisfied with the foothold that you have there right now?

I think that there's definitely some possibility. I definitely, every time I do a show in Europe I come back excited. I think that right now, we just would like to make sure that we have a good customer base before we really start stepping out but I do feel that there is some room for other stores. We're just going to evaluate that as we go along and see but I think after we do some more shows, get a little bigger base, we'll start looking at whether or not to branch out.

Okay. Shannon, in terms of the gross profit improvement, I know that there's a greater mix of retail than there was last year but is there anything else going on within that gross profit that might be different from last year that might be improving it?

Ron will probably have more details if you want to get into the nitty gritty, I'll tell you conceptually, the biggest improvement was on the surprisingly on the wholesale side but the reason for that is the wholesale stores or the Leather Factory stores are selling a lot more to retail customers and less of course to the big wholesale customers because that's why sales are struggling so much, so as a result, they've obviously made a huge improvement in gross profit. Is that good? Sure.

Would I rather have that wholesale business back? Yeah, I'd take that at a slightly lower gross profit margin but I think overall, that's got to be a lot of what's happening is they don't have those big wholesale orders like they had a year ago. They are doing more the small little one-time almost retail type customer. Ron, do you want to add anything?

This is Ron. Also, I think a lot has to do with the fact that last year in this quarter, we got very aggressive advertising, trying to buy some sales. And while it did work a little bit, it didn't really produce like we had hoped. This year, we had learned from those mistakes and while we did buy a few sales, we also decided that we weren't going to go the path of the other retailers. We didn't want to discount like I saw today that Macy's started at a 70% discount early in the quarter. We thought our inventory was in good shape and was in line. We had a good advertising and marketing program put together, and we chose not to follow in the path of the other retailers and not discount things as drastic, knowing that it would be a little tougher to sell it, but the margin improvement was by far offset it, and it looked like it turned out about what we expected would happen if we didn't attack the sales as hard as we probably should have. Yeah, we might have got a little closer to a sales gain but that wouldn't have made us much profit.

Okay, great and Shannon, in terms of the repurchases made from the employee stock ownership plan, how far along is that? Is that all we can expect and at what price did you buy the shares? What's the current share count? Can you just provide a little bit more detail there?

Sure. We ended up buying 324,000 shares from a possible 486,000 I believe, average price was $2.47 a share, we paid a total of $803,000. That program is completed. It was a 60 day offer to wind down the ESOP and got all of that done before year-end. So we are, that is all done. We've got now 330,000 shares in Treasury, nothing else going on with the ESOP is totally done now.

So the share count is 10.6, 10.7 somewhere around there?

10.655 I believe.

And are you still planning on selling that piece of land adjacent to your office?

Yes.

It's available.

For the right price.

It's posted that it's for sale. It's going to take somebody willing to offer the right price and so far as far as I know, no action on that. But yes, it is still available.

Okay. Given your valuation and your balance sheet and your earnings potential, have you been approached by anyone seeking to take you out as an acquisition and what's your kind of openness to those types of discussions at this point?

We have had calls. We have not, most of them in my opinion were tire kickers. Our position is that we are a public company. Our stock is for sale, every day on the market. If you'd like to be in control of this Company, jump out and buy some stock. That's our position.

Okay. Thank you, and look forward to hearing about the share buyback. When can we expect that? What do you have to do? Meet with the Board or what's the holdup in terms of executing that?

Stay tuned, Graeme. Can't say too much today, but just pay attention in the next short while.

Okay, well.

How is that?

Seems like a no-brainer at this price.

I tend to agree.

Thanks a lot.

Our next question comes from the line of Ivan Zwick with Raymond James Financial. Please proceed with your question.

I have one comment, I want to congratulate you on the great quarter you had, navigating in this environment, and going forward, when you appear that things are starting to get better in the economy, I assume you plan ongoing back to your normal type of expansion and do you have the people and locations where you could start doing that if that happened in the next six or seven months for the stores?

Yes, we could. We have and always have trainees and plan on always keeping Manager trainees and reserve enough to make sure that we plan for any store openings, losing any people, or whatever reason, and we said we'll do four stores. We've got one so we'll certainly do three more. If we see that the sales warrant it, we certainly could open more stores, but we're just obviously watching that as we go but we certainly have the trainees and reserve.

Okay, thank you.

You're welcome.

Thanks, Ivan.

Our next question comes from the line of Joe Koster with Chanticleer Holdings. Please proceed with your question.

Hi, this is actually Matt Miller. Good afternoon, everyone.

Hi, Matt.

Mr. Morgan? Congratulations on your retirement. I didn't get to pass that along last week. You've done a great job building the Company over the years and so congratulations on your retirement.

Thank you very much, Matt.

One question, I'm not sure if you're able to comment on this at this point but you still own a significant number of shares obviously approaching over 1.5 million. I'm not sure if you had any comments on your plans with regards to your holdings at this point.

My wife and I, Robin, hold approximately 1.8 million shares of TLF stock. My financial advisor for some time has been asking to reduce our asset concentration, every time I bring it up to him, he brings it up to me, I ask him to recommend a better investment, with more long term potential for growth. I'm still waiting on his call, so at this time, I really don't have a firm plan on this 1.8 million. I do believe is that some time in the future, we will sell, my wife and I will put on the market maybe 800,000 shares, maybe not that much. I don't have a firm plan. We will probably as long as the current Management is in place in this Company, I feel fairly certain to say we will always be the largest non-institutional stockholder in the Company, because it's the best place for us to put our money.

That's fair enough. That's a pretty good answer. Thank you.

Yes.

I wonder if I could maybe get everyone's opinion on the competitive landscape, given that a number of your competitors if you can call them that tend to be mom and pop operators, I wonder if you could comment on how they're fairing and if you think you're at all taking any market share from those types of folks in this difficult time?

I think we're doing a better job in the marketplace. If mom and pop, since you can't really find it out in the newspaper, we can only judge it by what we sell them that our competitors also buy, they are purchasing less. That would lead me to believe that their business is less. As far as how we're doing in comparison since our business is predicated on teaching leather craft in schools, hospitals, summer camps, 4 H, boy scouts, et cetera, that our business is probably holding up a lot better than most. I don't know if you guys remember or paid any attention but Tandy Leather Companies growth years were in 71 to 75. That's when that Company grew the largest ever in sales growth, the percentage of gains. Ray and me started the Leather Factory in 1980 and we grew through 81, 2, 3, to five stores and built the base for this Company.

If you guys also know that the economy in those two periods was very similar. Matter of fact it's a combination, so tough times in the economy while we holdup a whole lot better, matter of fact we do better than most companies, so the economy worries us, it worries us but we're actually not paying a whole lot of attention to it other than what we're hearing on the news and the radio and paying attention and seeing if we got any banks we can do business with because we're going to be here and we're going to be growing, whether the economy is tough or not in our opinion. And it's like my old ex-partner used to say, the recession, we choose not to participate.

Well, that's certainly good. Thank you. I wonder another question, sorry, just two more. If you have seen any impact from traffic that might in the past have gone to Wal-Mart, certainly you don't, you aren't doing business with the US Wal-Mart stores but have you seen any evidence of those that used to go to Wal-Mart now actually trafficking your stores?

No, I haven't and I've talked to, I mean I'm in constant communications with the people over in that department and the operations people and I have not heard a word about that and I think it would have been something significant enough for them to have brought up to me. So no, we know nothing about that.

Okay.

In effect either way.

And finally I wonder if you could comment, Shannon, you briefly brought up Mid-Continent. I think you're maybe going on now two years of ownership owning that. It's obviously a small component of your business but I wonder if you could assess that acquisition now for almost two years later?

Well, if you let Ron answer the question he will tell you that it was probably not one of the better decisions we've made, although I think it's the only one I've really worked on really hard and I think I've still got a better track record than the predecessors around here. In all seriousness, what's wrong with Mid-Continent? Yes, it is as of February it was, we had the thing 24 months. We have, I think it's a good unit. We're trying, we have, we made the decision when we bought it to let it continue to operate as Mid-Continent and not to blend it in under the Leather Factory trade name.

We have done wonders with increasing the gross profit margin and frankly, the best thing about the acquisition and we still think it was a good one from this perspective, we eliminated a business competing against us who was undermining the market. They didn't have a good feel for what they were buying product for, therefore they were selling at crazy prices, really undercutting the market so if nothing else, we paid for that business to eliminate that issue, and that's huge. It helps stabilize our business considerably, so when you look at it from strictly that perspective, it was still the right thing to do. Should it, do we want it more profitable? Absolutely. They were heavily staffed when we bought it. It's taken us a little while to trim all of that down. We've still got some issues as far as operational costs that we can work on to get it more in line with the way a Leather Factory store operates.

And frankly, we may, if the operations team and John and Ron and the team decide they want to change it to a Leather Factory store instead of letting it continue to operate with its own website and its own brand name, maybe that would help. I don't know, so I think overall, is it making huge money for us? No. Have we made huge strides from where we were? Yes.

But the most important thing is and we would do it again tomorrow to eliminate the Company and the market that's undercutting everybody because they don't really have a good feel of what they are doing with product and sales and all of that, so our sales are down there and have consistently dropped from when we bought them because frankly, they were selling product below what they were paying for product because they didn't know any better, so we've had to raise selling prices there and of course, customers don't take to that too well, so that business that has lost some customers because they don't want to pay the new prices and so we continue to deal with those issues. Ron and John may have other comments.

You have to remember too, their business was predominantly wholesale which is one of our biggest parts of the business that is down so they got a little bit of a different product line, which still allows them to sell some tools that are different from us but we're also within 10 miles of another store, so I think what Shannon said is again we got rid of a competitor, we got rid of somebody that was undercutting prices and affecting our margin so I think long term we're still better off.

Thank you, I appreciate the candid comments on that.

Yes.

That's all.

Thanks, Matt.

(Operator Instructions). Our next question comes from the line of Douglas Joseph with Masonic Capital. Please proceed with your question.

Good afternoon.

Hi, Doug.

Just a quick question about the Company that sold the rights I guess, the gas rights previously to an undisclosed corporation. I was just curious if you could give us an update as to if there's any activity?

Yeah. Right now they've run water lines for the fracking and they are on the site right now setting up for wells, and like I said they are operating and starting to drill and frac those wells. So we hope to see something, it's about three weeks so probably three weeks from now we'll know a little better where they are at but they are started finally.

They are on site again this week, Doug, and you know the boom of the whole gas thing here particularly in Fort Worth, that has slowed down some in the last several months as gas prices have come down. It's not quite as busy around town as it was there for a while but it's beginning to pick up again and like Jon said, that lease company is actually on property today, or actually this week. I noticed them first thing on Monday bringing in all the stuff and getting started, so hopefully we'll know some more in the next couple weeks.

Okay, and how will you keep us informed as to what the progress is?

I guess if it's anything significant we'll do some sort of announcement. I don't think, it's a long process and I don't think it's going to add millions and millions of dollars to our bank account. Anything is better than nothing but I suppose if there's anything significant that was worth doing a full press release on we would do that. Otherwise we will continue to bring it up in the calls quarterly as we know more, we'll be glad to share whatever information we can at that time.

Great. Thank you.

There are no other questions in the queue. I'd like to hand it back over to management for closing comments.

Thank you, on behalf of Ron Morgan, Jon Thompson and the entire management team thank you for participating in our 2008 earnings conference call today. We look forward to speaking with you again next quarter. Have a good afternoon.

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