Tandy Leather Factory Inc (TLF) 2009 Q1 法說會逐字稿

Greetings and welcome to the first quarter 2009 earnings conference call. (Operator Instructions). 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 now begin. Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter 2009 earnings conference call. I am Shannon Greene, Chief Executive Officer of Tandy Leather Factory. Joining me on today's call is Ron Morgan, our Chief Executive Officer, and Jon Thompson, our President. Before I begin, I call your attention that the fact that these conversations will contain forward-looking statements to the extent that we speak today of any future events or make any other forward-looking statements,

You are reminded of the inherent uncertainties of looking into the future. That there are risks to Tandy Factory that should prevent these events from occuring in the matter foreseen. Please check our Form 10-K for 2008 and subsequent forms Form 10-Q for discussions for some of these risks. Copies of the documents are available through SEC (inaudible) 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.

No matter what business you're in, I think we can all say those are interesting times, we managed to beat last year's fourth quarter sales, although just barely. Our gross margins improved minimally, but it was an improvement, which was good. We reduced our operating expenses by more than 3% or $240,000. And while we alway believe we can do more, we are please with that. Compared to year end 2008, our cash increased by $800,000, and our inventory was down by $400,000. We have opened one new retail store in 2009 with plans to open several more this domestically this year. Our wholesale leather craft division posted a sales decline of 7% this quarter. The wholesale stores were down 10%, and the national account group was up 17%. Gross profit increased from 55% to 57%. Operating margin was up 195%. The wholesale leather craft television also includes the central support unit. So reductions in corporate and administrative expenses impacted the division's overall performance. The stores themselves ended the quarter with an 8% operating margin this quarter compared to 10% in last year's first quarter. Our resale leather craft performed well in the top line reporting a 5% sales gain for the quarter and a 3% same store sales gain.

We added two new retail stores during the trailing twelve months ended March 2009, bringing us to a total of 74 stores in the chain. However, gross margins fell from 62% to 60% and operating margin decreased by approximately 10%. The increase in operating expenses is primarily the results of the two new stores. Our international leather craft division consisting of one store located in the UK, is performing exceptionally well, given that it is only a year old. Sales for the quarter total $293,000. Gross profit margin was 76% and operating income was almost 28%. We are extremely pleased with the growth in profits here and are convinced our international business is just going to get better as time goes by,

Now for the numbers from today's press release. First quarter consolidated sales were basically flat increasing by less than 1% from the first quarter of 2008. Current quarter sales were $13.3 million. up $100,000 from last year's first quarter sales. Also leather craft sales were $6.3 million this quarter compared to $6.7 million a year ago, a decrease of 7%.

Breaking it down further, the distribution centers posted a 10% sales decline reporting sales at $5.4 million compared to $6 million in Q1, 2008. Our national account posted a 17% sales gain, reporting sales of $872,000 compared to $746,000 last year. Our retail leather craft division reported sales of $6.6 million,at 5% from a last year's first quarter sales, of $6.3 million.Sales from the two new stores were $135,000 this quarter. The 72 comparable sales posted sales of $6.5 million, an increase of 3% compared to last year.

Consolidated gross profit margins for the quarter was 58.5%, a minimal increase from Q1 2008 gross profit margins of 58.4%. Wholesale leather craft margin improved from 55.2% to 56.8%. Retail leather craft gross profit margin decreased from 62.3% last year to 59.8% this year. The reason for the fluxation in gross profit margin in whole and retail is almost always sales mix and that is the case this quarter. Our wholesale store are not making those big sales to manufacturers in wholesale customers right now. So the bigger discounts given to those larger customers isn't happening. In the retail store, we're selling more leather goods to stores than we have in the past. And when that happens, that will pull the gross profit margin down. Because leather is normally what gets people in the door but it is also the item we make the lowest margin on.

Consolidated operating expenses were $6.8 million or 50.7% of sales in the current quarter compared to $7 million or 52.9% of sales last year. Wholesale leather craft reported operating expenses totaling 50.9% of it's sales versus 53.4% last year. Retail leather craft reported operating expenses totaling 51.5%, of it's sales currently compared to 52.5% last year. On a consolidated basis, we have reduced our occupancy cost due to the purchase of our building. Rent and utilities have decreased by $120,000 compared to the first quarter of 2008. We have cut back on dues and subscriptions and supplies resulting in cost savings of $60,000 from last year. We also had a one time moving expense last year of $110,000, that we didn't incur this year. And freight out shipping merchandise to customers is down $85,000. While any expense reduction is good, we will continue to look for ways to reduce expenses without sacrificing sales and customer service. Income from operations was $1 million for the quarter, up 44% compared to the first quarter of 2008.

Looking at the balance sheet, total assets have increased to $42 million. From December to March 31st, cash increased $800,000 at 7%. Account receivable increased $350,000, Inventory is down by $400,000. Current liabilities increased $950,000 due to an increase in accounts payable. Our debt consists of $3.8 million in bank debt for the purchase of our building. And $530,000 on a 36 month capital lease for the buildings (inaudible) track system. We have made principal payments totaling $460,000 on the bank debt and capital lease in the last 12 months. We've increase our total cash position by 35% during the last 12 months, from $8.6 million at March 31st '08 to $11.6 million at March 31 '09. During that same period, we've opened two new retail stores domestically, we repurchased $800,000 from our stock from our ESOP participants, and paid for roughly $1million in building improvements. Our currently ratio is 5.1%. EBITDA for the first quarter of 2009 was $1.4 million.

Some specifics on this Tandy retail stores, looking at store performance based on the year it opened, excluding the one store opening in 2009, gross profit margin ranged from 51% to 59%, and operating income range from 20.6% to a negative 3%. Looking at the individual stores, average monthly sales ranged from $84,000 per month to $10,000 per month. And operating margins range from 21% to a loss of 29%.

In this first quarter of 2009, average store sales per month was $30,000. Based on the year the store was opened, average monthly sales ranged from $40,000 to $21,000. There are 11 stores with operating losses as of the end of March, totaling $101,000. One was opened earlier this years. Four were opened in 2007. Three were opened in 2006. And three were opened in 2005. We have three wholesale stores with operating losses as of March 31st, albeit two of the three are very small, less than $1,000. Operating margins range from 17% to a negative 7%.

To summarize, the economic environment we're working in right now is tough. We need to be smart with our cash, with our inventory investments and with our investment in stores. We have opened one retail store so far this year and plan to open several more domestically before the year is over. We absolutely believe the opening of our UK store a year ago was the right decision and I think it's performance is solid evidence of that. We also believe our potential to expand further on the international front is very high. We see our biggest obstacle is people. People who understand our business philosophy and strategy and are trained not only to run a store but also to grow the business in whatever location we select. Also we are working hard to grow our international customer base to a level that would support additional stores.

Our retail business is growing in 2009, despite the state of the economy and we believe we can capitalize on that with some new stores. Our wholesale business is struggling and we expect it will continue to do so for the remainder of the year. It is important to note that despite the overall negative sales trend, we have increased our profits in three of the last four quarters, when compared to those same quarters a year earlier. As a result, we are very confident in our ability to maintain profitability regardless of what the economy does. That concludes my prepared remarks. Operator, we are now ready to take questions.

Thank you. (Operator Instructions). Our first question comes from the line of Graeme Rein from Bares Capital. Please proceed with your questions. Your mike is now live.

Good afternoon.

Hey Graeme.

Shannon, did I hear you right, 76% gross margin internationally?

Yes.

What is driving that? Is that currency or is that scarcity over there? I mean, how are they so high?

I'm going to let Jon discuss that since he has been over there.

Yes, I like Ron's answer better. It's astute management.

Yes, we are doing a hell of a job.

That's right. Well again I think everyone has said again, it's sales mix. Again, we sell items that have just high margins. We're not selling a lot of leather yet over there. But I expect it's due later and that will probably have an effect on it. But it's again, a lot of high gross items. A lot of hardware, needles, threads, conchos, buckles, so. It's just a good mix.

Okay, and how much inventory are you holding over there? Is it something you're shipping over consistently? Or do you have a base --

They have a regular that they ship over there. We're keeping about $250,000 U.S. dollars over there right now. We're still obviously trying to get our legs under it as far as understanding too with that market buys because it is a little different. We try and ship as much as we can by ocean. We have a regular schedule with our manager there to order. We use our point of sale system to take advantage mid max system we have set up in it to order by. We feel real good about it.

I believe that we're probably are about $100,000 too lean in the inventory, right now. But it will take us awhile to get there until we learn where we are going course sales just keep growing over there.

And Shannon you mentioned your constraints to growth was people. What does your (inaudible) managers look like right now?

Jon, do you know what the trainee, last time I looked I think we had ten or 12 trainees in the system. But from an international standpoint, they can train in the U.S. stores, but part of what made the UK operation so successful is we sent our Canadian President over there to run Tandy Canada for four years or whatever. And he knew what it, the way we wanted to do business, the way we like to do things and then he also knew what it takes to actually generate business from nothing. We went over there with a very small customer base, a very small mailing list. He had a real sense because he had grown the Tandy Canada chain and he worked with us so long. He knew what our philosophies and strategies were. He knew how to find customers out of nowhere. The U.S. store managers learned a lot of that, but we also feed the mailing lists and customer lists. And a good -- here is a list of people to call.

So part of what we need is not only somebody who knows our business and our strategies but can find customers out of nothing overseas. So you're looking at either somebody local who likes where they live or we have got to find somebody here who knows how the run our business here. And then is willing to locate internationally, potentially indefinitely. That is hard to come by right now. Hard to find people that are willing to relocate to a foreign country, even if they know our business very well. Our middle management team that is overseeing our stores, those guys are very happy to run, to oversea to U.S. stores. We don't have anybody beating down Jon's door, hey, I want to move to whatever country.

So, we got to train people there. We do have the training with the UK store, with the idea that we'll move them somewhere in the UK perhaps. But, where do we find a person that who can run the store in Germany and where do we find a guy that can run a store in Australia that really understands our business. We haven't found those people yet. And we are working on that. So, that's going to be the scary part. That is a long way away, that somebody over there that we are not convinced are going to do things the way we want them done. We had that in the UK which I think is part of the reason it is going so well.

Okay, that is helpful, and the inventory levels are you satisfied with where they are? What do you expect in the next six months? Do you see that going up or down?

Inventory overall?

Yes.

It is too low. $1 million maybe. We are actually about 5% to 7% below where we think we should be. It is working. We're okay. But it's probably given that retail seems to be running a decent sales game, if wholesale ever kicks in we're going to be in a world of hurt. But right now, yes, it's a little low, but given that it's hard to predict anything, I'm certainly not unhappy with it. But it's, it will as we move through the rest of the year, I suspect it will increase a little bit. Not substantially but a little bit.

Jon is helping us with that inventory. He just got back from the Hong Kong leather show. And I think he bought enough leather that we'll be pushing it up pretty quickly. We don't have to worry about that. Graeme, I'm sorry. (inaudible) He did a good job with the purchases he made.

Okay, great, and the last thing. Could you give any update on how that buy back is going in April? Are you able to get any shares? And what is the current share count?

The buy back has started off slow. The restrictions of when we can get in and buy prevented us from buying as much as I would have liked. I'll tell you in a minute, Graeme, what the total, what we ended buying back. It is not very much, I think we ended with about, we bought $30,000, $35,000 back so far. It is pretty paltry, but I think it could get better as we continue, as we move forward I hope. Yes, total shares we bought back was about $15,000 for a total of $40,000.

Okay.

So it is low. But it will take us a long time to buy a million shares at that rate. But hopefully it will pick up as we move forward.

Have you thought about a Dutch tender or something like that?

Yes, and if this is the kind of results we're going to get, then obviously we probably have to look at something different if we think that this is still the right thing to do. And still even at the prices that we're at, I think it is. So if it doesn't, we're 30, 40 days into it. If it doesn't get significantly better we'll have to look at something else, some other way to shake some shares loose.

Okay, thanks a lot.

There are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Sure. Thank everybody for their time today. I would also like to remind everyone about our 2009 annual meeting of stockholders to be held on May 12th at our corporate offices in Fort Worth. Please consider yourself personally invited. We'd love to meet you. On behalf of Ron Morgan, Jon Thompson, and the entire company, thank you for your participation on today's call. We appreciate your interest in the company. Have a good afternoon.

Ladies and gentlemen, this has concluded today's teleconference. You may disconnect your lines at this time. And thank you all for your participation. May you all have a wonderful day.