Tandy Leather Factory Inc (TLF) 2009 Q2 法說會逐字稿

Greetings, and welcome to the Tandy Leather Factory, Inc. second quarter 2009 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, Mrs. Shannon Greene, Chief Financial Officer, for Tandy Leather Factory, Inc. Thank you, Ms. Greene, you may begin.

Thank you. Good afternoon, and thank you for joining us for our second quarter 2009 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory, and am joined the other two members of our senior executive team, Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice 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, 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 2008 and subsequent forms 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's Edgar system and from our Investor Relations office. Also statements made today by us as management of Tandy Leather Factory are made as of this moment, and we disclaim any duty to update those statements.

Our second quarter has mixed results. An overall sales decline of 5% but an increase in gross profit margin and earnings. Regarding sales, the retail stores continue to report positive results and the UK store is growing nicely but there is continued weakness in sales at our wholesale stores. In short, we see positives and negatives in our performance this quarter.

We released our July sales numbers earlier today and once again we are running gains in retail and declines in wholesale. July is the eighth consecutive month of gains at the retail stores, but the 13th consecutive month of sales declines at the wholesale stores. We still believe that the weakness in wholesale is driven by the economy not something we are doing internally.

Compared to year-end 2008 our cash increased by almost $400,000 which doesn't sound like very much but we were able to increase our cash as well as pay down $700,000 of debt and open two new retail stores this year, one in the first quarter and one in the second quarter.

Our wholesale Leathercraft division posted a sales decline of 15% for the second quarter. The wholesale stores were down 12% and the national account group was down 32%. Gross profit increased from 55% to 57%, and operating margin was up 36%. Our retail Leathercraft division reported a 6% sales gain for the quarter. The Tandy Leather retail store chain grew from 72 to 75 stores during the trailing 12 months ended June 2009. Gross margins decreased from 62% to 60%, but operating margin improved by 13%.

Now for the numbers from today's press release. Our second quarter consolidated sales decreased 5%. Current quarter sales were $13.2 million compared to last year's second quarter sales of $13.8 million. Also Leathercraft sales were $6.1 million this quarter, down 15% from $7.2 million in the second quarter of last year. The distribution centers posted a 12% sales decline, reporting sales of $5.3 million compared to $6.1 million in the second quarter of 2008. Our national account group posted a 32% sales decline, reporting sales of $785,000 compared to $1.1 million last year. Our retail Leathercraft division reported sales of $6.6 million, a 6% increase over last year's second quarter sales of $6.2 million. Sales from the three new stores were $125,000 this quarter. The 72 comparable stores posted sales of $6.5 million, an increase of 4% compared to last year.

Our international Leathercraft segment, which consists of the one store in the United Kingdom, reported sales of $308,000 for the quarter compared to $194,000 in last year's second quarter, a gain of 58%. Consolidated gross profit margin for the quarter was 58.6%, up from last year's margin of 57.8%. Wholesale Leathercraft gross profit margin was 57.3% compared to 54.1% in the second quarter of '08. Retail Leathercraft gross profit margin fell from 62.5% in last year's second quarter to 60.8% in this year's second quarter. International Leathercraft gross profit margin for the second quarter was 47.6%, down from 57.9% last year.

Consolidated operating expenses were $6.6 million or 49.9% of sales in the current quarter compared to $6.9 million, or 49.9% of sales last year. A decrease of $320,000 or 4%. Also Leathercraft reported operating expenses totaling 48.9% of its sales versus 46.8% last year. Retail Leathercraft reported operating expenses totaling 51.1% of its sales compared to 53.3% last year. International Leathercraft operating expenses for the quarter were 51.5% of its sales compared to 61.8% last year. Income from operations was $1.1 million for the second quarter, up 5% or $50,000 compared to the second quarter of 2008.

On a year-to-date basis, consolidated sales decreased 2%. 2009 sales are $26.6 million compared to 2008 sales of $27.1 million. Wholesale Leathercraft sales were $12.4 million this year, down 11% from last year's sales of $13.9 million. The decline is the result of a 10% sales decline at the stores, with sales this year of $10.7 million compared to $12 million last year, and a 13% sales decline for national accounts, with sales this year of $1.6 million versus $1.9 million in 2008. Our retail Leathercraft division reported sales of $13.2 million, a 6% gain over last year's sales of $12.5 million. Sales from the three new stores were $260,000 this year. The 72 comparable stores posted sales of $12.9 million, an increase of 3% compared to last year's sales of $12.5 million.

On international Leathercraft segment reported sales of $601,000 so far this year compared to $235,000 last year, an improvement of 155%. Consolidated gross profit margin for the year was 58.5%, a slight improvement from 2008's gross profit margin of 58.1%. Wholesale Leathercraft's gross profit margin improved from 54.6% to 57%. Retail Leathercraft's gross profit margin decreased from 62.4% last year to 60.3% this year. International Leathercraft's gross profit margin improved from 60.3% to 61.4% this year.

Consolidated operating expenses were $13.4 million or 50.3% of sales in the current year compared to $13.9 million or 51.4% of sales last year, a decrease of $561,000. Wholesale Leathercraft reported operating expenses totaling 49.9% of its sales, the same as last year. Retail Leathercraft reported operating expenses of 51.3% of its sales.

Ladies and gentlemen, please remain on the line, it seems we are having technical difficulties. Back to Shannon Greene.

I have no idea what you heard last. I will summarize the end and then we will take questions. I think we have done a good job of managing the things we can control, namely expenses. Conservative management will continue to pay off for us even if it doesn't make for a very exciting story. I would like to think we are compensating for that with our cash accumulation and our increased profits. The rest of 2009 will continue to be tough from a sales perspective, particularly at the wholesale level. But I think we will continue to perform relatively well despite the fact that sales are not where we want them.

We accomplished what we wanted to do in the second quarter, which was do what we could to get sales, maintain reasonable inventory levels and continue to hammer on expenses. We expect inventory to increase some in the third quarter but not excessively, and we will continue our efforts at expense control and reduction in order to maximize profit.

Operator, we are now ready to take questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Graeme Rein with Bares Capital, your line is open. You may proceed with your question.

Good afternoon. I think you guys have done a great job with the expense side of the equation. Congratulations on that. I was curious as to how the sales are going in the wholesale side of the business. Can you provide a little bit more detail? What is actually going on within the national accounts? Is it customer attrition, is it just carrying less SKUs? Is the end customer of the national accounts weak? Do you have an idea of what might be pressuring those revenues.

It sounds like to me you're asking multiple questions because to me wholesale accounts are just accounts here in the US and Canada that are maybe belt makers or saddle makers. So let me understand which ones you are asking about because national accounts are also like crafts accounts, so which side of that are you interested in.

I am interested in Michael's and some of those larger retailers who are your customers.

Obviously they carry very limited lines of our product. And again, we we do have competition because anything that we make, they can go and knock off overseas. They run our numbers constantly. If they're good they keep us, if they don't they knock us out. We were knocked out just not long ago from Wal-Mart Canada, so that was one more down off the list.

So it is something we do expect, it is not really our main focus as obviously our stores and opening internationally are going to be our big focus. But those guys are carrying 20, 30 products out of 3,000. And there's nothing that they really, that we give them, that they couldn't go get overseas, and we do have some small competitors that can make it for them here in the USA also. So, I don't know, it is not really our focus, I think, and again we can't really second guess what they're thinking. Michael's has been good, JoAnn has been good to us. It has been great but we don't know how long that will last.

The other thing, Graeme, as far as the national accounts on the second quarter comparison, they had a 32% sales decline in second quarter this year compared to last, but then last year they had a 34% sales gain over the quarter, the second quarter of '07. Remember that we lost Wal-Mart USA in March of 2008. In the second quarter of '08 we sold off to a couple of unique customers, we sold off in one time sales a lot of that Wal-Mart inventory that we were carrying. So I don't know that it's going to make you feel any better but in terms of the big decline for second quarter national accounts, part of that is they were up against a really tough comparison a year ago because we got some unique sales second quarter getting rid of some of that inventory that we'd been carrying for Wal-Mart USA.

The other thing about national accounts is a lot of it is timing. If we get orders toward the end of the quarter, maybe we get them out in the quarter or maybe they fall into the next quarter. So depending on how that all falls out, we can have gains and losses quarter to quarter comparisons just simply because of timing. But as John said, Michael's is a good customer, JoAnn's is a good solid customer. We are not having any issues with them in terms of major fluctuations in terms of their consistent buying, but it depends on the timing of their orders and how quickly we can turn them around. So that causes fluctuation quarter to quarter that makes it a little bit hard to look at when you are just analyzing quarter fluctuations.

That's helpful. Jon, have you seen anything in the current quarter that would affect your plans to expand internationally? Is managers still the constraint there? Can you just talk about the environment overseas?

Again for us overseas, finding people that we can partner with like we did in the UK, we basically went to our clients and we were able to at least hire somebody there. I think that's still going to, again, be a real key. We have met some good people. We just got back from a trip to Buenos Aires, meeting with some possible clients that we were hoping to set up with. But, again, just like that trip, I see some good possibilities. It's going to take, I think a lot of work. Again, yes it is going to take some more people here to back us up to be able to take care of those countries and expand if we're going to add Tandy stores like in the UK. We've got the Leather Factory running well. We just need to get some more Tandy stores open over there. There's still a lot of possibility.

While I was there, I had a gentleman from India that's in the same business, asked why we couldn't do the same thing there in India. And of course I had to tell him the same thing. We have our hands full right now, we would love to come to India, but we are trying to get all these other things worked out now.. Lots of possibilities, just people right now is the constraint.

Okay. And then the last thing, the obvious question, when you look at your financials is what are you going to do with cash. It looks like the buyback was very slow. Any thoughts of a special dividends or paying down the debt? Can you walk through that thought process?

As far as the buyback is concerned, yes, it has been really slow, disappointing at this point, that we haven't gotten more activity there. Through the end of July, we are at a little over 25,000 shares that have been bought so far, which is nothing. Hopefully that will continue to improve.

As far as the debt, we did pay off the one capital lease in the second quarter on the air conditioning system we put into this building, about $0.5 million. We could do that without any kind of penalty so we have paid off all the debt we can without incurring prepayment penalties. So the remaining debt is the bank debt with Chase. And I want to say May of 2012 before we can start making extra payments or pay it off without incurring a penalty. And, frankly, I don't want to pay the penalty to get out of it at this point. The penalty is too stiff. I don't think we can justify that.

So we have done everything we can with debt at this point. We will keep hammering on that. If the buyback doesn't get better over the course of the year, the board will be back with the task of figuring out does a dividend make sense, should we do some sort of debt tender, something. And otherwise I guess we are stuck with accumulating cash and trying to figure out where to put it to maximize some sort of return without jeopardizing the capital.

Okay. And so are saying the prepayment penalty would be greater than the money you would save by paying off that debt because the rate you are earning on the cash is probably much less than the rate you are paying on the debt? You are saying the prepayment penalty would --

It evens that up, if doesn't exceed it a little bit. The penalty will get less as we get closer to that magic May 2012 date. After that, of course we can pay off anything we want to, prepay it as much as we want to, or pay the whole thing off with absolutely no penalty whatsoever. Right now, yes, by the time you factor in the penalty, we don't come out any better. We just take a huge hit to earnings with the penalty we will have to pay.

Okay. Thanks for your time.

Thank you, Graeme.

(Operator Instructions). Mrs. Greene, there are no further questions at this time. I would like to turn the floor back to you for any closing comment.

On behalf of Jon Thompson and Mark Angus and myself, thank you for your participation in today's call. Have a good afternoon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you, very much, for your participation and have a great afternoon.