Tandy Leather Factory Inc (TLF) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Tandy Leather Factory's fourth quarter 2009 earnings conference call. It is my pleasure to introduce your host, Ms. Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Thank you. You may begin.

Thank you. Thank you for joining us for our 2009 earnings conference call. I am Shannon Greene, Chief Financial Officer. I'm joined today by Jon Thompson, CEO, and Mark Angus, Senior Vice President. We will be discussing our fourth quarter and year end 2009 results as well as plans for 2010.

Before we get started, I'd 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 matter foreseen. Please see our Form 10-K for 2008 and subsequent forms 10-Q for the 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 are made as of this moment and we disclaim any duty to update those statements.

2009 was a respectable year for us. Our sales increased, our gross profit margin increased, and our earnings increased. We opened two new retail stores in the US. Given the way we started out, we are pleased with our annual results. The last half of the year certainly made up for a weak first half. As most of you know, we had a change in leadership in the middle of the year, and from everything I've seen, we didn't skip a beat. Jon has great vision for this company and I am excited to see what we can accomplish under his leadership.

In highlights from 2009, we achieved a 4% sales gain in 2009 compared to 2008. 2009 was our 13th consecutive year of operating profits, increasing 26% from last year. Our consolidated gross profit margin improved for the 13th year in a row. We were profitable for 2009 for the 11th consecutive year, reporting a 30% increase in earnings, compared to 2008. Our UK store is doing extremely well. It is now two years old, and continues to report sales gains month after month, which confirms our belief in the potential of our Company beyond the borders of South America. How about North America.

We set another record with our cash, ending the year with the most we've ever had, about $13 million. That's after spending almost $3 million in debt service, capital expenditures and stock repurchases. We have debt on our balance sheet totaling $3.7 million, all related to the purchase of our corporate headquarters. We would pay it off today if we could do so without incurring a prepayment penalty.

As I mentioned in today's press release, we have discontinued the operation of Robert Cushman and Company, which is presented as our other segment in our SEC filings. Robert Cushman is a wholly owned subsidiary that distributes hat bands and trims to hat manufacturers. You all know that our priority and potential for growth is in our retail store chain and we have stated numerous times that Robert Cushman doesn't really fit into our future plans. Robert Cushman's declining sales prompted considerable analysis and discussion which brought us to the conclusion that the timing for discontinuing the Robert Cushman operation was appropriate. Its operations are immaterial to our total Company and have little impact on our overall financial performance. The financial information presented in today's press release and discussed on this call excludes all Robert Cushman information, with the exception of net income, which includes both continuing and discontinued operating results.

Quick run-through of the numbers for fourth quarter an the year. For the fourth quarter, consolidated sales increased 13%. Sales were $15.6 million this year, compared to $13.8 million in 2008. Wholesale Leathercraft sales were $6.8 million this quarter, compared to $6.5 million a year ago, an increase of 5%. Within the wholesale Leathercraft division, the wholesale stores reported quarterly sales of $6.2 million in 2009, up $349,000, or 5% for the fourth quarter of 2008. Our national account group reported quarterly sales of $664,000 for the quarter, compared to $647,000 in the prior year fourth quarter, an increase of 3%.

Retail Leathercraft sales were $8.4 million for the quarter, compared to the prior year of $7 million, an increase of 20%. International Leathercraft sales for the quarter were $364,000, up $88,000 or 32% from 2008 fourth quarter sales of $277,000. Consolidated gross profit margin for the quarter was 61.8%, up from 61.3% last year. Wholesale Leathercraft gross profit margin increased from 60.9% last year to 62% this year. Retail Leathercraft gross profit margin increased slightly from 61.2% in 2008 to 61.5% this year. International Leathercraft gross profit margin for the fourth quarter was 63.8%, down from last year's fourth quarter of 71.4%.

Consolidated operating expenses increased $645,000 for the fourth quarter, but decreased as a percentage of sales, to $7.6 million or 48.5% of sales, compared to 50.3% of sales last year. Wholesale Leathercraft reported operating expenses totaling 50.5% of its sales versus 50.1% last year. Retail Leathercraft reported operating expenses totaling 46.9% of sales compared to 50.2% last year. International Leathercraft operating expenses totaled 48.7% of its sales this year compared to 56.6% last year. Income from operations was $2.1 million for the quarter, an increase of $562,000 or 37%, compared to the fourth quarter of 2008.

For the 2009 annual results, consolidated sales were up 4% from 2008. Sales were $54.5 million this year compared to $52.5 million last year. Wholesale Leathercraft sales were $25.1 million, versus $26.4 million a year ago, down 5%. Within the division, the wholesale centers reported sales of $21.9 million, a decrease of 5% from 2008 sales of $23.2 million. The national account group reported sales of $3.1 million compared to $3.3 million in 2008, a decrease of 3%. Retail Leathercraft sales were $28.1 million, compared to last year of $25.2 million, an increase of 11%.

We opened two new retail stores in 2009. The new stores for 2009, which are these two plus one opened during 2008, contributed sales of $606,000 in 2009. The 73 comparable stores contributed sales of $27.5 million in 2009, which translates to a same store sales gain of 9% over 2008. International Leathercraft sales were $1.3 million for the year, compared to last year of $836,000, an increase of 56%. Consolidated gross profit margin for the year is 59.9%, improving from 2008's consolidated gross profit margin of 59.2%.

Wholesale Leathercraft gross profit margin increased to 58.5% this year, compared to 56.5% last year. Retail Leathercraft gross profit margin was 60.9%, down from 2008's gross profit margin of 61.6%. International Leathercraft gross profit margin was 63.6% for 2009, down from 2008's gross profit margin of 68.4%. Consolidated operating expenses were $27.5 million, or 50.5% of sales in the current year, up $489,000 compared to $27 million or 51.5% of sales last year. Wholesale Leathercraft reported operating expenses totaling 50.5% of its sales versus 59.8% last year. Retail Leathercraft reported operating expenses totaling 50.6% of its sales currently compared to 52.9% last year. International Leathercraft sales were 50.1% in 2009 versus 61.8% last year.

Income from operations is $5.1 million this year, a 27% increase over 2008's operating income of $4 million. Total assets grew 6% in 2009, compared to the end of 2008. As we ended the year with total assets of $43.3 million. We held $12.9 million in cash at year end including certificates of deposit, a 19% increase from the end of 2008. Accounts receivable increased by $20,000, inventory increased by $850,000. Current liabilities increased by $700,000. We paid down $530,000 of debt and total liabilities increased by $260,000. Our debt, which consists of the bank date related to the real estate purchase is $3.7 million. Our current ratio is 5.6 and EBITDA for 2009 was $6.4 million.

Regarding the Tandy retail stores performance in the fourth quarter. Sales are $8.4 million, gross profit, 61.5%, operating income, 14.7%. In looking at the store performance based on the year opened, gross profit margins ranged from 59.2% to 62.2%, which is right in line with our store model. And operating income ranged from 15% to 3%. Looking at the individual stores, average monthly sales in the fourth quarter ranged from $105,000 a month, to $16,000 a month. Operating margins ranged from a positive 22% to a negative 12%. For the fourth quarter of 2009, average monthly sales per store was $37,000.

For the year, average monthly sales per store was $31,000 which again is right in line with our store model. There were 10 stores with operating losses in 2009, totaling $187,000. Our Leather Factory stores are comfortably profitable except for Mid-Continent Leather, and it's getting closer to profitability. Our balance sheet is in really good shape. We increased our cash holdings in 2009 by almost 20%.

Receivable balance is up less than 2% at the end of 2009, compared to the year-end 2008, given our sales have increased. We believe our inventory is at the right level as it is within 2% of our internal target. I think we've done well managing operating expenses in 2009 as they increased by less than 2% compared to 2008. Compared to 2008, significant expense increases are employee compensation and benefits, depreciation and property taxes. We also wrote off some old computer equipment which resulted in an additional expense of $365,000 in the fourth quarter. Significant expense decreases were in random utilities, professional fees and outside services.

Looking at 2010, we are not providing specific guidance for sales and earnings yet, but I will tell you that our goal is to have higher sales and higher earnings in 2010 than we had in 2009. Our sales so far this year have been good as we are up 6% through the end of February. Retail same store sales are up 11%. And wholesale same store sales are up 5%. As we announced last week, we opened a new retail store in Saskatoon, Saskatchewan, and we are looking at more locations in the US as well as overseas, but are not prepared to provide a definite time line as to when the next store will open.

At the risk of sounding like a broken record, the pace at which we open stores is contingent on our ability to hire and train qualified store managers. We ask a lot from our managers and while there are plenty of unemployed people available, finding those who want to commit to our philosophy and strategy seems to be a challenge at times. As most of you know, we have been trying to buy back some stock as we believe this is a good use of cash given where the price of the stock is. The buyback started in April 2009, and as of the end of February, we bought a total of 63,000 shares at an average price of $3.29. Certainly not what we were hoping for in terms of the number of shares purchased. The current program allows us to purchase a total of 1 million shares at a maximum price of $3.70 per share until December 2010.

Last thing before we go to questions, our annual meeting of stockholders is scheduled for May 18th at 10 in the morning, at our corporate offices here in Fort Worth. The meeting is open to the public and Jon, Mark and I would welcome the opportunity to meet you. Please consider yourself personally invited. That concludes our prepared remarks, we appreciate your time today and would be happy to answer any questions you may have. Operator, we are now ready to take questions.

Thank you. (Operator Instructions). One moment, please, while we poll for questions. Our first question comes from the line of Graeme Rein with Bares Capital Management. Please proceed with your question.

Good afternoon.

Hey, Graeme.

Jon, could you talk a little bit about the international expansion, sort of which areas you might be looking at, what the time frame might look like in terms of expanding there? Could you just kind of talk generally about your thoughts?

Right now, just like anything else, really we're just trying to look where we have people that we could work with. We were fortunate in England that we had Roy Fisher that came from one of our dealers and we're really looking for the same kind of people anywhere that we would go. I just got back from a trip to Spain visiting two dealers there and we were talking again to people just like them to see if there's any interest in going to work for us and opening units, and if we can find somebody that's ready to go, we'll probably just head in that direction. That's really where we're kind of pinned down to. So if we can find the people, we're ready to do something. We're continually looking and talking. When I head to Hong Kong, I'll be meeting with some more people again over the same thing but I don't have anything definite at this time.

Okay. Shannon, on the gross margins, they seem to keep inching upwards. Where do you kind of see them leveling out? I understand it depends on the mix between retail and wholesale. But what are your expectations for the next year or two? Is 60% better or could you get as high as 64, 65%?

I don't think we'll ever get that high. I think we've been talking for several years and I keep telling you we're getting real close to hitting the max but if Tandy's going to -- if the retail stores are going to drive the sales mix, they are all sitting somewhere between 59 and about 64%. We've got a couple of stores that are exceptional with gross margin but the average, what our goal is 60% out of the retail stores. So we are sitting right on that right now and I -- frankly, I don't see it getting much higher. We do enough wholesale business even though Leather Factory sales have been down, we do enough wholesale business, I don't think it can get much higher. Very low 60s at best. I think we're about there. I don't ever see us running a 60 -- a consolidated 64, 65% margin. I think that's impossible.

Okay. I know you guys were very cost conscious this past year. Are there any expenses that might be coming back that you sort of cut this year that might be coming back in more healthier times?

No. I don't think so.

Okay.

We will continue, Jon will continue the mantra that Ron had, which is to keep expenses as low as possible, regardless of what sales are doing, because that's the way you maximize earnings. So no, we did not delay or postpone or stop something temporarily with the idea of adding it back when sales got better. We don't have any of that. I think you're going to see the same thing continue on with holding operating expenses as tight as possible. There's nothing out there in the wings that we're going to add back if sales continue to go well.

And then the last thing. The Robert Cushman, do you have any sort of plan lined up? Is there a potential buyer for that piece of the business? Can you talk about your thoughts there? And then also I know at one point, you were trying to sell some of the property that you bought. Has there been any progress there? What's kind of the status on that?

Robert Cushman part, we actually had worked with our partner in Taiwan, actually took a lot of pieces of machinery of that. We were working hand in hand with them to do a lot of the hat bands so really at this time there's nothing really left at this time to sell off, so there are no plans to make another attempt to pass that on to someone. Again, the same problems would be for them as we have, problems with the metals and the content. So it's just right now, it's just really -- we don't foresee anything happening with that.

Okay. So that's just going to fade away?

Yes. It really already has. You can see from where we posted, it's already actually gone.

We think that industry's shrinking. We've seen it shrink over the last couple of years, as evidenced by our sales. The name we think has value and we will continue to hang onto that. Certainly we've got the rights on that. But in terms of there's something to sell to someone, there's really not. It's just wound down to the point there's just not much there anymore.

And on the land, we haven't had anybody come in, approach us with anything probably in the last six months and the ones we had a year or so ago were all too low, and we're sitting on that gas lease anyways that's on the back end of that property, so --

Well. Thanks a lot and congratulations on a good year.

Thank you.

Our next question comes from the line of Matthew Miller with [Chantasy Holdings]. Please proceed with your question.

Hi, good afternoon everyone. I just wonder if you might be able the to provide a little bit more color on the issue with finding the right people. I know that's been something that you've been working on for a little bit now, but I wonder if you could just really help us really try to understand that, a little perplexing, given the state of employment. So I just wondered if you could provide any more color on that. What is it that the people that you're able to talk to just aren't able to grasp with the philosophy?

The main thing for us is you've got to understand when we ask someone to go to work for us, we ask them to be able to move anywhere in the United States. That weeds out probably 97, 98% of the people. Now, a lot of people just do not want to pick up and move. After that, the ones that we do get, probably a third of those fall out through training, and decide it's not for them or they don't like it. So it's really more so the fact that people just don't want to move. That's probably why we don't get the big numbers, and I still find that kind of interesting because of course like I said, if someone's looking for a career or a job, I guess like I said, I would just figure would be more interested in probably moving up and through a Company. But it doesn't seem like that's so.

And are you actively engaged in any advertising on that side of things? What is the recruitments process at this point?

We do keep ads up in a couple places on web sites and we keep some in local papers. We have our regional managers that are training applicants, and so we're always looking for people, and even on our web site there's a place for people to apply through. So we're always trying to get applicants and we could open more units if we had people that were ready, willing and able to move anywhere that we would want to put them.

Shannon, I think we've spoken over the years about the Company's belief that there could be as many as 120 or so, 100, 120. Does this give you any pause with that long-term outlook, given the difficulty with finding folks?

No, the markets are still there and as John's indicated, the international markets are there as well. What we run into is we could open stores and put some young people who are not sufficiently trained in those stores, but then we're going to run sales losses and profit losses and nobody's going to like that. So there's a balance there of how we can open stores with the greatest chance of success, and the three of us, Mark, Jon and I, sit around and talk about this all the time. What do we need to do to get the right people in so that we can get into those markets because every day that goes by is just one more day that we're not in that market and we're not getting those sales. But it hasn't changed anything. The 100 to 120 stores in North America, we absolutely still believe that.

Beyond the North American borders, the potential is even greater, but we've got to have people that will do the job we want done because we think we're good at it and we want people to learn the way we do things, buy into the philosophy, believing that they can make good money if they do the things we're asking them to do in addition to as Jon said, move, and in this -- when my -- when our parents were working age, getting relocated wasn't nearly as big a deal as it is now. But it's hard to find people in the US that are willing to move anywhere, and John fights that with the store ops team all the time, trying to find those people.

So yes, the markets are still there. We're still looking at 100 to 120 stores. Our issue is we can open 120 stores, but if half of them aren't profitable and run sales losses, we're going to get beat up for that. We want profitable stores. We want good earnings for everybody. So it's a very delicate balance, something we wrestle with all the time.

And I know I've taken quite a bit of time, but if I may, just one other question. Really, I guess the question, kind of a Board type question, but you're now just shy of $13 million in cash. The announcements with the buybacks thus far have seemed to provide a floor, if you would, on the stock. I wonder if you're able to share a little bit of what the Board is contemplating with, first, that strategy of the buyback and then if there's any contemplation of any other sorts of capital allocation decisions, whether it might be a dividend or anything of the nature, given what is perhaps a slower growing store base going forward.

Obviously, we do have the buyback out there at 370 and we've got that through the end of the year. As Shannon mentioned, we have bought back some stock. Our plans for this year in talking with the Board is we have -- we do have plans in mind, so that obviously we would like to make sure that we're -- we do have cash available for things that we do have planned for expansion and normally we've been expanding obviously out of our own pocket. We're not borrowing money to do that. And our concern is if we're going to expand internationally, that it's going to require a little more cash because in some of these areas we haven't been in before.

We have a lot of people that we would like to work with. We have a lot of areas we have been looking in. Like I said, I just got back from Spain myself. So we would like to again look at all of our options with the people that we think could do us the most good with that cash and that's right now that's where we're headed. Trying to pump that back into the business just by opening.

I'm sorry.

Just trying to pump that cash back into openings, preferably internationally right now.

Right. If I might just follow up again, is something like as revolutionary as a tender offer, are things like that, do they get tossed around in terms of any consideration? Because as I said, it appears as though you really have more than enough cash to expand both domestically and internationally. And to date, the buyback as I said has really just kind of put a floor under the stock. Is there any consideration of anything more aggressive in that area?

The Board's talked obviously about the size. We've talked about dividends. We've talked about the stock and the amount of stock that's still outstanding. We do definitely feel like it's still a great buy, certainly at the price it's at. If things continue the way they are, it will continue to be a great buy. So we're going to keep our eye on the price and see where we're at with our earnings through the year and who knows, I mean, there may be an adjustment in that price many we have . We have to wait and see.

I appreciate the comments. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of [Doug Joseph], private investor. Please proceed with your question.

Good afternoon. Good job.

Thank you.

Thank you.

And getting back on that -- sort of the balance sheet issue and the buyback and -- I believe on February 22nd, there was a large sale or purchase, about 300 -- there was over 326,000 shares that traded, and just curious as to how that would -- whether or not the Company was -- had an opportunity to purchase that chunk of those shares that exchanged hands on that day?

Doug, as far as we -- we think we know who the buyer and the sellers were. We were not involved in any of it. It all happened -- we saw it the same time everybody else did. Don't know how it was done. Don't know what the thought process was. It just happened.

Our buyback allows for -- we can buy a block of up to 100,000 shares per week. Again, we're maxed out right now at $3.70, which is what it is. Although if I remember right, I think that trade went at $3.61 or something but we were not approached as a possible buyer. It was all done outside of us between a couple of parties, from what we gather and I don't have any hard and fast evidence on exactly who it was anyway.

So if there were over 100,000 shares where someone had a block and they approached you, would you be able to purchase those shares at the $3.70 or below?

We could, yes, whatever the market price is, we can buy up to 100,000. If a person had 300,000 shares, it would take us three weeks to get their shares. The most we can buy in a block is one block trade a week, maximum 100,000 shares per week. It would take us several weeks to do it but yes, we certainly could.

Could you talk a little bit about the 2010 depreciation and CapEx and where you sort of see those numbers falling into place?

I don't think -- well, we did clean up -- we had some old computer equipment on our books that had another year or so of depreciation and amortization left. That was part of what we went ahead and got rid of in the fourth quarter which will translate into a reduction of depreciation and amortization expense in 2010 of about $200,000. Other than that, depreciation in the last couple years is higher than what we've historically seen but now we've got a building we're dealing with. That's what's causing the increase they, if you look over the last five years or so but we'll drop depreciation expense $200,000 in 2010.

CapEx, we're not really buying anything of note, except for computer equipment. Workstations and servers and replacement type things, my estimates are somewhere between $500,000 and $600,000, probably for CapEx for 2010. And 95% of it's based on what I know right now is going to be in just computer system stuff, equipment, not even software and licensing and all of that. It's just hardware. But other than that, we don't have -- we are not CapEx intensive. The stores don't need a lot of fixtures. We certainly are outfitted well here. There's just nothing significant that would really throw a wrench in kind of expectations as far as CapEx goes for 2010.

Okay. Great. Again, the Company is cash flowing very nicely and it's -- we're all sort of interested in seeing some of that cash allocated in good ways.

Absolutely. Well, you and me both.

Well, thank you.

Thank you very much.

Thank you. Our next question comes from the line of [Len Fuchs] with Tandy Leather Factory. Please proceed with your question.

Did you ever think of raising the entry level salary of potential managers?

We actually have done that over the past few years so we have increased that and we have actually given -- we based the salaries for areas on the West Coast and East Coast that are higher cost of living, so we have adjusted those based on where they're living and the abilities of the person that was going in there, so yes, we have brought them up over the years. And then again, you've got to remember, a lot of our guys, we want them though to be hungry and we want them to earn a bonus, which is supposed to be 50% or more of their pay. So they're supposed to want to be able to achieve a lot of their earnings themselves and have that ability to control that themselves.

Right.

Better salesmen, obviously those people make great money. The ones that don't like the to get on sales obviously don't make any money. Yes, we have increased that pay.

Thank you.

You're welcome.

Thanks, Len.

Thank you. Ladies and gentlemen, at this time there are no further questions.

On behalf of Jon Thompson and Mark Angus I would like to thank you for participating in our 2009 earnings conference call today. Please remember our annual stockholder meeting on May 18th in Fort Worth, and we look forward to speaking with you again next quarter. Have a good afternoon.

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