Tandy Leather Factory Inc (TLF) 2010 Q1 法說會逐字稿

Greetings. Welcome to the Tandy Leather Factory first quarter 2010 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, Shannon Greene, CFO for Tandy Leather Factory. Thank you, Ms. Greene, you may begin.

Thank you. Good morning, everyone. Thank you for joining us for our first quarter 2010 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory. Joining me on today's call is Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice President.

Before we get started, 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 events or make other forward-looking statements. You are reminded of the inherent uncertainties of looking into the future, but there are risks for Tandy Leather Factory that could prevent these events from occurring in the manner foreseen. Please see our Form 10-K for 2009 and subsequent Forms 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC 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 these statements.

We have started the year off well with a solid sales gain, a significantly improved gross profit margin and a substantial improvement in earnings. We have opened one new retail store so far this year and are looking at further possibilities for store openings. We have maintained our strong cash position of almost $13 million while adding $675,000 in inventory during this first quarter. The increase in inventory was expected given the sales gains we'd been running. Our Wholesale Leathercraft division posted a sales gain of 5% this quarter. The wholesale stores were up 7% and the national account group was down 8%. Gross profit margin increased two percentage points and operating margin was up 46%.

Our Retail Leathercraft division posted a 15% sales gain for the quarter. Same-store posted a 14% gain. We opened two new stores in the trailing 12 months bringing the number of stores in the chain to 76. Gross profit margin increased 3 percentage points and operating margin increased 68%. Our International Leathercraft division posted a 31% sales gain for the quarter. Gross profit margin decreased 11 percentage points and operating margin was down 2%. The decline in gross profit margin was expected and is now much more in line with what a store should be achieving given its sales mix.

Now for the numbers from today's press release. Our first quarter consolidated sales increased 10.7% over 2009's first quarter sales. The current quarter sales totaled $14.6 million compared to last year's first quarter sales of $13.2 million. Wholesale Leathercraft sales were $6.6 million this quarter compared to $6.3 million a year ago, an increase of 4.8%. Inside the Wholesale Leathercraft division, the wholesale stores posted a 6.8% sales gain reporting sales of $5.8 million compared to $5.4 million in the first quarter 2009. The national account group posted a 7.7% sales decline, reporting sales of $805,000 compared to $871,000 last year.

Our Retail Leathercraft division reported sales of $7.6 million, up 15.3% from last year's first quarter sales of $6.6 million. Sales from the two new stores were $89,000 this quarter. The 74 comparable stores posted sales of $7.5 million, an increase of 14% compared to last year. International Leathercraft sales were $384,000 in the current quarter, increasing 31.3% from last year's first quarter sales of $293,000.

Consolidated gross profit margin for the quarter was 61.5%, a substantial increase from last year's fist quarter gross profit margin of 58.7%. Wholesale Leathercraft gross profit margin improved from 56.8% to 59%. Retail Leathercraft gross profit margins increased from 59.8% last year to 63.5% this year. International Leathercraft gross profit margin decreased from 75.9% last year to 65.4% this year. Consolidated operating expenses were $7.4 million or 51% of sales in the current quarter compared to $6.7 million or 51.2% of sales last year. Wholesale Leathercraft reported operating expenses totaling 50.9% of its sales, the same as last year. Retail Leathercraft reported operating expenses totaling 51.4% of its sales, also matching that of last year. International Leathercraft reported operating expenses totaling 44.7% of its sales, a slight improvement from last year's 48.2%.

The most significant expense increase is in employee compensation, namely store managers, and accounted for approximately 40% of the total expense increase. As a reminder, our store managers earn a bonus of 25% of the operating profit of their respective store. As profitability at the store rises so does the store manager's bonus. Credit card fees and freight out, which is the cost to ship orders to customers, are both up this quarter as a result of increased sales. Expense reductions consist of depreciation, employee benefits, legal and professional fees, postage and property tax. Income from operations was $1.5 million for the quarter, up 54% compared to operating income of $998,000 in the first quarter of 2009.

Looking at our balance sheet, total assets have increased to $45 million. From December to March 31, total cash including CDs held steady at just under $13 million. Accounts receivable increased $256,000 and inventory increased by $673,000. Both increases are the result of the increase in sales. Current liabilities increased $592,000 due primarily to an increase in accounts payable. Our only debt consists of $3.7 million related to our building. In the last 12 months, we've made principal payments totaling $203,000 on the bank debt and paid off a capital lease in the amount of $530,000. We've increased our total cash position by 12% during the last 12 months from $11.6 million to $12.9 million. During that same period, we repurchased 563,000 shares of our common stock for a total purchase price of $1.6 million. Our current ratio is 5.3 EBITDA for the first quarter of 2010 with $1.8 million.

In looking at the individual store performance of the Tandy Leather retail stores, gros profit margin ranged from 59% to 68%, and operating income ranged from 25.6% to a negative 10.1%. Average monthly sales range from $89,000 a month to $14,000 a month. In this first quarter of 2010, average sales per store per month was $34,000. There are four stores with operating losses as of the end of March totaling $16,000. We have one wholesale store with an operating loss as of March 31 of $10,000.

To summarize, we have started the year off well. We want to be smart with our cash, with our inventory investment, with our investment in stores. Sales gains make everything easier but that doesn't mean our operating expenses don't need continued attention, and our senior management team is committed to sticking to that task. We have opened one retail store so far this year and would like to open several more. However, as we've mentioned numerous times it all depends on people, people who understand our business philosophy and strategy and are trained not only to run a store but also grow the business in whatever location we select. Our international expansion plans are slowly beginning to take shape, as we believe we have tremendous potential beyond the borders of the US and Canada. We are working hard to grow our international customer base to a level that would support additional stores. I can assure you that as soon as we have something concrete to announce we will certainly do so.

Our overall business is growing in 2010 driven by strong sales growth, especially in the retail arena, and we will certainly do whatever we can to keep that trend going. We expect that we will continue to accumulate cash. For now, as we watch the debt crisis evolve, we prefer to be sitting on a mountain of cash to take advantage of whatever opportunities might present themselves and avoid having to get into the debt game. With that said, we will continue to manage our cash conservatively while we are exploring and considering options that maximize the best return on that cash.

That concludes the prepared remarks. Operator, we are now ready to take questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions). Our first question comes from the line of Graeme Rein of Bares Capital Management. Please proceed with your question.

Shannon, you said the average retail store was about $34,000 in sales per month, I believe?

Yes.

Are there any general rules for how much inventory you carry at each location and how that changes when you're running sales gains? Can you walk through the inventory management in a little bit more detail? How do you decide when to beef up inventory? Are there any general rules as to how much you carry at a store at one time, how quickly does it turn, things like that.

Sure. We start out with somewhere between $50,000 and $60,000 at a brand new store. And remember that our target for average sales is $30,000. Basically, the way our stores manage their inventory levels is they are allowed that base of $50,000 to $60,000 depending on their square footage. They also have an extra factor to consider of 1.5 times sales. So if a store's running $90,000 a month obviously he's going to need a whole lot more inventory than a guy that's only running $30,000 a month. So the target is their base of $50,000 to $60,000, or 1.5 times their monthly sales, whichever's greater.

Okay. That's helpful. I heard you say 40% of the cost increase in operating expenses from store manager compensation and then you said there was increases in freight. I missed the other.

Credit card fees.

Credit card fees. Are there any other line items that increase with sales increases?

Not, not really. Obviously freight out which is shipping to customers and credit card fees are all related to sales, and we saw both of those line items decrease over the last two years. Obviously if you are not processing sales, you are not processing credit cards, you're not shipping merchandise to customers. And even compensation, the only piece of that that should fluctuate is the manager bonus piece. Obviously, the employee expenses and employee compensation is pretty static. Employees aren't paid commissions and things like that based on sales. It's mainly the increase in compensation is tied to that 25% of the profit of the store, freight out and credit card fees. The increase as far as dollars for those two items in the current quarter versus first quarter of last year was about $120,000.

Okay. Then the last thing relating to cash, the short-term investments, are those all CDs, or is there any other investment instrument in there?

No, it's all CDs and money market.

Do you have any expectations for capital spending for the year?

First quarter CapEx was about just right at $100,000.

But there's no projects on the horizon that would --

Not at this time, no.

Okay. Thanks a lot.

(Operator Instructions). Our next question comes from the line of [Len Puchas] of [Staid Coopers & Company]. Please proceed with your question.

Hi. You obviously know how to run the store and the chain of stores. But I'd like to get back to something I spoke about on the last call. The recruitment of managers , it's hard for me to believe, and I know you're very honest people, that you can't recruit, with a store base of 76, that you can't recruit seven or eight managers for new stores. I mean that's one in ten finding a good person. It's hard for me to believe that you can't find a good person who might move to an area that you would find attractive. I'm not saying 15 out of 76, but seven or eight. I'm a little bit unhappy about that although I'm happy about the way you manage the business. I'm still in it. Could you respond to that?

We always have trainees. We have eight manager trainees working with us right now. All of them with less than six months' experience. You've got to remember that a lot of their compensation does come from the bonus. We expect them to make usually at least the same amount of bonus that they make salary. A lot of people just don't like working that way. A lot of people (inaudible) they come from. We're very up front with people how we pay and what we expect of people. This is really not just a caretaker type position. We do expect them to sell and to get out and make sales. A lot of people are not suited to the sales environment. So that's really what we see. Obviously moving is a big thing. We are up front look, that if you do come on, you're going to have to move somewhere where we need to open a store.

So we're certainly out there. We're asking. We've done some job fairs. We keep an ad up on your web site. We keep ads up in the regions we know we're trying to move to. But we always do have trainees. We have eight currently. So we keep addressing it, but it's again, a fact of what it is. We feel pretty well for the central part of the US. We're probably not high enough in the West and the East. But like I said, 25% net bonus is a pretty good pay plan for someone that likes to get out and make sales calls and likes working with people. There's just not a lot of good salespeople. There's plenty of people that are willing to stand there and scan products all day long but just not a lot of good salespeople.

All right. The other question I have is how much of the improvements in retail sales and comparable store sales do you think is Internet related?

We could probably tell you. We've had a pretty good increase in our Internet sales. Not to give you a specific about how much that is, but just knowing our Internet sales business has been up considerably. Shannon, I think is reaching for a number to tell you.

Looks like just for the month of March, sales on the Internet were up 25% over March of last year. It's definitely growing and growing quite nicely.

Right. Any plans to put money in to make it even more effective?

We've got plans on the horizon now that we're releasing two more sites this year. One related to instructional videos and the ability to buy videos off of a site. Mark Angus is working on that now. We hope to release later this year. Another one is related to our wholesale business, that's a site with our metals company. We design buckles and conchos. So we've got these two sites that are supposed to come online hopefully by October. So yes, we are pushing towards that. There's probably a lot more we could do, and we do have two sites related to that coming out.

I like getting e-mails from you on the sales. It's not that I'm going to think of buying any of the kits, but I like getting them.

Good.

I know on the Internet you get a lot of zip code information. Have there been areas of the country where you're surprised there might be a need for a store?

Not really. I really have been amazed at how even it is. And you've got to imagine, we're within one-day shipping to almost every location, one-day shipping UPS anywhere in the USA. I think I'm more amazed by the amount that we do, considering how close we are to the public, that we don't get more walk-ins, I guess.

Right. Could you tell me how much percent of your retail business is now on the Internet?

Shannon's pulling out her form again.

I know you can't tell me how much is people looking at the Internet coming to the stores.

It's hard to tell. When you look at where they're going on that web site, though, you get a good indication there's probably a lot of them are coming in because normally the pages they're hitting the most are normally the locations. So we see their looking up stores and looking at the map. So you've got to imagine there's still a lot of them coming in. Then when you look at the breakdown of sales that hit our stores and seeing a lot of cash and credit card business, you've still got to imagine that a lot of them are coming in.

Lenny, I don't have that number in front of me but I might have it before the end of the call depending on how many more questions we have. If not, I'll e-mail you or call you.

Okay. Thanks a lot. I hope progress continues and particularly with a few more stores. Thank you.

Our next question comes from the line of Doug Joseph, a private investor. Please proceed with your question.

Good morning. Just a question about the UK store and the international operations. I was wondering if you could give us a little history as to what your expectations were for that UK store? It seems to be doing quite well. And if it's met the expectations, exceeded the expectations or where you think the top line growth may stabilize. And also other opportunities internationally as compared to what you're seeing in the UK.

When we opened that location, we knew that there was some history before with Tandy, and we don't know what they did that went wrong for them, but we did a lot of business. Most of our international business was handled at our corporate office in Fort Worth, so we had a good eye for where it was going and what we were seeing. If you look at the population of the UK, depending on whose numbers you look at, you've got 45 million to 60 million people. So there's certainly the big enough population base. We know there's a lot of re-enactment business there. Still a lot of western type carving. So we had seen it. We just never knew obviously how well we could do being on the ground.

If you look at how many stores we have in Canada, we've got nine stores and 40 million, 45 million people. So you can relate that obviously there's plenty of space for us to grow in the UK. I think it's proceeded well. You have to imagine we don't do any mass media advertising. Everything is word of mouth or shows that we attend trying to get the word out. I think there's a lot of potential in other countries. We've earmarked probably 20 countries we feel like we could possibly go to and do well in. I think each one of those has a top end. Probably today I would just guess you should be able to pull around $5 million, $6 million based on the populations out of those countries if we do well in sales each year.

That's per each of those?

Per country. So there's 20 countries and you should pull say $5 million per country. It depends. Going in, our concept was one large location that would service the warehouse, get established, then open smaller Tandy stores in the large cities in that country. So you've got one large warehouse and four to five Tandy stores opening thereafter. That's what we're looking at doing right now in the UK. Our manager there is looking at opening the Tandy locations now in the other cities. So he's out looking for leases. Obviously, we have other countries on the horizon. Right now, we've been working towards getting open in Spain. We spent some time this year. And we're also working, paying right now to have a lot of our content or web books translated into Spanish. So we will open over there sometime this year.

So for those of us who are wondering where some of the growth will be coming from in the future, there seems to be a pretty good runway for growth overseas.

I think that's probably our biggest area for us for growth. The United States will certainly continue to grow and do well, but I don't think you're going to see any explosive growth. Tandy really only had that big run up during the '60s, late '60s, early '70s. I think that a yes for us to get some big dollar growth is going to be reaching out into those other countries.

I appreciate the answer.

So Doug, I'll throw this out there just from a numbers standpoint. I don't know if you are a real heavy numbers guy or not. If you translate what Jon just said into numbers, before we opened the UK store from here in the US, we were doing about $650,000 of sales into Europe. The first year we opened, which was 2008, we opened in the UK, we were open 10.5 months and we increased that $650,000 by 28%, 29%. Then last year, which was 2009, we increased those sales by 56%. Last year we actually hit $1.3 million in sales which, in less than two years, we doubled the sales that we were getting out of Europe when we didn't have a store over there. So that gives you an idea what happens when we're local, when we're on the ground over there. In less than two years we doubled the sales into Europe that we had before.

And from what you're saying relative to a country like Canada, you should be able to double the sales from where you are based on population?

Yes. And again, to get the rest of those sales, we'll have to do the same thing as we did there in the UK. We'll have to get closer to the customers. We're going to have to open up store. You're going to see a lot of people don't like to shop, again, unless there's somebody close to them. There's some of that comfort zone, I think, working with a vendor that's close to you. We've seen that in the USA, and we certainly saw it by opening there in North Hampton. If we can get some other stores open, the rest of the sales will come.

Great. Thank you.

(Operator Instructions). Our next question comes from the line of Matthew Miller of Chanticleer Advisors. Please proceed with your question.

Good morning, everyone. Appreciate the time this morning. Congratulations on a good quarter. You had some interesting comments as it related to your capital position, how you like to have that war chest there. And I don't remember the exact quotes but I wonder if you could explain some of what you are seeing out there as opportunities for that cash. Is that for this international move that's going to require some of that capital or are you seeing any small acquisition opportunities that have come up because of the current climate? I wonder if you could talk about that a little bit more?

For us, what happens is where we see that we will have to spend money is, like we talked about earlier, we're having translations done of our whole web site into other languages. And we know that as we move out to meet the laws and standards for each country's labeling, language on the web site, currency conversions, we'll have to spend some money on that. We're spending money, as I mentioned earlier, on two web sites. So those costs are going to come up. The other thing that we use money for is to make purchases, for instance, in the leather market. We see a lot of times, for instance, our buyer just got back from Columbia and happened to see a large purchase that we were able to make a very big deal on, but, again, it was by making a cash purchase to get the price that we wanted. So we have to use that money a lot of times to get the price that affords us to make some good profit. And what we are doing is usually spending anywhere from $100,000 to $250,000 a lot of times on these purchases but it affords us, again, to be very competitive.

This might be a question towards the structure of your industry, but are you seeing any small acquisition opportunities or is that something that you're not focused on at this point?

No, not really. We don't see anybody else in the market at this time, and we made a foray off into the shoe bindings. We didn't like that side of the business. We got rid of that. I don't see any other side other than trying to focus on the international because again, just like you heard, that's probably the biggest area for us for growth, that if we feel, like we said, that there's $100 million of growth out there, I think that's where we need to spend our time and effort.

Great, thank you.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Very good. Len, if you are still on the call, the answer to your question is Internet sales in 2009 were up 34% over 2008. Through the end of March they're up 44%. So they're a nice addition to part of what's causing the retail growth.

Appreciate your time today. I would also like to remind everybody about our 2010 annual meeting of stockholders to be held next week on May 18 at our corporate offices in Fort Worth. Please consider yourselves personally invited. We would love to meet you. On behalf of Jon Thompson, Mark Angus and the entire Company, thank you for your participation on today's call. Have a good day.

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