Tandy Leather Factory Inc (TLF) 2009 Q3 法說會逐字稿

Greetings and welcome to the Tandy Leather third quarter 2009 earnings results. 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, Ms. Shannon Greene, CFO for Tandy Leather Factory, Inc. Thank you, Ms. Greene, you may begin.

Good afternoon. Thank you for joining us for our third quarter 2009 earnings conference call. I am Shannon Greene, Chief Financial Officer for Tandy Leather Factory; and am joined by the other team members of our executive team, Jon Thompson, our Chief Executive Officer; and Mark Angus, our Senior Vice President.

I will 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 that when 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 2008 and subsequent Form 10-Q for a discussion of some of these risks. Copies of these documents are available from the SEC EDGAR system and from our Investor Relations office. Also, statements made today by us at Tandy Leather Factory are made as of this moment,a nd we disclaim any duty to update those statements.

I would give our third quarter results a satisfactory rating. Sales were up, gross margin was up. Operating income was up, and net income was up. However, operating expenses were also up. Inventory has increased, which is expected, and cash is down. However there are good reasons for the fluctuations in both cases.

Regarding sales -- at the risk of sounding like a broken record, sales in retail and international are up, wholesale is down. We released our October sales numbers last week, and once again we're running sound gains in retail and declines in wholesale. October is the 11th consecutive month of gains in the retail stores and the 16th consecutive month of sales declines at the wholesale stores. The declines at the wholesale stores have consistently gotten smaller as we have moved through the year, so if there's something positive to say about sales loss, that's it.

Compared to year-end 2008, cash has decreased by $1.2 million. That's because we repurchased a large block of our shares in August for $1.4 million. Inventory is up $960,000 compared to year-end 2008, and up $1.2 million compared to June 30th. The increase from the end of June to the end of September is normal as we're stocking for the Christmas shopping season. Our October sales certainly support that inventory increase as well.

Our wholesale Leathercraft division posted a sales decline of 2% for the third quarter. The wholesale stores were down 4% and the national account group was up 16%. Gross profit increased from 56% to 57%, but operating margin was down 20%. Our retail Leathercraft division reported a 13% gain for the quarter. The Tandy Leather retail store grew from 73 to 75 stores during the trailing 12 months ended September 2009 as margins increased from 60% to 61%, and operating income doubled.

Now for the numbers from today's press release. Third quarter consolidated sales increased 4%. Current quarter sales were $12.8 million compared to last year's third quarter sales of $12.3 million. Wholesale Leathercraft sales were $5.9 million this quarter, down 2% from $6 million in the third quarter last year. The wholesale stores posted a 4% sales decline, reporting sales of $5.1 million compared to $5.3 million in Q3 2008. Our national account group posted a 16% sales increase, reporting sales of $821,000 compared to $708,000 last year.

Our retail Leathercraft division reported sales of $6.4 million, a 13% increase over last year's third quarter sales of $5.7 million. Sales from the three new stores were $170,000 this quarter. The 72 comparable stores posted sales of $6.3 million, an increase of 10% compared to last year. Our international Leathercraft segment, which consists of the one store in the UK, reported sales of $342,000 for the quarter compared to $324,000 in last year's third quarter, a gain of 6%. Consolidated gross profit margin for the quarter was 59.4%, up from last year's margin of 58.3%. Wholesale leather crafts gross profit margin was 57.5% compared to 56.3% in Q3 2008. Retail Leathercraft gross profit margin was 61.3% compared to 60.3% in last year's third quarter. International Leathercraft gross profit margin for the third quarter was 67.2% compared to 69.3% last year.

Consolidated operating expenses were $6.7 million or 52.6% of sales in the current quarter, compared to $6.4 million or 52.1% of sales last year, an increase of $348,000 or 5%. Wholesale Leathercraft reported operating expenses totaling 51.5% of its sales compared to 49% last year. Retail Leathercraft reported operating expenses totaling 54% of its sales compared to 56.2% last year. International Leathercraft operating expenses for the quarter were 51.9% of its sales compared to 52.3% last year. Income from operations was $870,000 for the third quarter, up 14% or $106,000 compared to third quarter 2008 operating income.

On a year-to-date basis, consolidated sales match that of 2008's year to date sales. Sales in both years were at $39.4 million. Wholesale Leathercraft sales were $18.3 million this year, down 8% from last year's sales of $19.9 million. The decline is the result of a 9% sales decline at the wholesale store with sales this year of $15.8 million compared to $17.4 million last year, and a 5% sales decline for national accounts of sales this year of $2.5 million versus $2.6 million in 2008. Our retail Leathercraft division reported sales of $19.7 million, an 8% gain over last year's sales of $18.2 million. Sales from the three new stores were $431,000 this year. The 72 comparable stores posted sales of $19.2 million, an increase of 6% compared to last year's sales of $18.2 million. Our international Leathercraft segment reported sales of $943,000 so far this year, compared to $560,000 last year, an improvement of 69%. Consolidated gross profit margin for the year was 58.8%, a slight improvement from 2008's gross profit margin of 58.2%.

Wholesale Leathercraft's gross profit margin improved from 55.1% to 57.2%. Retail Leathercraft's gross profit margin decreased from 61.8% last year to 60.6% this year. International Leathercraft's gross profit margin decreased from 65.5% last year to 63.5% this year. Consolidated operating expenses were $20.1 million or 51.1% of sales in the current year compared to $20.3 million or 51.6% of sales last year, a decrease of $213,000. Wholesale Leathercraft reported operating expenses totaling 50.4% of its sales compared to 49.7% last year. Retail Leathercraft reported operating expenses totaling 52.1% of sales currently versus 54% last year. On a consolidated basis, the most significant expense reductions were rent and utilities, freight out, professional and consulting services, and moving expenses.

Income from operations was $3 million, up 16% compared to 2008. Looking at the retail stores, store performance based on the year open, gross profit ranged from 63% to 58%, and operating income ranged from 15% to 1%. Looking at the individual stores, average monthly sales ranged from $79,000 per month to $11,000 per month, and operating margins ranged from positive 22% to negative 30%. In the third quarter of 2009, average sales per store per month was $29,000. Based on the year the stores were opened, average monthly sales ranged from $39,000 per month to $21,000 per month. There are 15 stores with operating losses as of the end of September totaling $251,000. Two of the stores were opened this year. We have replaced store managers in eight of the stores, and we have moved one of the stores to a new location. All of our Leather Factory stores are profitable as of September 30 except for one, Mid-Continent Leather sales is posting average monthly sales of $37,000 this year and is not profitable, but this year's loss was only 25% of last year's loss. So we are headed in the right direction.

To summarize, I think we have done relatively well in an economic environment that is not really conducive to growing sales. We didn't do as well in the third quarter with expense control as we would have liked. However, the majority of the increase was in items that are hard to control in the first place, examples being employee healthcare cost and utilities. In addition, advertising expenses were higher in the third quarter, but you won't hear us apologize for that. We firmly believe that our advertising is what drives our sales. We can cut our advertising budget, but we're almost guaranteed a sales loss if we do that. Our cash will continue to trend up, and I believe our purchasing staff is to be commended for managing our inventory so well in an environment where sales are difficult to predict. Our October sales were great, especially in retail. We will do what we can to continue that trend through the remaining two months of the year. Based on the predictions for the holidays, that may be a tough order. With that said, I think it's reasonable to assume we will match last year's sales. As far as earnings, I think it's safe to say we should beat last year's earnings of $0.24. A reasonable number in my opinion is $0.28 to $0.29 for the year.

That concludes our prepared remarks. Operator, we are now ready to take questions. Operator, are you there?

Yes, I am, sorry about that. (Operator Instructions). Our first question comes from the line of Graeme Rein with Bares Capital Management. Please proceed with your question.

Good afternoon.

Hey, Graeme.

Shannon, can you talk about the breakdown of the wholesale sales? I mean is there any -- what is going on at the wholesale centers, and what is going on at the national accounts? Can you provide any insight there? And I don't know if you guys have broken down the percentage of wholesale sales between those two. Is that possible to provide that number?

In terms of the dollars?

Yes.

Yes, it's in there. As far as overall what is going on with wholesale, I still think it's pretty much economy driven. Our wholesale stores sell to small businesses, small manufacturers, mom and pop retailers, dealers, that kind of thing. And based on all of these discussions we have with customers, those are the hardest hit in the economy that we're in. They don't have a lot of cash tucked away. They live paycheck to paycheck, so to speak. They can buy merchandise, or buy product, as they sell what they have. And if they are not selling as much, they are not buying as much. And we see that consistently, and have for the last two years with the wholesale customers. The bigger companies probably are going to do just fine. These are the small guys that have no savings -- maybe even if they had a small bank line, they are having a hard time maintaining that because of the credit situation. Even credit cards, the cost of credit cards is such that they are trying not to put a whole lot on credit card as far as credit card purchases either. So there is nothing in our business that is a problem with our product or customer acceptance. It is strictly those small mom and pop customers, which are our bread and butter on the wholesale side, just are not doing well. And until they get more comfortable, and start seeing their product in their store and their little factories start turning faster, they are going to be very careful and very conservative of what they -- in terms of when they buy product, how much they buy. It's going to take a while for them to feel like things have really recovered to a point that they can get back to buying product like they used to.

Okay. Have you guys experimented with pricing at wholesale or the retail level, either up or down? Have you done any experiments there?

Again, suppliers do all of our -- really all of our selling, and that's where we put those pitches to those guys, we break out our mailers by segment, and we do mail to that wholesale segment. So we're able to hit them all the time. Matter of fact, we're coming up on a period of time where we ran a great sale last year to that segment, and sold a lot of our saddle skirting leather. So we're going to try to anniversary that again this here. But that's where we try to hit them, in the specific mailing, because we do target everybody by group or by category.

Okay. That's helpful. And in terms of expansion, I mean, are you waiting to see any traction on the sales side or are you still constrained in terms of how many managers you have ready to go? Can you talk about what you are thinking in terms of expansion for the next 12 or 24 months?

We're still looking at trying to get four stores open again next year, trying to get enough people in. I keep hearing with the economy that people are looking for jobs. Our biggest problem is when we tell them they must relocate, almost everybody pulls their hat back. People just don't seem to want to move. But we have plenty of job openings if people want to apply. We could probably get another six to eight open next year if we had the people.

Okay. Shannon, do you have the share count? It is about 10.15 million?

Yes, 10.166 million.

Okay. Thank you.

And, hey, Graeme, in terms of asking the dollar breakdown on the stores versus national accounts -- look at the press release today where the selected financial data is. Those tables break down the dollars of the -- in wholesale the stores versus national accounts.

Okay. Thank you.

You bet.

(Operator Instructions). There are no further questions in the queue. I would like to hand the call back over to management for closing comments.

On behalf of Jon Thompson, Mark Angus, and myself, thank you for participating in today's call. 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, and have a wonderful day.