Tandy Leather Factory Inc (TLF) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tandy Leather Factory second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a Question and Answer Session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Ms. Shannon Greene. Ma'am, you may begin.

Thank you. Good afternoon and thank you for joining us for our second quarter 2010 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory, and I am joined by Jon Thompson, our Chief Executive Officer. I call your attention to the fact that the conversations today 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 but 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 2009 and subsequent form 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 was a good one achieving a solid increase in sales, a remarkable increase in gross profit margin, and a strong improvement in earnings. All three operating divisions reported sales gains and operating income increases. There is just not too much to say that isn't positive. However, with that said, we cannot coast into the third quarter. As we have mentioned several times the sales comps are going to be tougher in the last half of the year so while we have had a few weeks to enjoy our second quarter success, we have lots of work to do to keep that positive momentum going. Compared to year end 2009 our cash increased by about $200,000 dollars. As most of you know our directors approved a one time special dividend of $0.75 per share which was paid on July 5 for a total payment of $7.6 million.

As a result our cash will decrease in the third quarter. Inventory has increased from year end 2009 by about $1.3 million. A large portion of the increase is due to an intentional decision to increase the level in inventory maintained at the stores. The thought process is if the product isn't there, the customer can't buy it. We are carefully monitoring those inventory levels, however, as it only works if the right product is in the stores.

Now the numbers from today's press release. Second quarter consolidated sales increased 10%. Current quarter sales were $14.3 million compared to last year's second quarter sales of $13 million dollars. Wholesale Leathercraft sales were $6.2 million this quarter up 2% from $6.1 million in the second quarter last year. The wholesale stores posted a 5% sales increase reporting sales of $5.6 million compared to $5.3 million in the second quarter of 2009. Our national account group posted a 13% sales decline reporting sales of $680,000 compared to $785,000 last year. Our Retail Leathercraft division reported sales of $7.7 million, a 16% increase over last year's second quarter sales of $6.6 million. Sales from the two new stores were $118,000 this quarter. The 74 comparable stores posted sales of $7.6 million, an increase of 14% compared to last year.

Our International Leathercraft segment which consists of the one store in the UK reported sales of $396,000 for the quarter compared to $308,000 in last year's second quarter, a gain of 29%. Consolidated gross profit margin for the quarter was 60.7%, up from last year's margin of 58.8%. Wholesale Leathercraft margin was 62.5% compared to 57.3% in second quarter 2009. Retail Leathercraft's first profit margin fell from 60.8% in last year's second quarter to 59.3% in this year's second quarter. International Leathercraft margin for the second quarter was 59.9%, up from 47.6% last year.

Consolidated operating expenses were $7.3 million or 50.7% of sales in the current quarter compared to $6.6 million or 50.4% of sales last year, an increase of $700,000 or 10%. Wholesale Leathercraft reported operating expenses totaling 52.5% of its sales versus 49.5% last year, Retail Leathercraft reported operating expenses totaling 49.4% of its sales compared to 51% last year. International Leathercraft's operating expenses for the quarter were 47% of its sales compared to 51.5% last year. Income from operations was $1.4 million dollars for the second quarter up 30% or $336,000 compared to the second quarter 2009's operating income.

On a year-to-date basis consolidated sales increased 10%. 2010 sales were $28.9 million compared to 2009 sales of $26.2 million. Wholesale Leathercraft sales were $12.8 million this year up 4% from last year's sales of $12.4 million. The increase is the result of a 5.6% sales increase at the stores with sales this year of $11.3 million compared to $10.7 million last year offset somewhat by a 10.4% sales decline for national accounts with sales this year of $1.5 million versus $1.6 million in 2009.

Our Retail Leathercraft division reported sales of $15.3 million dollars, a 16% gain over last year's sales of $13.2 million. Sales from the two new stores were $206,000 this year. The 74 comparable stores posted sales of $15.1 million an increase of 14% compared to last year's sales of $13.2 million. Our International Leathercraft segment reported sales of $780,000 so far this year compared to $601,000 last year an improvement of 30%. Consolidated gross profit margin for the year was 61.1%, an improvement from 2009's gross profit margin of 58.8%. Wholesale Leathercraft gross profit margin improved from 57% to 60.7%. Retail Leathercraft's gross profit margin increased from 60.3% last year to 61.4% this year. International Leathercraft gross profit margin improved from 61.4% last year to 62.6% this year.

Consolidated operating expenses were $14.7 million or 50.8% of sales in the current year compared to $13.3 million, also 50.8% of sales last year, an increase of $1.4 million. Wholesale Leathercraft reported operating expenses totaling 51.7% of its sales compared to 50.3% last year, Retail Leathercraft reported operating expenses totaling 50.4% of its sales currently, versus 51.3% last year. On a consolidated basis the most significant expense increases were in manager bonuses, advertising, freightout and credit card fees. These expenses are tied to sales and profit increases. Legal fees are also higher than last year due to the foreign trademark registrations we are working on.

Income from operations was $2.9 million, up 41% compared to 2009. Looking at the Tandy retail stores gross profit margin ranged from 71% to 52% and operating income ranged from 23% to a negative 16%. Average monthly sales ranged from $87,000 per month per store to $13,000 per month per store.

In the second quarter of 2010 average sales per store per month were $33,000. There are six Tandy retail stores with operating losses as of the end of June totaling $27,000. All of our leather factory stores are profitable as of June 30 except for one. It has a year-to-date operating loss of $1,600. Mid-Continent leather sales is posting average monthly sales of $29,000 this year and has an operating loss of $18,000. We have improved its gross profit margin by five points this year compared to last year but have affected sales as a result.

To summarize, we have enjoyed great success in the first half of 2010 and we will certainly do everything we can to continue that success in the last half of the year. Our retail business continues to be strong. Our wholesale business is lagging. Contrast that to our stores, the retail stores are doing very well as evidenced by the solid sales gains. Our wholesale stores are also doing well because of the retail business that they're doing. But, we are still hearing from our store managers that the small business customer has not recovered from what has been a very difficult economic environment. That explains why the gross profit margins in the wholesale stores are so strong. It's due to an increase in retail business at those stores. The rest of 2010 will be somewhat a challenge from a sales perspective because we're up against tougher comps. But, I think we will continue to perform well and we'll be monitoring and controlling expenses to keep them in line with what sales are doing. As I mentioned at the beginning of this call there will be a significant decrease in cash in the third quarter as a result of the $7.6 million dividend paid. Inventory is expected to increase some in the third quarter as we are stocking new products for our catalog that comes out on October 1 and are preparing for the fourth quarter holiday sales. That concludes our prepared remarks today. Operator, we are now ready to take questions.

(Operator Instructions) Our first question comes from Graeme Rein with Bares Capital. You may begin.

Good afternoon.

Hi, Graeme.

Shannon, could you provide any sort of details on prices? Are you guys still revisiting those once a year or are you doing so more frequently now and if so you know what is the direction of prices? Are you moving them up or are they staying the same?

We only address prices once a year normally unless there is a huge swing in the leather market, and we've had that happen before but not you know recently. We have got our catalog coming up October 1, so that's when we will make big changes, but, no, it has been pretty much the same. We try and plan in advance. We do take into account all the market news we can just to make sure that we don't get any surprises through the year, but so far we have been pretty good.

Okay. So the movement in the gross margin is mainly mix of business, then?

Yes, it is, and some of what Shannon said earlier gives you an idea. We don't-- we aren't selling as much of the some of the older business we used to do and the Leather Factory type. The wholesale like the saddle business, the saddle releathers were very low margin, high volume, and a lot of our businesses switched even the retail wholesale that we do today has moved into leathers like the upholstery leather, garment leathers that are higher margins, so at least the leathers we are selling are higher gross profit margins.

Okay. And the number of new openings in the next 12 months, do you guys have a target? Are you prepared to kind of state what your expectations are from that perspective?

For our new stores?

Yes.

I would hesitate to say we're going to open any. Like I said, right now we're still trying to address the training at our current stores, and we are still working on our plan. We've added more regional managers where we're able to spend more time out in the system with the managers we do have, so we're trying to make sure we address any weaknesses in our point of sales system with the managers we have currently. Sales abilities and so we'll probably just take a look and see. If we feel like we have got everything addressed, and you know we would like to get back to four stores a year probably.

Okay. And the six that are unprofitable, how many of those are sort of new stores that are ramping up and how many are sort of chronically unprofitable?

Let's take a look and see.

Hang on, Graeme, I will tell you. We got a few that are older and let me find my list real quick and I will give you the date. I did notice as I was looking through them, though, that almost all manner we made manager changes in a bunch of them. Let's see. Two of them were opened in 2005, one of them was opened in 2006, two of them were opened in 2007, and we had one that was opened in 2004. We made manager changes in one, two, three, four of those six stores this year.

Okay. And then, Shannon, on the cash flow statement there is a reconciling item for other current assets of about a million dollars.

Uh-huh.

What is that?

I don't have the schedule in front of me, Graeme. I will send you an email.

Okay.

Change in other current assets. Let me think what's in there. Pre paid catalog expense, pre paid insurance, inventory in transit or, let me try that again. Inventory that we have paid for that's not here yet, that's probably the bulk of it because we had quite a bit of inventory that was headed our way at the end of June, and we'll probably continue to see that. I'll shoot you an email with a little bit more specifics after the call, but I will have to look it up. Get the [inaudible] of all of it.

Thanks for taking my questions.

Thanks, Graeme.

Bye.

Thank you. [ Operator Instructions ] Our next question comes from Matthew Miller with Chant Clear Holdings. You may begin.

Hi, guys. Good afternoon.

Hi, Matt.

A couple of my questions were actually just addressed. On the retail stores that are currently showing losses, given the years that those have been open, and granted that you've just made some management changes, are there any thoughts to shutting some of those locations or is that really not being contemplated at this point?

Hey, you know that's not an option. Like I said, we're going to fix them -- there is no reason for them to be where they're at right now.

Yes. Remember, Matt, and you have known us long enough you have heard us say this before, the key to the success of the stores is not the location. It is manager. Bad location doesn't make any difference if you have good managers. They will turn profits, and you know we have had some these particular stores we have had a couple of different people in there. You know, we just didn't get the training they needed or what have you or they lose their interest and they're not doing well, so you know I think it will be a very long time before you see us actually come out and say we're closing a store because out of the 100 stores that we run there is no reason that all of them shouldn't be profitable.

It just is a matter of finding right person to fit into that market and do a good job, and we just haven't found it with these six yet. But, I think I have seen some improvement in the monthly performance of the stores of these six stores or the four stores that is have had manager changes since you get the new guy in there. So, I think with a little bit more work these will probably turn around, too. We're not talking that much. I mean the total six stores year-to-date the loss is only $27,000. I don't want losses at all. But, that's a heck of a lot better than it was a couple years ago when we were saying you know the operating losses was $150,000, $200,000 for the year out of half a dozen or ten stores, so it is getting much better. We just have not quite found the click yet for these particular stores, but we'll get there.

And then just my other question on the international you made the comment that you're spending some money in terms of trademarking overseas. Are there particular countries that you have ramped that up in or is it a continuation of the process that you have discussed in the past?

Well, we're just trying to make sure we're ready for some areas we know we're going to go into, and it was convenient for us to go ahead and do at the time. We're working on registrations in Spain, France and Italy, so some of those things, yes, were all just part of our plan we've got. Some of these things are probably going to happen possibly in the next four to six weeks. You know, we'll have new announcements on that.

Part of the thing, Matt, is as we get into countries or get close to countries and the name starts going around, we want to make sure that if we're in the UK, Spain and Italy and France knows about us, we certainly don't want anybody else jumping in there and trademarking the name before we get there. So, our net is pretty big in terms of those registrations, but as you know the name is critical to the business, and so we want to be real sure that we're covering ourselves before somebody else decides that they want to get in there and grab the name and we have to wrestle with them about how to get it.

Sure. All right. Thank you. Congratulations, guys.

Thank you, Matt.

Thank you.

Thank you. Our next question comes from Doug Joseph private investor. You may begin.

Good afternoon. I don't really have a question but I just wanted to thank you guys for the dividend distribution. That was fantastic.

You're welcome.

You're welcome.

So that was it. Nice job, and glad to be a shareholder.

Thank you.

Great. Thank you, Doug.

Appreciate it.

I hope we get through this conference call without anybody asking us what we're going to do with the cash. We hope we've addressed that issue at least for now. You know. We'll continue to build cash. Third quarter is going to be a little tight.

But, fourth quarter generates an awful lot of cash, and you know our hope is certainly that a couple years down the road or so maybe we'll number the same situation we were a month or so ago and be ready to do another dividend. I think that would be great, and we certainly appreciate the shareholders that have stuck with us for so long and a very small way to express appreciation but we do, so glad it was helpful.

Thank you. I am showing no further questions at this time.

On behalf of Jon Thompson and myself, we appreciate your time on today's call. Have a good afternoon.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.